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The Essentials of SDGs

Educational module for investment professionals

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Continuous education is an important part of any professional investor’s career, particularly as times change so rapidly. Investing is changing fast, as seen with the rapid adoption of the UN’s Sustainable Development Goals (SDGs). This has put some financial professionals at a disadvantage in being able to explain the concept to clients and prospects. This module bridges that gap.

Those participating in this course are invited to digest the information and then take the test at the end. To enhance the learning experience, the module is delivered using clear language, charts, videos and case studies. Each of the six chapters takes around 15 minutes to read.

A score of at least 10 out of 12 correct answers (80%) for the test will count as one and a half hours towards your professional CPD requirements. The educational module is already accredited by CII, CISI, FPA and lBF with more to follow.

CFA Institute allows its members the ability to self-determine and self-report professional learning credits earned from external sources. CFA Institute members are encouraged to self-document such credits in their online PL tracker.

Good luck!

1. What are the SDGs?

The UN’s Sustainable Development Goals are taking sustainable investing to the next level, focusing on clearly defined objectives to transform our world, while also offering returns for investors.

In this chapter, you will learn:

  • How the 17 SDGs came into being as the successor to MDGs
  • The methods for tracking their progress, and their limitations
  • The funding needed to achieve them and their public appeal

The origin of the SDGs

Climate change

The Sustainable Development Goals (SDGs) are 17 objectives for improving human society, ecological sustainability and the quality of life published by the United Nations in 2015. They cover a broad spectrum of sustainability topics, ranging from eliminating hunger and combating climate change to promoting responsible consumption and making cities more sustainable.

All countries – no matter how rich or poor – have agreed to work towards achieving the 17 SDGs by 2030, thereby establishing a 15-year timeframe for progress. The goals are part of ‘Transforming our World: the 2030 Agenda for Sustainable Development’ and are branded by the UN as "a blueprint to achieve a better and more sustainable future for all.”

Millennium Development Goals

The SDGs succeed the Millennium Development Goals (MDGs), eight objectives launched in 2000. They included a commitment to eradicate extreme poverty and hunger, achieve universal primary education, and combat HIV/AIDS. Developed from 2012 using a global consultation period in which more than one million people gave their inputs, the SDGs are much broader in scope – and they apply to all countries, not just those earmarked as ‘developing’.

Figure 1: The UN’s Sustainable Development Goals

Find out more about each goal by clicking on the UN’s interactive chart below.

Source: www.un.org

The goals themselves

Indicators

The 17 goals have 169 underlying targets and 232 approved indicators, which are used to track progress towards achieving them. For example, the targets for SDG 3 (good health and well-being) aim to end premature mortality, halt the spread of communicable diseases such as malaria and HIV/AIDS, and promote the attainment of affordable universal health coverage. The indicators measure such factors as a country’s child mortality rate, the number of new malarial or HIV infections, and the number of people covered by health insurance.

In terms of tangible investing, health care companies can contribute to SDG 3 by developing drugs that combat certain diseases, or by improving people’s access to affordable medicines. Conversely, some companies may negatively contribute to the SDGs, by producing harmful products such as tobacco or firearms.

Tracking progress

All 193 UN member states adopted the SDGs, and are expected to track their progress in achieving these objectives. The UN Statistics Division (UNSTATS) has primary responsibility for collecting countries’ metrics on the SDGs. These can be accessed via ‘SDG Indicators’, the UN’s Global SDG Database.1

Other initiatives are helping to monitor progress. The online publication SDG Tracker was launched in June 2018 and backed by Our World in Data – a joint project between the University of Oxford and the non-governmental organization Global Change Data Lab.2 It collects data on all indicators relevant to the SDGs.

Another project is the Global SDG Index and Dashboards Report. The SDG Index does more than track performance with respect to all 17 goals; it also ranks countries in terms of their achievements, thereby facilitating comparisons. This annual publication is co-produced by Bertelsmann Stiftung, a foundation run by the German Bertelsmann media group, and the UN’s Sustainable Development Solutions Network.3

Check out how your region is performing on any one of the 17 goals by clicking on the interactive chart below.

Figure 2: The Global SDG Index and Dashboards Report is interactive

Check out how your region is performing on any one of the 17 goals.

Problems with indicators

The sheer scale and diversity of the indicators makes tracking progress a difficult task. Statisticians struggle with obtaining data as numerous indicators are not compiled regularly. Others have problems creating methodologies for indicators that are not mainstream. Even the richest countries have shown significant gaps in their ability to track progress.4

Companies also face challenges in measuring their contributions to the SDGs. The investment process of asset managers including Robeco, offers a solution in this regard as it has strategies to target these objectives. This is discussed more fully in Chapter 3. However, a lot more needs to happen in order to achieve the SDGs, including the core issue of funding.

