Written with Josh Robins (Intern)
In September 2015 the United Nations (UN), as part of their 2030 Agenda for Sustainable Development, released the Sustainable Development Goals (SDGs) outlining seventeen goals with 169 individual targets on issues ranging from poverty reduction to marine conservation.[i] The goals are aspirational and set extremely demanding objectives for the next 15 years. But perhaps more importantly, because of the UN’s imprimatur, they also set out authoritatively what the world’s governments consider as development priorities for the next 15 years.
In the several months since the announcement, a number of articles have been written highlighting the role that investment and asset management firms can play in achieving these goals. Using WHEB’s investment strategy as a case study, the question we sought to answer was whether they also represent a useful investment framework.
Which SDGs have a greater chance of being achieved within an investment framework?
At WHEB, sustainability is at the heart of the business with nine investment themes built around the concept of sustainable development. These nine investment themes broadly reflect the SDGs framework, but the varied and diverse nature of the SDGs present a challenge in assigning each individual investment to an SDG. The campaign group ShareAction, in a recent study of 52 institutional investors, identified three SDGs as having the most potential to help meet their organisation’s investment objectives. These were: Goal 9 ‘Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation’, Goal 8 ‘Promote sustained, inclusive and sustainable economic growth’ and Goal 13 ‘Take urgent action to combat climate change and its impacts’. It is perhaps notable that each of these goals is broadly framed and more likely to involve indirect support from companies rather than direct contributions through the provision of products and services connected with the goals.
We conducted a similar analysis at WHEB and Figure 1 below illustrates how the current FP WHEB Sustainability Fund ‘maps’ onto the SDGs[ii]. Four themes account for over ninety percent of the fund with the largest being Goal 3 – ‘Good Health and well being’ which accounts for 36%. The fund’s Clean energy and Resource efficiency themes are clearly aligned with Goal 7 – ‘Renewable Energy’ which accounts for 18.1% of the fund with companies including SunPower Corp, a business that provides high performance solar panel technologies, and several businesses providing energy efficient products and services which are also included in this goal.
Another SDG to which the private sector is also likely to make a significant contribution is Goal 6 – ‘Clean water and sanitation’. The FP WHEB Sustainability Fund invests in Suez, a global water and waste services business dealing with the production, treatment and distribution of drinking water, which is clearly aligned with this goal.
The generalist Goal 9 – ‘Innovation and Infrastructure’ includes several companies in WHEB’s ‘Safety’ and ‘Sustainable Transport’ themes which are not directly captured in other areas of the SDGs. Goal 12 – ‘Responsible consumption’ covers several targets related to waste minimisation and recycling and so this covers many of the companies in WHEB’s ‘Environmental Services’ theme.
Pitfalls of SDGs as an investment framework
While there are clearly areas of overlap between the FP WHEB Sustainability Fund and the SDGs, the broad and varied nature of the SDGs does present some significant challenges for it to have strict utility as an investment framework. As primarily an intergovernmental initiative, several of the goals are oriented towards systemic challenges facing the world. For example, Goal 1 – ‘End poverty in all its forms everywhere’ and Goal 16 – ‘Promote peaceful and inclusive societies[iii]’, are not goals for which the private sector has clear solutions in the form of commercial products and services as they do for Goals 6 (Clean water and sanitation) and 7 (Renewable energy). Our analysis suggests that ten of the seventeen goals fall into this category of broad systemic objectives.
Of course this does not mean that the private sector has no role. Businesses through their behaviours can promote ideals that are aligned with the SDGs. For example, business can work to achieve gender equality in their employment practices (Goal 10 – ‘Reduce inequality within and among countries’) and can adopt transparent and ethical practices that make it more difficult for other actors to engage in bribery and other corrupt practices (Goal 16 – ‘Promote peaceful and inclusive societies’). These behaviours can have a profound impact in indirectly supporting the SDGs. All businesses, no matter what they sell, can play a role in indirectly supporting the SDGs, but rather fewer can claim that their products and services provide direct solutions themselves.
A second challenge is in the broad framing of the SDGs. For example Goal 9 ‘Build resilient infrastructure, promote sustainable industrialization and foster innovation’ is such a broad goal as to apply to whole swathes of the listed market. Perhaps this is a good thing as it illustrates the positive contribution that many companies can make. But it also makes the framework less useful as a way of differentiating between different companies in their contribution to the goals.
It is worth reiterating that the UN’s SDGs send a powerful message to the investment community as to what the world’s governments consider as development priorities for the next 15 years. It is also clear that institutional investors will play a vital role in advancing the SDGs by encouraging businesses to adopt behaviours and conduct themselves in ways that indirectly support them. The SDGs will also create economic change and drive demand for products and services that help to deliver the goals directly. WHEB’s investment strategy is positioned to support and benefit from these changes. However, in our view, any realistic assessment of the SDGs must conclude that this direct impact is really only true for a subset of the SDGs that directly rely on products and services from the private sector to deliver the goals.
Ultimately, because the SDGs are framed primarily by and for governments, they have a very broad scope, and therefore, taken together offer rather limited utility as an explicit investment framework. WHEB will nonetheless continue to pursue an investment strategy that directly supports the goals where this is possible whilst also encouraging businesses generally to consider how they might work indirectly to support the broader goals.
[ii] For the full list of portfolio holdings as of 30th June 2016 see http://www.whebgroup.com/investment-strategies/listed-equity/fp-wheb-sustainability-fund/fund-holdings/
[iii] The full name for Goal 16 is ‘Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, account and inclusive institutions for all.