The UN Sustainable Development Goals (SDGs) place immense responsibility on investors. We have an important role to play - along with countries, companies and NGOs - in order to achieve what the global community acknowledges is an ambitious agenda.
But can we live up to expectations? And what should owners of capital really be looking out for?
For over a year now, during our investment trips to Europe and the US, we have sat down with many management teams from companies keen to articulate how they address the UN SDGs. These conversations have been matched by increasing interest from our clients, especially from pension funds and asset owners in the UK, Scandinavia, the Netherlands and the US.
The successor to the UN Millennium Development Goals were adopted by the UN's member states in 2015 and are the global goals for sustainable development, including economic development, environmental sustainability and social inclusion. It is a framework for the developed and developing world to mobilise, to ensure our sustainable future. But what is the role of asset owners and managers within this framework?
Super funds in Australia which have begun or are yet to integrate the UN SDGs into their investment strategy may gain useful insights from the experience of pension funds from around the world.
Here are three observations we have made on how some leading investors and pension funds are working towards achieving the UN SDGs, which might resonate with Australian super funds.
1. Choose realistic targets. The 17 goals represent a comprehensive framework of targets and indicators, for addressing many of the major challenges facing the world. While important goals for the world, only some can really be achieved with help from the investment industry.
Dutch investors APG and PGGM have suggested they target 13 out of the 17 goals. Our most SDG-savvy European-based clients have requested we map the investments we hold on their behalf, showing where companies contribute to specific goals, as well as those that may compromise them. As global equity investors we have found we can invest in line with promoting most, but not all of the SDGs. It's important that asset owners understand where they can best influence; these are after all where governments believe development needs are most required, rather than being established as an investment tool.
Our own mapping exercise found greatest overlap amongst: SDG2 Zero hunger; SDG3 Good health and well-being; SDG5 Gender equality; SDG9 Industry, innovation and infrastructure; SDG11 Sustainable cities and communities; and SDG12 Responsible consumption and production. These goals and their underlying targets and indicators sit comfortably with an equity portfolio deriving investment returns from allocating capital to listed companies around the world - which in turn understand the sustainable development challenges we face and aim to make a profit while achieving them.
The targets under SDG2 which aim to end malnutrition and ensure sustainable food production systems, are well-supported by an emerging markets food and beverage company selling plant-based protein largely from non-GM sources. Similarly, a biology company that is developing enzymes to improve production yields, making better use of animal feeds, and producing fewer greenhouse gas emissions, should contribute to the underlying targets.
SDG3 includes targets such as ending epidemics of neglected tropical diseases. We invest in a drug production company which is leading in the elimination of schistosomiasis, a tropical disease that causes 280,000 deaths from 200 million sufferers each year. This company is one of the world leaders in providing Access to Medicine, a UN commitment to affordable medicines for all.
SDG5 is important everywhere we invest to ensure we meet the target of women's full and effective participation and equal opportunities for leadership, at all levels of decision-making in economic life. We invest in less than a handful of companies which have female chief executives and CFOs, but continue to try to influence where we can.
SDG9 includes targets to make industry more sustainable with increased resource-use efficiency and adoption of clean technologies. We have an abundance of investment opportunities, in particular in the developed world which can transfer technology into the developing world to ensure cleaner industry. This includes companies certifying, inspecting and testing cleaner industry or introducing closed loop circular economy practices in logistics, factory automation and fabric production. SDG9 and SDG11 provide many more examples.
2. Be honest and careful about the impact being achieved. Our clients with the best understanding of the SDGs recognise that there is a question mark about the additionality in equity investments; i.e. the idea that our equity capital is not necessarily contributing additional capital to promote achievement of the goals, but simply business as usual in line with them. Our purchase of the capital is replaced by a seller. It's a very different proposition, for example, to taking capital into a developing country privately and investing in a new clean energy source.
As equity investors we can play an important role in shifting capital to a pathway of sustainable development over the long term, but we need to be cautious about our measurement and understanding of the impact of our investments. Lazy claims of our equity portfolios saving a number of lives, or number of tons of carbon per year, are difficult to justify when we cannot easily measure the counterfactual; i.e. what would happen anyway at these companies. Over the long-term, the focus by governments, institutions and society should generate more inclusive and sustainable growth which support companies that are well aligned to the goals.
3. Focus on achieving investment returns, not just managing risk. There is a recognition from many of our clients that they are tasked with a responsibility as a capital allocator for their members and clients, over and above maximising returns. In Europe in particular, many of our clients strongly consider how their capital is used to drive international economic development, or contributes to inclusion within their own country as a 'universal owner,' a concept well understood by Australian super funds. Implicit in this role is an understanding that there need not be a trade-off in financial returns when considering this obligation. But many in Australia remain focused on removing ESG risk only, ignoring the opportunity of long-sighted companies with purpose.
Nearly three years since the SDGs were adopted, leading members of the investment community are identifying what their role is in achieving the world's sustainable development priorities, and are constantly learning and refining their investment approach.
At Stewart Investors, we continue to believe that companies well-positioned to benefit from, and contribute to, a model of development in line with the SDGs, are better quality companies.
It indicates that the management teams of the companies have the foresight to consider a range of stakeholders, opportunities and risks, while operating for the long-term health of the company, not just managed for the quarter. Their franchises are often in more necessary consumer goods which show resilience through the economic cycle and commitment to their brand. It can also show better financial quality as a sense of purpose discourages corner-cutting or crossing-the-line of paying taxes or ethical business practice.
We believe that high quality companies and portfolios that invest in line with sustainable development and thereby direct capital towards achieving the SDGs will prosper in the long run.
By Nick Edgerton, Stewart Investors