Funding needed

Estimates vary widely for how much funding is needed to meet all 17 goals by 2030. The UN’s own estimates are between USD 5 trillion and USD 7 trillion a year. This represents 7-10% of global GDP and 25-40% of annual global investment at 2014 levels. However, only about half of that amount is currently being invested by public and private organizations. The UN estimates the funding gap to currently be between USD 2.5 trillion and USD 3 trillion per year.5

While some progress has been made, the road ahead remains challenging. Things have been made increasingly difficult by the 2020 coronavirus crisis that saw much economic activity come to a standstill. Aside from damaging normal economic progress, it has made less money available for investing in initiatives such as the SDGs.6

Looking forward: We the People

Still, the SDGs have captured the world’s imagination. They have started a movement that began with the optimism that this new millennium brought for the future. As this learning module will demonstrate, there are many opportunities for investing in one or more of the goals.

And we all have a role to play, as this ‘We the People’ video, featuring some very famous faces, suggests. It’s not just governments, companies, investors or special interest groups that should be involved – it’s everyone!

Summary

In summary, you should now know how and why the 17 SDGs were created, how they became the all-embracing successor to the MDGs, the methods for measuring their success (and the challenges that this brings), and how much funding is still required to achieve these objectives.

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2. Why are SDGs relevant for investors?

Why then should investors place their clients’ cash into an arena that essentially targets social or development projects, rather than more established means of generating returns?

In this chapter you will learn:

  • Why the SDGs present a great business opportunity for companies
  • The most (and least) favored SDGs for development capital
  • The link with impact investing and the returns that can create

The ‘call to action’ that lies at the heart of the SDGs is that unlike most UN initiatives, the 17 goals are not just aimed at governments or NGOs, but the whole of society. It presents both a challenge and an opportunity, aimed equally at businesses and investors, who are seen as key to achieving the goals. The SDGs are unique, as it is the first time in history that a global plan has been drawn up to promote social well-being, economic development and ecological sustainability. What is more, this plan applies to all countries and involves everyone.

Subsequently, contributing to the SDGs presents a business opportunity for companies, although opinions will differ on the preferred goals to invest in. A survey by the United Nations Development Program identified the three most popular goals in Uganda as being SDG 7 (affordable and clean energy), SDG 13 (climate action) and SDG 11 (sustainable cities and communities).7

Figure 3: Which SDGs are you most interested in contributing to?

Source: www.undp.org

Infrastructure

All three involve infrastructure and therefore provide a physical means of measurably adding value, while also achieving clear returns. SDG 16 (peace, justice and strong institutions) was not considered very investible, but ultimately any SDG can be invested in by making the right selections. Building telecommunications equipment, for example, improves access to information – a target under SDG 16. It depends on how and where you look.

Renewable energy

Research has shown that even though massive investment is still needed to meet the SDGs, it would also create new markets. For example, renewable energy or medicines could be sold to people who previously had no access to them. One estimate suggested this could mean as much as USD 12 trillion of market opportunities per year and that 380 million new jobs could be created, particularly in projects related to combatting climate change.8, 9

A business opportunity

For companies and investors, the SDGs are therefore not a 'nice to have' aspect of investing, or a PR exercise, but a clear business opportunity. Indeed, the SDGs could provide companies with a future competitive advantage by being a source of innovation and by encouraging process improvements and operational efficiencies – in other words, improving returns.

Regulations

Meanwhile, regulations are changing fast, and the public is increasingly demanding a more sustainable approach to business. Companies and investors that embed SDGs into their strategy will subsequently be more likely to align with present and future governmental policies and regulations. This means they would then avoid the risk of losing their license to operate, or encountering high costs resulting from structural change that is eventually forced upon them.

This in turn reduces the risks inherent in investment portfolios. At the same time, sustainably minded companies will have a positive impact on societies and the environment, ensuring a win-win scenario.

Impact investing

Impact investing

Targeting the SDGs is a form of impact investing, which is defined as "the process of intentionally making investments with the aim of creating a measurable beneficial impact on the environment or society, as well as earning a positive financial return”.10

The SDGs are a popular means of engaging in impact investing, since they provide a good framework for investors to determine the intended social and environmental impact of their chosen investment.

Intentionality, positive financial return, measurable

Impact investing has three components:

  • There must be intentionality: an investor is making a deliberate, targeted effort to exert a positive impact. This could be due to the feelgood factor of making a difference, coupled with an underlying business motivation.
  • The investment should generate a positive financial return; this is the key differentiator between investing and descending into charity or philanthropy, where no return is expected.
  • The benefits of impact investment should be measurable. This means the results of the investment should be tangible, such as how many hospitals were built. The measurability of investments is discussed more fully in Chapter 5.

Pension fund commitments

Pension funds

While such investment has captured the imagination of investors who want to engage in impact investing and assist progress with the SDGs, it has yet to enter the mainstream. Few of the world’s major professional investors such as pension funds currently allocate large sums to SDGs, viewing it as ‘niche’.

