Measuring a company’s contribution to the UN SDGs is not that straightforward. In an earlier article, we outlined Robeco’s three-step approach, in this article we look more closely at some of the difficulties associated with the first step, which links products and services offered by companies to the SDGs and assesses their contribution.
There are 17 main SDGs and 169 sub targets which address a very broad range of issues and which sometimes have conflicting impacts on each other. This means implementing this first step is not so straightforward. Those companies that make a more indirect contribution to achieving the goals, could be eliminated from the selection process prematurely in an approach that does not look beyond their core activities.
Although the goals themselves appear to be fairly clear cut, it is perhaps surprising how many gray areas there are when it comes to assessing sectors and individual companies. The agrochemical industry is a good case in point. On the one hand, crop-protection products improve agricultural yields significantly, which is very beneficial for SDG 2 (zero hunger). But pesticides are increasingly criticized for contaminating the environment and so also have a negative association when it comes to other SDGs. Firms manufacturing plastic food packaging are another example. They help prolong the shelf life of products – again beneficial for SDG 2 (zero hunger), but also create waste products that have a negative impact on the environment.
The list goes on. How should firms be dealt with that engage in heavily polluting activities (extracting oil, shale gas) but take issues like gender equality (SDG 5) and health and safety (one of the sub goals of SDG 8) extremely seriously? Moves to shut down or wind up coal mines or nuclear power generators are very beneficial for SDG 7 (clean energy) but cause unemployment, something that can have a material negative impact on SDG 1 (zero poverty), especially in developing economies.
There is more to creating an SDG-linked investment universe than simply looking at what companies do
Although there are a few sectors that make an outright negative contribution to the SDGs (tobacco, gaming, aerospace/defense), in most cases, it is not so clear cut. The electric utilities sector contains both coal fired generators and electricity producers that rely heavily on renewables. Firms in the latter category should receive high SDG rankings, while those that depend more heavily on fossil fuels and nuclear power are likely to be assigned negative SDG scores.
The automotive sector is another good example. Most car manufacturers still have a negative/medium SDG ranking because they have not yet attained the electric vehicle/hybrid production thresholds. But this sector also includes trucks which play an essential role when it comes to the distribution of food and other basic materials, while some car-parts suppliers also positively contribute to SDGS, depending on their products (efficiency enhancing, safety supporting, for example). A sub-goal of SDG 3 (good health & well-being) targets a 50% reduction in traffic-related deaths and injuries globally in 2020.
By taking a black and white sector approach, companies within a ‘negative’ sector that handle other aspects of their business well – environmental impact, labor relations, supply chain considerations, for example – are automatically eliminated too.
There is more to creating an SDG-linked investment universe than simply looking at what companies do. RobecoSAM’s proprietary SDG framework looks beyond this to evaluate how they do it. This ensures that companies operating in sectors that may not appear to contribute to realizing the SDGs are not excluded and can be evaluated on the basis of other aspects of their business, resulting in an SDG score for an individual company that reflects its true contribution to the goals and a well-balanced investment universe. Robeco’s credit analysts and RobecoSAM’s SI specialists have used their framework to assess a diversified credit universe of almost 600 names – in investment grade, high yield, and emerging segments across a broad range of sectors.