Investing in the UN’s Sustainable Development Goals (SDGs) can be challenging, but it is now possible to verify corporate contributions to them.
A three-step framework developed jointly by Robeco and RobecoSAM offers a scoring methodology that evaluates a specific company’s ability to meet the 17 SDGs, or whether its products or activities detract from them. The framework enables the construction of a bespoke credits strategy that can be shown to make a positive contribution.
The SDGs range from eradicating world hunger and reducing global warming, to improving health care, technological access and educational standards in emerging markets. Launched in 2015, they have been adopted by 193 countries, with a challenge to businesses – including asset managers – around the world to help meet them all by 2030.
“We’ve created a three-step process to assess the impact that companies are having on achieving the Sustainable Development Goals," Jan Willem de Moor, manager of the RobecoSAM Global SDG Credits fund, told the Responsible Investor 2018 conference.
“In the first step we look at what the companies are producing, or what services they are offering, and how does that contribute to a specific SDG. For example, for SDG3 (good health and well-being), it would make sense to look at pharmaceutical companies, or those making medical devices, or offering health care insurance, as these companies could contribute to that specific SDG.”
“Taking SDG 11 (sustainable cities and communities), we would focus on home builders, the producers of building materials, and also car producers, because if you’re making a lot of electric vehicles, this is helping to achieve the goal of sustainable cities.”
“SDG 10 (reduced inequalities) is a typical example of where it’s difficult to find companies whose products contribute directly to this SDG. This is where the second step of the process is used to focus on how companies are producing their goods. Are they, for instance, emphasizing gender equality in their human resources, creating a good governance structure, or putting a lot of emphasis on reducing their greenhouse gas emissions?”
“Lastly in step 3, we focus on controversies. The first two steps are more process orientated, while in the third step we look at whether a company has done something like generated an oil spill for example, has been caught up in bribery and fraudulent activity, or has been mis-selling its products. We then assess whether this was a one-off event, and whether the company is addressing its problems or not.”
The outcome of this three-step process is quantified in the SDG rating framework. This uses a proprietary scoring system developed by RobecoSAM in which scores are assigned from +3 for those companies making the best contributions, to -3 for those making the worst. Detractors would include companies suspected of using child labor, causing excessive pollution, or selling over-priced products for quick profits in emerging markets, and such activity would be reflected in negative scores.
“We find that about 60% of companies in our investment universe do make a positive contribution to the SDGs,” de Moor says. “We use these outcomes as a screening process and a first step into creating a credit portfolio that would ultimately have a positive impact on the SDGs.”
“This is really new, and is different to the way we used to do things. Our dedicated sustainability products always used to have a best in class approach – which is something we still offer – but the SDGs have more of a sector focus. It’s been driven by client demand for more impact-created products, as clients don’t want to invest in certain companies.”