Ever since the United Nations adopted the Sustainable Development Goals (SDGs), investors have become increasingly interested in investments that both contribute to realizing these goals while providing financial returns.
Robeco is among the first investment managers to construct an effective framework for mapping and measuring SDG contributions that can be applied across investment portfolios.
The United Nations released the Sustainable Development Goals (SDGs) in 2015. The ‘2030 Agenda for Sustainable Development’ was adopted by all 193 UN member states, which together agreed to contribute to the realization of 17 SDGs by 2030. The 17 goals with their 169 targets aim to advance a broad range of topics, including the availability of water and sanitation for all, food security, achieving gender equality, protecting ecosystems and biodiversity, and access to affordable and sustainable energy.
The UN Conference on Trade and Development estimates the investments required to achieve the goals at USD 5-7 trillion per year from 2015 – 2030. Given the overwhelming price tag, the UN explicitly invited the private sector to contribute. Surprisingly, big business and big financiers have enthusiastically embraced the invitation.
Corporate Social Responsibility (CSR) departments across all sectors are booming and gaining unprecedented access to C-suite decision-making. Business leaders with rock-star like status are promoting socially responsible, environmentally-sustainable, and measurably-transparent projects and initiatives across banking and finance, pharmaceuticals and healthcare, utilities and consumer goods. And amidst all this activity, the SDGs and their measurement are prominent on the agenda. Given the increasing interest in business, investors too have taken a keen interest in having sustainability and SDGs in their portfolios—interest that goes beyond mere exposure towards demonstrating measurable impact. Now, the challenge for asset managers is to quantify a company’s contribution to the SDGs.
The challenge for asset managers is to quantify a company’s contribution to the SDGs.
Robeco’s current line-up of sustainable equity products are already strongly aligned with the SDGs and we continue to explore ways to enhance impact reporting in these areas. Moreover, we are developing new products that not only align but are designed to measure SDG contributions from companies. Our SDG Global Credits and Global Sustainable Impact Equities strategies are tailor-made to invest in attractively-valued companies with high impact on SDGs.
But just how does one move from globally-endorsed development goals to financially-viable investment products? In this paper, we discuss our inputs and approach in constructing a framework that can objectively and reliable measure SDG contributions within an investment portfolio.
But just how does one move from globally-endorsed development principles to financially-viable investment products?
It is easy to imagine that some businesses have a positive impact on goals, and others negative. Some of these are intuitive—a solar company is more likely to contribute positively than an oil company. But intuition only gets you so far. The challenge is to properly evaluate and quantify the contribution of all companies in an investment universe when building a targeted SDG strategy. This requires rigor, objectivity, consistency and replicability. In other words, a framework with clear, objective and consistent rules. Robeco is one of the first asset managers to meet this challenge by developing a proprietary SDG framework which consists of a 3-step approach (see in Figure 2). Robeco investment analysts are successfully applying the framework within fixed income and equity asset classes. The investment teams for RobecoSAM Global SDG Credits and Global SDG Equities strategies use it for universe construction. Eligibility is based on SDG scores assigned to each company / issuer.
Robeco investment analysts are already successfully applying the framework within fixed income and equity asset classes.
Step 1 is about linking products and services offered by companies to the SDGs. To what extent do these products and services contribute positively or negatively to the SDGs? Companies are assessed on an extensive set of rules and Key Performance Indicators (KPIs). These are summarized in a guidebook, linking each sector and industry to specific SDGs that correspond to the products and services provided by a specific company / issuer. The guidebook also states whether the contribution of these products and services is positive, neutral or negative.
For telecom, for example, the starting point is positive. Telecommunications are an essential part of the infrastructure needed to maintain a safe, secure and connected society. Industrialization and the increase in productivity highly depend on effective telecommunications. They contribute to making cities smarter and more sustainable, improving the quality of life. Farmers can use mobile phones to check market prices before selling to middlemen, and market traders can accept payments in mobile money. This way, the telecom sector can contribute to a proper infrastructure (SDG 9), economic growth (SDG 8) and ultimately to the reduction of poverty (SDG 1). We then determine the extent of the contribution, which in the case of telecom is deemed to be low.