For example, a survey was held in 2019 by the Dutch Association of Investors for Sustainable Development, which represents about 95% of the Dutch pension savings market and has about EUR 1.36 billion in assets. It found that only 19% of its members had set targets to allocate investment cash towards the goals.11

As with the UN survey, the Dutch research showed that some SDGs were more popular investment targets than others. SDG 13 (climate action) was seen as the one offering the biggest investment opportunity, particularly as it has quantifiable targets in terms of things like CO2 emissions.

Figure 4: Focus of pension funds on investment opportunity and business responsibility of the 17 SDGs

Source: VBDO - Pension Funds and Sustainable Development Goals

Ultimately, achieving the SDGs is in everyone’s interest. If we reach them, our planet will be more stable and less likely to face natural and manmade hazards. And if such hazards do strike, such as the Covid-19 pandemic, then investments in our economies and in people’s basic needs will make us more resilient. In other words, the SDGs can create a world in which business can flourish.

Summary

In summary, you should now fully understand why the SDGs are a business opportunity rather than a PR exercise, how they link with impact investing as a means of making a measurable impact and return, and which ones are proving more popular depending on their perceived investibility.
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3. Assessing companies’ contributions to the SDGs

We have seen that the SDGs present a great business opportunity, but it is important to know which companies are able to contribute to these goals before deciding whether to invest in them.

In this chapter you will learn:

  • The contributions that companies can make differ widely per sector
  • The net result is vital, combining negative and positive contributions
  • Three examples of the different ways investors measure these goals

Contributing to the SDGs

Companies can contribute to achieving the SDGs by making products or offering services that help achieve one or more of the 17 goals. Moreover, companies can advance the SDGs by integrating them into their policies. Some companies will, by nature, be more attuned to making a contribution than others.

For example, there can be no doubt that a company producing solar energy is contributing to SDG 7 (affordable and clean energy). A business creating educational materials for schools is directly contributing to SDG 4 (quality education), while a firm that actively works to promote women in leadership roles is advancing SDG 5 (gender equality).

Negative and net contributions

However, some companies have negative impacts on the SDGs. This might be obvious in some cases, where harmful products such as cigarettes are produced. But other companies may contribute both positively and negatively. How to categorize, for example, an energy utility that uses both wind power and thermal coal?

Greenhouse gases

Even more complex challenges arise with the creation of products or services that advance SDGs but simultaneously generate negative externalities. For example, mining metals that are crucial for the manufacture of electric cars or wind turbines, also adversely impact ecosystems and emit greenhouse gases.

How investors assess contributions

In order to address these issues, investors have come up with several means of comparing positive and negative impacts. These systems are then used to make investment decisions on whether a particular company should be included in an equity or corporate bond portfolio. The following section discusses three of these systems.

1. The SDI Asset Owner Platform

The Dutch pension funds APG and PGGM manage EUR 750 billion in assets, between them, for 8.7 million people. They joined forces to develop a common approach for analyzing contributions. Their Sustainable Development Investments (SDI) Asset Owner Platform allows institutional clients to see the extent to which their portfolio investments contribute to the SDGs.12

The data is supplied by Entis – a data analytics team that APG bought from Deloitte in 2018. It uses artificial intelligence for the more advanced number crunching. The analysis is based on an SDI taxonomy that explains each SDG, and crucially defines which of its sub-goals are investible. By the end of 2018, the Entis team had analyzed an investment universe of around 10,000 listed companies.

The team then measures how much of the company’s operations contribute to these investible subgoals. They do this by using financial or operational metrics such as the proportion of revenues derived from a certain SDG-friendly activity. External metrics include outcomes such as the number of people who have access to health care or financial services as a result of a company’s activities. The example below shows the platform’s views on the investibility of SDG 14 (life below water).

Figure 5: Platform’s views on the investibility of SDG 14

Source: The SDI Asset Owner Platform

2. The SDG Solutions Assessment

The Institutional Shareholder Services group (ISS) is the world’s largest proxy advisory firm and supplies voting facilities, corporate governance and responsible investment solutions to investors. It also takes a slightly different approach. Its SDG Solutions Assessment uses 15 of its own sustainability objectives that are broadly aligned with the 17 SDGs, but have a different emphasis.

Objectives such as ‘conserving water’, ‘optimizing materials’ and ‘safeguarding peace’ are not standalone SDGs, although they appear in some sub-targets. Other objectives such as ‘ensuring health’, ‘alleviating poverty’ and ‘mitigating climate change’ are more directly correlated.13

The SDG Solutions Assessment identifies a product or service category’s contribution towards the 15 sustainability objectives. This is done according to the proportion of revenue derived from each one to arrive at ‘objective scores’. An overall SDG Solutions Score is eventually allotted, taking into account a company’s most distinct objective impacts.

The score will then fall into one of five performance categories: Significant Obstruction (-10.0 to -5.1); Limited Obstruction (-5.0 to -0.2); No Net Impact (-0.1 to 0.1); Limited Contribution (0.2 to 5.0) and Significant Contribution (5.1 to 10.0). Once these results are known, ISS is able to advise its clients about the positive or negative contribution that their portfolio is making.

