The United Nations' Sustainable Development Goals (SDGs) is an important tool for investors who want to make a positive difference, according to industry thought leader
The United Nations' Sustainable Development Goals (SDGs) is an important tool for investors who want to make a positive difference in the world, according to an RBC Global Equity thought leader.
Jeremy Richardson, senior portfolio manager, said that an increasing number of people are caring not just about returns but about how those returns have been generated.
He said: “They want to know that their capital is not being used to support business activities that do not align with their personal values.”
Enter SDGs. The goals were created in 2015 when leaders from 193 countries around the world came together to tackle the challenges of the future. What emerged was sobering, with many people facing the prospect of famine, drought, war, poverty and disease.
The leaders set 17 agreed-upon targets that imagined a future – the year 2030 – free from poverty and hunger, and safe from the worst extremes of climate exchange. These SDGs were created from 83 national surveys engaging seven million people over three years and are as follows: 1, no poverty; 2, world hunger; 3, good health and being; 4, quality education; 5, gender equality; 6, clean water and sanitation; 7, affordable and clean energy; 8, decent work and economic growth; 9, industry, innovation and infrastructure; 10, reduced inequalities; 11, sustainable cities and communities; 12, responsible consumption and production; 13, climate action; 14, life below water; 15, life on land; 16, peace, justice and strong institutions; and 17, partnerships for the goals.
Richardson said the way investors will go about aligning themselves with these targets will depend on the individual and what’s most applicable to them. For many, this will involve avoiding certain business activities while for others it may involve going further than “doing no harm” but trying “to do good”.
He said: “This is about making a positive difference; having a positive impact. This view is gaining a bigger profile and for many investors, such as ourselves, it is obvious that a business that does not make a positive impact is unlikely to be a sustainable one.
“Thinking about this impact is therefore an essential part of any business appraisal. The development of the SDGs, which came into effect in early 2016, is an important contribution to this.”
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He added that using the goals as common framework will enable comparison and increase transparency around the progress towards achieving them.
Richardson said the goals have universal appeal which means, however, that a degree of contextual interpretation is required for companies and investors, with each SDG supported by a number of subsidiary goals to provide further granularity.
Some add greater relevancy and easier alignment with a firm’s purpose. He said: “The SDGs can provide a framework whereby purpose can be turned into key performance indicators to help companies and investors assess impact.”
The biggest challenge, though, is measuring the impact of SDG-led responsible investing in financial reporting. Richardson explained that traditional financial reporting copes best when there are discrete values for changes in financial capital and that, while the diversity of RI can add resiliency to human capital, it’s hard to find in the numbers.
He added that investors often need to consider strategic pre-financial forms of capital.
“Environmental issues can be especially problematic in this regard as traditional accounting would only recognise the cost of pollution prevention but not the benefit. In essence these are externalities that are not being priced by the market. Pricing would be helped by disclosure and in many ways the SDGs highlight areas ripe for improvement.”
Richardson said he is hopeful that the development of SDGs can follow a similar path to carbon, meaning better feedback for investors in terms of how much impact their portfolio choices are having.
Several years ago, he said, carbon data was patchy and was often generated using different underlying assumptions. While far from perfect – he highlights challenges around measuring the carbon impact of using goods and services – the number of companies providing carbon data is steadily increasing.
He said: “Similarly, it may be the case that companies’ reporting around SDGs will continue to develop over time. As investors and owners, we have an active part to play in this, but until that time problems of disclosure and measurement will likely inhibit investors from deriving a quantitative assessment of how a company complies with each SDG.
“This does not mean, however, that investors should disregard SDGs. To the contrary, we feel they are an incredibly useful addition to the discussion. But they are a tool and, like any tool, they need to be used in the right way to get the most out of them.”
With this in mind, the thought leader explained that RBC Global Equity Team favours a contextual approach above a quantitative one, especially when SDGs are assessed through the lens of a firm’s purpose.
In a written piece to investors and industry participants, Richardson said: “Without purpose a firm is unlikely to be either sustainable or have a positive impact. RBC has its own purpose ‘to help clients thrive and communities prosper’ and we have also considered our team purpose: ‘to make a positive difference to our clients, to the companies we own and to society as a whole through responsible long-term investment’.
“We continue to experiment with how best to communicate the adoption and targeting of SDGs by investee companies. Our expectation is that although our portfolio may change, the relevancy of SDGs for each company will be set by the company’s purpose and this is likely to evolve only slowly with each company’s business model.”
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