Having determined the starting point of the overall sector’s contribution and impact, we then dig deeper by looking at the individual companies within this sector. To this end, we define a set of KPIs, on which the companies are assessed. For example, the initial positive-low impact for a bank is upgraded to positive-medium for SDGs 8 and 9, if more than 25% of its loan book is dedicated to small and medium enterprises (SMEs), which are the backbone of most economies, support local communities and foster sustainable economic growth. See figure 3 for an illustration of the KPIs that are used.
SDGs are also about how companies operate themselves. Are they polluting, do they respect labor rights, do they refrain from corruption and do they have a well-diversified board? In step 2, analysts check if the way the firm operates is compatible with the SDGs. This includes comprehensive evaluations of a company’s environmental policies, conduct track record, governance framework, etc. If necessary, the SDG ratings can be adjusted.
In the final step, we check whether the company concerned has been involved in any controversies. A company can make the right products, operate in the right manner, and so meet the criteria set in steps 1 and 2, but still be caught up in controversies, such as oil spills, fraud or bribery. The analyst then determines whether a company passes. In this context, it is important to know if the controversy is structural or just a one-off, and if management has adequately dealt with it to prevent recurrence in the foreseeable future. The credit analyst can therefore propose to temporarily put the SDG ranking at (-3) while awaiting management reaction and corrective measures. If firms commit serious and structural breaches of the UN Global Compact, they are even excluded.
A company can make the right products, operate in the right manner, but still be caught up in controversies, such as oil spills, fraud or bribery.
The outcome of this three-step analysis is quantified with a proprietary SDG rating methodology. All companies obtain an SDG score based on their contribution to the SDGs (positive, neutral or negative) and the extent of this contribution (high, medium or low). This is shown in Table 1.
Robeco investment analysts and SI analysts have mapped around 640 companies in line with this process. Our assessments show that 62% of the companies within the analysis group are making a positive contribution. Noteworthy examples include grid operators, healthcare companies, and banks. For some, it may be counterintuitive to think of banking ranking high on SDG contributions. However, banks are a critical means of financing the small engines of the economy. This is especially true in emerging markets where banks play an important role in fostering innovation and stimulating economic growth. Moreover, energy companies active in exploration and production also received positive SDG scores, if natural gas makes up more than 65% of the upstream production mix, but only if less than 10% of revenue is generated from unconventional oil & gas and no unconventional oil & gas expansion is planed).
Just over a fifth (22%) of the companies analyzed make a negative contribution. Companies with a weaker SDG profile are, for example, energy producers with a relatively large share of fracking, companies that produce unhealthy food, car manufacturers with a low share of EV/hybrid models, gambling companies and tobacco producers. Interestingly, in 14% of the cases, an adjustment was made in step 2 or 3 of the process.
All companies obtain an SDG score based on their contribution to the SDGs.
For Robeco, the SDGs wide-scale popularity, is satisfying affirmation of a decades-long conviction of the power of sustainability in business and investments. But the work of harnessing the power of SDGs for investing has just begun.
For sure, assessing a company’s contribution to the SDGs is a challenge. But we are confident of the effectiveness of this simple yet robust approach that 1) links a company’s products and services to the SDGs for contribution and impact, 2) analyzes the rigor of sustainability within its corporate policies, structures, and operations, and 3) continuously monitors for material controversies that could result in reputational damage, regulatory fines, or profit losses.
In the end, SDG impact may be a pre-requisite for business rather than a complementary component.
So far, the results of our analysis indicate that some sectors are already well-advanced in aligning with and contributing to the SDGs, however, the pace of innovation (not to mention the reckoning force of regulation and public scrutiny) is accelerating unprecedented change across not only individual companies but entire industries. We are already witnessing this within the energy and automotive sectors and the trend will only continue to gain traction and expand across developed and emerging economies. In the end, SDG impact may be a prerequisite for business rather than a complementary component.