Figure 6: The SDG Solutions Assessment's 15 sustainability objectives

Source: The SDG Solutions Assessment

3. The SDG Impact Framework

Robeco developed a proprietary SDG Impact Framework to provide research for bespoke investment strategies targeting all 17 goals.

Figure 7: Proprietary SDG framework consists of a three-step approach

The methodology uses a three-step process to ascertain companies’ sustainability credentials:

  • Step 1: What does the company produce? Analysts look at what the company produces to determine whether this contributes positively or negatively to the relevant SDGs, using specific key performance indicators and thresholds.

  • Step 2: How does the company produce? Here, analysts examine how these goods and services are produced and whether these companies advance SDGs in their operations, or whether there are any flipsides to apparent good intentions, such as poor governance.

  • Step 3: Has the company erred? Checks are made to see whether the company has been involved in any controversies. Examples include pollution incidents or the mis-selling of services.

Scores are then assigned to assess a company’s overall impact. These range from +3 (highly positive) to -3 (highly negative). Once the overall score is known, Robeco can use its SDG investment products to invest in those companies that advance the SDGs.

The animated video below describes this three-step process: watch the short film to see how it works:

Source: Robeco

Summary

In summary, it is clear that there are different ways of measuring how companies contribute positively or negatively to one or more of the SDGs. Some models pinpoint which goals are investible, while others prefer to prioritize objectives, or take a more company-specific approach. Like so much in sustainable investing, it is not an exact science and there is no ‘one-size-fits-all’ approach. Rather, it is a complex subject and there are different shades of green.
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4. SDG investment solutions

Once an investor has decided to take the plunge and support the SDGs, a choice of investment vehicle needs to be made, using equities, bonds, or other forms of funding.

In this chapter, you will learn about:

  • Investing in the SDGs using equity and bond strategies
  • Traditional impact investments such as renewable energy
  • Engagement programs and other alternative solutions

There are many ways of investing in companies and sectors that have the potential to make a positive contribution to the SDGs. This can typically be done through equity or credit strategies that exclusively target the SDGs, or through more thematic strategies that target a theme related to the SDGs, such as renewable energy.

Relatively few investors offer strategies that target the SDGs. But, more asset managers are now considering launching such products, as demand for these kinds of bespoke strategies is growing rapidly. They do this by seeking equities or bonds of companies that are demonstrably making a positive contribution to achieving one or more of the 17 goals. As seen in Chapter 3, there are various means of identifying those companies.

Instead of taking a targeted SDG approach, some impact funds target a specific issue or theme, such as reducing plastic pollution. The investor is therefore contributing to its associated goals – in this case SDGs 11, 12, 14 and 15. This is a more focused method and therefore has different risk-adjusted return characteristics when compared to taking a broader approach.

Thematic or issue investing

Three examples of investment strategies that target an issue rather than a specific SDG, can be seen in themes that are gaining traction in environmental protection: renewable energy, the circular economy, and green bonds:

Renewable energy

  • Renewable energy is a genre of investing in its own right that now straddles impact investing and mainstream sustainable investing. Once considered niche, the solar, wind and hydroelectric power industries have become an important part of the international energy mix, accounting for 28% of global energy production in 2020. Investing in renewables, however, is often done indirectly through more mainstream investing.14

Circular economy

  • 2020 saw the launch of several funds targeting the circular economy. These aim to replace the current ‘take-make-dispose’ model of production and consumption, which relies on the continual use of resources. To this end, such funds invest in companies engaged in activities starting with ‘re’: recycle, reuse, refurbish, repair, redesign, recover. There is no specific SDG for the circular economy – although it ties in with SDG 12 (responsible consumption and production).

Green bonds

  • Green bonds are debt securities that are exclusively used to promote environmental projects. They are issued mainly by governments, municipalities and NGOs. For a bond to qualify as ‘green’, its proceeds should be used for projects with clear environmental benefits, such as renewable energy or waste management. The first green bond was a Climate Awareness Bond issued by the European Investment Bank in 2007. It is becoming increasingly mainstream, with EUR 700 billion of green bonds now in circulation.

Accepting the rough with the smooth

It is not always necessary, or even possible, to commit to an investment that would 100% contribute to an SDG. Renewable energy is a good example. Multiple solar and wind projects are operated by major energy companies, including Big Oil, as a form of diversification away from fossil fuels. Many investors therefore buy the equities or bonds of traditional oil companies as a means of contributing to their transition towards renewables.

Often, it is an issue of degree. Impact investors increasingly look at how much of a traditional company’s business is in renewables, while accepting that its core business is not compatible with this. If its renewable energy activities exceed a certain threshold, this is enough for some to consider the business as being sustainably investible. The main issue is to ensure that activities that cause ‘significant harm’ to sustainable development, are avoided.

Using engagement

Engagement

Engaging with companies can be a powerful means of improving their ESG metrics. Not all asset managers have active ownership teams. An asset owner will often ask a potential manager if they have such a team during the procurement process, so as to ensure a voting and engagement capability for their assets.

