For the first time in history, the world has a shared plan for promoting sustainable economic growth, advancing social inclusion and safeguarding the natural environment. The UN SDGs represent a workable blueprint to creating a better world for ourselves and future generations.
Universal good-will and global progress are not only noble, they are also necessary to fully optimize global assets and achieve economic growth that is truly sustainable for all. But how can investors translate lofty goals of supranational bodies into specific actionable steps that inform portfolio investment decisions? How can investors be sure their invested capital is moving the world in the right direction?
ESG and SDG, acronyms not synonyms
The rise in investor interest in ESG investing raises awareness and mobilizes financing for sustainability issues, both of which significantly enhance the ability to achieve the SDGs.
But many investors conflate ESG integration with SDG impact. Though ESG integration helps investors avoid companies that are not adequately managing environmental, social, and governance risks, it does not measure a company’s positive SDG impact. This is further supported by the fact that some notoriously harmful companies in industries such as tobacco or sugared beverages often perform well in ESG rankings.
ESG ratings can be useful for determining many aspects of a company’s sustainability performance, but they are insufficient for measuring whether companies are positively influencing the SDGs. A much deeper analysis and more thorough metrics are needed to better understand companies’ SDG performance.
How can investors translate lofty goals of supranational bodies into specific actionable steps that inform portfolio investment decisions?
Impact investing is a broad term that can be misapplied. Robeco differentiates between impact-aligned investing and impact-generating investing1. The former puts assets to work in companies that are moving towards (and not against) sustainable goals and impact. The latter induces investors to positively impact a status quo that would otherwise have remained unchanged without their investment and/or influence, for instance through active ownership. Both are useful as investors are a diverse group and some will prefer one type of impact over the other.
Despite these distinctions, all impact investing strategies should contain some essential ingredients. Impact should be measurable, it should be aligned with generating a financial return, and it should be additional, meaning investors’ actions make an appreciable difference to changing the status quo.
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In short, impact investing takes sustainable investing to the next level. It not only requires that the right inputs and actions are present but also that the right outputs and outcomes are produced. Surveys indicate that creating positive impact is important for many market segments and particularly for women and millennials. Given that these groups will be in charge of trillions of assets in the coming decades, there is tremendous opportunity/potential to put their assets and motivation to work in creating positive impact and sustainable progress.
However, it is becoming increasingly important for asset managers to ensure the quality and rigor of their impact claims as more investors move into impact investment strategies and financial regulators tighten impact-labeling standards.
Empirical evidence supports our view that screening credit and equity holdings for their SDG impact and sustainability characteristics is positive for performance.
A rigorous approach
The Robeco SDG Framework rigorously measures and scores companies based on their SDG contributions. It is a systematic approach to capturing SDG impact of equity and credit issuers that is objective, disciplined and replicable. It consists of a three-step sequence that starts with an assessment of the impact of a company’s products and services. Step two consists of an in-depth analysis of the impact of its operations, internal policies and structures. The process ends with a screening and review of corporate controversies that could negatively influence SDG progress, and hence a company’s SDG impact. The final results of this three-step analysis are quantified in an SDG score.
SDG scores, together with the macroeconomic outlook, fundamental analysis, sustainability research and ongoing risk management help investment teams reduce downside risk and select the most promising stocks for investment portfolios.
Empirical evidence supports our view that screening credit and equity holdings for their SDG impact and sustainability characteristics is positive for performance. The SDG Framework and resulting SDG scores strengthen the ability of our investment teams to screen out poor performers and does not impede their capacity to generate alpha through issuer and stock selection.
Moreover, tracking the SDG contributions of companies provides investors assurance that they have diversified exposure to SDGs as well as diversified exposure to quality companies across the economy with vision and commitment towards a sustainable future.
Pioneering tradition, leading position
Robeco’s SDG Framework is characteristic of our pioneering spirit, investment acumen and disciplined rigor in developing advanced investment tools and strategies. It enabled us to be among the first to bring an SDG-focused credits product to the market and forms the backbone of Robeco’s suite of SDG-linked fixed income and equity investment strategies. It also underscores our ability and commitment to translating complicated concepts into actionable steps within the investment process.
The SDG Framework along with our SDG-linked products help investors steer capital towards companies that are generating positive impact, meaningful returns and continued progress in the right direction.
1Busch, T., Bruce-Clark, P., Derwall, J., Eccles, R., Hebb, T., Hoepner, A., ... & Weber, O. (2021). “Impact investments: a call for (re) orientation”, SN Business & Economics, 1(2), 1-13.