How the SDGs put impact at the heart of sustainable investing
Sustainable investing has a long history and has evolved considerably in recent decades. Today, we are witnessing a shift from ESG exclusion and integration-only approaches towards the inclusion of thematic and impact-aligned approaches.
Until recently, the sustainable investing industry focused on identifying and investing in companies that produced goods and services in a responsible way. However, it was less concerned about what was produced (with the exception of those sectors, such as weapons and tobacco that were explicitly excluded) and the societal impact or contribution of these goods and services.
With the launch of the United Nations Sustainable Development Goals (SDGs) in 2015, this started to change. But achieving the goals requires an estimated additional USD 3 to USD 5 trillion of private capital per year until 2030.
The SDGs have inspired a new generation of investors – private and institutional – to step up and proactively fund solutions to the problems facing society and the planet, and deliver strong financial returns while doing it.
James Gifford, Head of Impact Advisory, Credit Suisse, Sustainability Strategy, Advisory & Finance
Impactful investment opportunities
An increasing number of companies are addressing SDGs through innovative products and reporting on these efforts. Investors too are using the SDGs as a reference point to align investments and impact goals, and are working with investee companies to measure the impact of their products.
Many fast-growing sectors are also high-impact themes:
- education technology,
- access to finance in developing countries,
- sustainable food and agriculture,
- the new generation of low carbon technologies.
These companies are not only solving problems and contributing directly to the SDGs, they are also building business models that are amongst the fastest growing areas in the economy.
How to evaluate a company's impact and contribution to the SDGs
Assessing a company's contribution to the SDGs is not easy. The Impact Management Project (IMP) is a forum for building global consensus on how to measure and manage impact. Their framework helps to define and evaluate impact at the company level by considering the following points:
- What: How relevant are the targeted SDGs in a given geography or sector and are they important priorities?
- Who: Who are the stakeholders to benefit from the positive outcome? How underserved are they in relation to the product or service offered?
- How much: What is the magnitude of the expected SDG aligned outcomes?
- Contribution: Do the company’s efforts lead to better outcomes?
- Risk: What can go wrong, and what could be unintended negative effects of delivering the expected SDG contribution?
Investing into the SDGs
Investing into the SDGs is possible through public and private markets:
- thematic and impact-aligned investing is conducted primarily in public markets;
- impact investing, where investors are directly financing the growth of companies, is predominantly a private market activity.
As we see more purpose-driven companies shift from a focus on how they produce their products to what and for whom they produce, and whether they are positively contributing to society, investors are seeking exposure to those companies that are demonstrating this transition. They want to align their portfolios with impactful companies and seek investment returns from fast-growing SDG-aligned themes.
The key transition has been the refocusing of sustainability from risk to opportunity. For large established companies and asset managers, sustainability and ESG were examples of risk, concerned with operations and managing risks associated with those operations. The SDGs have refocused the agenda on the role that companies can play in a positive sense in achieving the goals and the financial opportunities associated with that, particularly around innovative products and services. This makes it easier for companies view to see how their strategies can align with and deliver returns because of sustainability.
George Latham, Managing Partner, and Seb Beloe, Partner and Head of Research of WHEB Asset Management