It can be even more powerful when investors band together. In May 2020, Robeco played a role in getting a former wind power executive appointed to the board of the Italian energy company Enel, in collaboration with the Climate100+ investor initiative. He will contribute to moving Enel away from its exposure to fossil fuels and point it towards renewables, in an effort to make the company carbon neutral by 2050.

Traditional impact investing

The SDGs have broadened the scope of impact investments from traditional and mostly private impact investing vehicles, such as microfinance funds or renewable energy projects, to listed equities and credits. The direct impact of investing in microfinance, which provides loans to lower income people in emerging markets, or in renewable energy, is much larger than the direct impact of investing in equity or credits.

One could argue that investing in an equity or bond does not really provide extra funding for specific impact projects, and therefore does not have ‘additionality’. On the other hand, liquidity and scalability are higher when investing in the listed space. It is possible to invest larger amounts in this arena, and if a large company moves only slightly towards sustainability, that can have a very large, direct impact too.

In short, different vehicles bring different opportunities, but also challenges for generating impact. It is up to investors to consider which investment strategy, and which combination of vehicles, will be most effective in contributing to the SDGs, while also meeting their fiduciary duty to clients.

Summary

In summary, you should now understand the different investment vehicles available for the SDGs. Some strategies target the equities and bonds of companies that can contribute to one or more of the SDGs. Others use sectoral themes such as renewable energy and the circular economy, or more subtle approaches such as green bonds and engagement. And then there is traditional investing in projects on the ground. Overall, impact investing means striking the right balance between generating an impact and achieving returns, so that impacts can be sustained in the long run.

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5. How to measure the impact of the SDGs?

We now know how to assess whether companies positively or negatively impact the SDGs, but measuring the impact at the sharp end of these business operations – the end users – can be much harder. Impact measurement is important, since it allows investors to know that their money is actually making a difference.

In this chapter, you will learn:

  • How the UN tracks progress made on the SDGs, with mixed results 
  • How impact can be understood from a ‘theory of change’ perspective 
  • How investors have different ways of measuring impact

How are countries doing? The UN’s own progress report

Inequality, ecosystems, climate change

The UN collects statistics from its member states to track progress in achieving each of the 17 SDGs. Five years after their adoption, these statistics paint a bleak picture: inequality is widening, hunger is on the rise, ecosystems are eroding at unprecedented rates, and climate change undermines the entire SDG Agenda.15

Despite these slow trends, there have also been more positive developments, including:

  • The number of women elected to parliaments has risen from 19% to 24%
  • 17.5% of total final energy consumption now comes from renewables
  • Global investment in research and development has trebled to USD 2 trillion
  • Almost 100 countries are actively promoting sustainable consumption
  • The portion of the ocean now legally protected has more than doubled to 17%

Ocean

The fact that countries are progressing so slowly towards achieving the SDGs is an impetus for investors and companies to help step up the pace. And to do that, impact measurement is key.

Impact measurement in theory

Let’s take a step back and consider how companies impact the world. The figure below introduces a helpful framework for understanding the chain through which companies generate impact. In academic and development communities, this is referred to as a ‘theory of change’.

Figure 8: The academic framework for the chain through which companies generate impact

Source: Robeco
Take, for instance, a pharmaceutical company. Its inputs and activities allow it to create medicine as outputs. These outputs can be quantified by volumes and according to the type of diseases they fight. They benefit people who need medicines, thus translating into outcomes, which are measurable by looking at the number of people experiencing an improved quality of life. Over time, the health and well-being of people in societies will be enhanced, creating the desired impacts.

This framework shows the complexity of measuring impacts. While inputs, activities, and outputs are relatively easy to quantify because they are within a company’s control, outcomes and the longer-term impacts are much harder to assess, since they happen within societies.

Different impact measurement methods are available. These include robust ‘randomized control trials’ that take a Nobel Prize-winning, experimental approach to investigating what happens when some communities receive an intervention, such as microfinance, and some don’t, as well as economic modelling, surveys and case studies.16

Indicators

Professor Karen Maas, Academic Director of the Impact Centre at Erasmus University Rotterdam, explains that a good starting point is to select key indicators and measure these over time. Once these indicators have been measured, investors can take the next step and “put their money to work and really help solve issues.”17

Impact indicators for investors

The Investment Impact Framework, developed by the Investment Leaders Group of the Cambridge Institute for Sustainability Leadership, has identified impact indicators that can be measured by the investment sector.18

They first divided the 17 SDGs into six themes. Then, they identified ‘ideal metrics’ as well as ‘practical metrics’ that are readily available for a representative sample of companies in the universe, through data systems such as Bloomberg. The result can be seen in the graphic below which depicts the impact indicators, using a coloring scheme to compare the impacts per USD 1 million invested to the benchmark.

Figure 9: Investment Impact Framework

Source: The Investment Impact Framework
This framework is pragmatic and, since the ’practical indicators’ are already available, it can be directly used. However, it is important to note that these practical indicators are quite rudimentary and the corporate reporting surrounding them needs to improve. Nevertheless, there is a need to go further in measuring the difference investors are making to the lives and livelihoods of people around the world. Some investors have taken up this challenge.

Impact measurement

Robeco has developed a means of measuring the impacts of the companies’ invested in its strategies targeting the SDGs. One example of discernible impact measurement can be seen in its Smart Materials strategy, which aids SDG 9 (industry, innovation and infrastructure), and SDG 12 (responsible consumption and production).

Electric cars

Electric cars have different components to those powered by petrol, not least in terms of their batteries. This requires cadmium and lithium, among other new minerals now being mass mined. Transformation materials are also creating opportunities in lasers, 3D printing and more advanced recycling – not to mention biodegradable plastics, and even parts for the human body.

Biodegradable

Companies in the Smart Materials fund have made a difference by recycling 5,481 metric tons of materials in 2019 – the equivalent to what 26,058 people would consume in a year. Some 32,060 tons of waste was avoided – equivalent to what is normally created by 65,780 people. And those involved in reducing energy consumption, prevented 465,095 tons of CO2 from entering the atmosphere – the equivalent of taking 326,605 non-electric cars off the road.19

Figure 10: The impact made by companies in the RobecoSAM Smart Materials strategy

Source: Robeco

Note: additional investments into the fund do not necessarily lead to additional or improved impacts.
The metrics stem from the 2019 impact report. Source: Robeco

1. 2017 average CO2 emissions EU 118.5 g/km; 2015 annual distance driven by car EU 12.009 km; in t CO2-eq;1,423 (source:www.eea.europa.eu;www.odyssee-mure.eu)
2. 2014 Recycling rate EU 43.6% 487kg *43.6%=0.21 tonners waste recycled per capita (source www.ec.europa.eu/eurostat).
3. 2017 EU:487 kg = 0.487 tonners waste generated per capita; in tonners; 0.487 (source: www.ec.europa.eu/eurostat).

Summary

In summary, we can see how impact measurement is important, though some of the results collected since 2015 have been disappointing, as shown by the UN’s own progress report. While impact measurement can be challenging, there are various methods and frameworks that investors can consider. And only by measuring what matters, can we move towards accelerating impacts on the SDGs.

15. https://unstats.un.org/sdgs/report/2019/The-Sustainable-Development-Goals-Report-2019.pdf
16. See e.g. Banerjee, A., Duflo, E., Glennerster, R., and Kinnan, C., 2015. “The miracle of microfinance? Evidence from a randomized evaluation”. American Economic Journal: Applied Economics, 7(1), 22-53.
17. For Karen Maas’s full column in SIX magazine, visit https://www.robeco.com/en/insights/2020/03/new-sustainable-investing-expertise-disguised-as-a-glossy-magazine.html
18. Investment Leaders Group (2020). “In search of impact. Measuring the full value of capital”. Cambridge, UK: Cambridge Institute for Sustainability Leadership.
19. The figures are for 2017 average CO2 emissions EU 118.5 g/km; 2015 annual distance driven by car EU 12,009 km; in t CO2-eq; 1.423 (source: www.eea.europa.eu;www.odyssee-mure.eu); 2014 Recycling rate EU 43.6% 487kg *43.6%= 0.21 tons waste recycled per capita (source: www.ec.europa.eu/eurostat); 2017 EU: 487 kg = 0.487 tons waste generated per capita; in tons; 0.487 (source: www.ec.europa.eu/eurostat). The graphic displays the resulting for holdings at 30 June 2019.

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6. Case studies

Putting ideology into practice lies at the heart of sustainable and impact investing. Different investors have differing motivations for what they hope to achieve with their money.

In this chapter, you will learn:

  • How impact investing helps previously underserved communities
  • Themes such as improving education can also generate returns
  • Raising food standards is an example of the power of engagement

There are many different motivations for making contributions to the SDGs, though all professional investors should have an underlying objective of wanting to make an impact, while still enjoying financial returns. As sustainable investing has developed over the years, there are now perhaps as many ways of going about it as there are SDGs. Here are some of them:

Serving the underserved

Let’s first look at the example of a dedicated impact investor, Vital Capital. Its principal mission is to invest in the rapidly developing markets in Sub-Saharan Africa to improve the well-being of previously underserved communities, while also generating risk-adjusted returns. To fulfil this mission, it mainly invests in urban communities, agriculture, healthcare, energy, water and education.

As a specialized impact investor, being able to accurately measure the impact of investments and report on them is essential. By working closely with its investees, Vital Capital is able to obtain relatively good insights into the outcomes and impacts it is supporting.

For example, its investments enabled 440,000 cubic meters of wastewater to be treated in 2019, allowed 50,000 liters of fresh milk to be processed every day, and provided 15,000 affordable housing units for lower-income families. Its achievements are show in the graphics below:20

Figure 11: The impact made by Vital Capital's investments

Source: Vital Capital

Improving education

Improving education is sometimes seen as being beyond the scope of generating returns, but it can be done with the right approach. LGT Impact Ventures is a Swiss private equity impact investor that targets market-rate returns, while also achieving measurable, positive social and environmental impacts. It has invested more than USD 80 million in scalable business models that help improve access to services and products in education, health and agriculture. Its investments reached 3.8 million disadvantaged people in 2015.

One of LGT’s investees, Bridge International Academies (BIA), runs public primary schools as a private operator, offering low-cost tuition to students in sub-Saharan Africa and India. At USD 5 per child per month, the firm provides a sustainable solution to increasing access to education. It ensures the quality of schools by regularly reviewing data on students’ progress.

With a mission of ‘knowledge for all’, BIA plans to educate 10 million children across a dozen countries by 2025, thereby directly contributing to SDG 4 (quality education).

Going green

It is possible for companies that were previously involved in unsustainable activities to have a ‘conversion on the road to Damascus’ and become big in areas that directly help the SDGs. The Danish energy company Ørsted used to be called Dong Energy, which was big in oil and gas exploration. Yet in 2017 it changed course, selling its oil and gas activities and reinventing itself as a leader in renewable energy.

Green bond

To this end, Ørsted issued a EUR 750 million green bond and a EUR 500 million green hybrid issue, which investors were very happy to purchase. Ørsted will use these proceeds to help install up to 12 gigawatts of offshore wind energy by 2025 and to replace coal with the more sustainable alternative, biomass. Purchasing this green bond enables investors to finance the energy transition and to help mitigate climate change (SDGs 7 and 13).

This bond was selected a winner in the 2018 Environmental Finance Green Bond Awards. It has become a funding tool in helping Ørsted achieve its ambition of a 95% reduction in carbon emissions from power and heat generation by 2023. These types of companies are typically found in listed SDG strategies, along with bespoke green bond funds.21

Higher food standards

An impact can be made indirectly through engagement, such as by raising food standards. Improving food security in emerging markets was a Robeco engagement theme in 2018 that focused on the role played by agrichemical, seed and fertilizer companies. These companies’ products and services have the potential to be well aligned with SDG 2 (zero hunger), as they can support farmers in food-insecure regions by closing the yield gaps that lead to food shortages.

This built on more specific work done in 2017, when Robeco took part in a campaign led by the research group Farm Animal Investment Risk and Return (FAIRR). The aim was to reduce the amounts of antibiotics used in farming. The overuse of these antibiotics to make farm animals such as cattle produce more meat, is making bacteria more resistant to them, creating a threat to humans.

Viral infections in livestock have proved to be a major stumbling block in achieving SDG 2, with knock-on effects for human health. Long before the coronavirus, the H1N1 ‘swine flu’ epidemic, first detected in pigs, killed around 150,000 people in 2009. The virus had become immune to existing vaccines and spread rapidly, before being declared a pandemic by the World Health Organization.

Summary

In summary, these case studies should give you a good understanding of how investing in the SDGs works in practice, from improving people’s lives in sub-Saharan Africa, to replacing fossil fuel production with renewable energy, and engaging with companies to raise food standards. Green bonds can make a significant difference as a funding tool, while providing an excellent return for their investors.

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7. Summary

To summarize, let us recap what we know about the Sustainable Development Goals and investing in them. This final chapter highlights the main points from the previous six.

  1. The Sustainable Development Goals (SDGs) are 17 objectives geared towards improving human society, ecological sustainability and the quality of life. They were adopted by the United Nations in 2015. They succeed the eight Millennium Development Goals and are intended to be achieved by 2030. The SDGs cover a broad spectrum of topics, that range from eliminating hunger and combating climate change, to promoting responsible consumption and making cities more sustainable. They have achieved widespread support of companies and investors, though a significant funding gap remains.

  2. The SDGs present major business opportunities and are relevant for investors because companies produce goods and services that can contribute to the SDGs. To date, investor interest differs between the 17 SDGs, as some prefer goals that focus on building infrastructure, where returns are more easily acquired. Impact investing – being intentional, measurable and providing financial return – can help target more SDGs.

  3. There are different ways of assessing how companies contribute positively or negatively to one or more of the SDGs. Some models pinpoint which goals are investible, while others prefer to prioritize objectives, or take a more company-specific approach. Like so much in sustainable investing, it is not an exact science and there is no ‘one-size-fits-all’ approach; rather, there are different shades of green. This means it is important to understand which assumptions and metrics are included in different models.

  4. There are many ways of investing in companies and sectors that can make a positive contribution to the SDGs. This can be done through equity or credits strategies that target the SDGs, or more thematic strategies that target a related theme, such as renewable energy. And then there is traditional investing in projects on the ground. Overall, impact investing means striking the right balance between generating an impact and achieving returns.

  5. Impact measurement is important. At the national level, some of the results since 2015 have been mixed, as shown by the UN’s own progress report. Investors can directly measure many impacts, such as how many mouths were fed or how much carbon dioxide was avoided, by collecting indicators over time. Impact measurement theories, data systems and frameworks are still being developed. These will help assess how well we are really doing towards achieving the SDGs.

  6. Four case studies show how investors have different ways of targeting the SDGs: from improving people’s lives in sub-Saharan Africa, to replacing fossil fuel production with renewable energy, to engaging with companies to raise food standards. Some investors specialize in impact investing, while others have a more indirect means of making a difference. Green bonds can be an important funding tool, as well as providing a return for their investors.
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What is the principal purpose of the Sustainable Development Goals?

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What makes it difficult to track the progress that SDGs are making?

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What is the main difference between the MDGs and SDGs?

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What is the estimated funding gap for achieving the goals?

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Why are the SDGs an opportunity for investors?

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What are the three components of impact investing?

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When assessing a company’s contributions to SDGs, we should consider:

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How do the SDGs deal with plastic pollution?

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Ways of investing in SDGs through themes include:

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According to the UN, successes for the SDGs include:

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Measuring the impact of contributions to the SDGs can be difficult because:

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Real examples of ways in which impact investing has made a difference include:

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1
What is the principal purpose of the Sustainable Development Goals?
To raise money to give to poor people in emerging markets
A blueprint to achieve a better and more sustainable future for all
A means of combatting global warming and climate change
To raise money to give to poor people in emerging markets
A blueprint to achieve a better and more sustainable future for all
A means of combatting global warming and climate change
2
What makes it difficult to track the progress that SDGs are making?
The data from emerging markets is always unreliable
The diversity of indicators which are not routinely compiled
We don’t have enough measuring sticks for 17 SDGs
The data from emerging markets is always unreliable
The diversity of indicators which are not routinely compiled
We don’t have enough measuring sticks for 17 SDGs
3
What is the main difference between the MDGs and SDGs?
SDGs have a much broader scope and apply to all countries
MDGs had 12 objectives, SDG have 17
MDGs only targeted poverty and hunger
SDGs have a much broader scope and apply to all countries
MDGs had 12 objectives, SDG have 17
MDGs only targeted poverty and hunger
4
What is the estimated funding gap for achieving the goals?
USD 2.5 trillion to USD 3 trillion
USD 5 trillion to USD 7 trillion
USD 5 trillion to USD 7.5 trillion
USD 2.5 trillion to USD 3 trillion
USD 5 trillion to USD 7 trillion
USD 5 trillion to USD 7.5 trillion
5
Why are the SDGs an opportunity for investors?
They are socially beneficial projects which also offer financial returns
They allow an investor to look good in PR terms
It stops regulators from criticizing their other investments
They are socially beneficial projects which also offer financial returns
They allow an investor to look good in PR terms
It stops regulators from criticizing their other investments
6
What are the three components of impact investing?
An emerging market, intentionality, a financial return
Intentionality, alleviating hunger, measurable
Intentionality, a financial return, measurable
An emerging market, intentionality, a financial return
Intentionality, alleviating hunger, measurable
Intentionality, a financial return, measurable
7
When assessing a company’s contributions to SDGs, we should consider:
Both positive and negative contributions
Only the positives in emerging markets
Only the negatives that come from ‘sin stocks’
Both positive and negative contributions
Only the positives in emerging markets
Only the negatives that come from ‘sin stocks’
8
How do the SDGs deal with plastic pollution?
They don’t, as there is no specific goal for it
The issue is indirectly covered by several of the goals
It is only covered by the goal for protecting oceans
They don’t, as there is no specific goal for it
The issue is indirectly covered by several of the goals
It is only covered by the goal for protecting oceans
9
Ways of investing in SDGs through themes include:
Targeting renewable energy and the circular economy
Targeting renewable energy and charities
Targeting renewable energy and emerging markets
Targeting renewable energy and the circular economy
Targeting renewable energy and charities
Targeting renewable energy and emerging markets
10
According to the UN, successes for the SDGs include:
The number of women elected to parliaments has risen from 29% to 42%
17.5% of total final energy consumption now comes from renewables
55% of all wars that began before the SDGs started in 2015 have now ended
The number of women elected to parliaments has risen from 29% to 42%
17.5% of total final energy consumption now comes from renewables
55% of all wars that began before the SDGs started in 2015 have now ended
11
Measuring the impact of contributions to the SDGs can be difficult because:
There aren’t enough measuring sticks in emerging markets
The data needs to be approved by the government in each state
Data collection is still in its early stages
There aren’t enough measuring sticks in emerging markets
The data needs to be approved by the government in each state
Data collection is still in its early stages
12
Real examples of ways in which impact investing has made a difference include:
Helping underserved communities in sub-Saharan Africa
Issuing green bonds to raise incomes in the Brazilian Amazon
Increasing the amount of antibiotics used in farming
Helping underserved communities in sub-Saharan Africa
Issuing green bonds to raise incomes in the Brazilian Amazon
Increasing the amount of antibiotics used in farming