By Aled Jones, head of sustainable investment, Europe
The latest Gates Foundation annual assessment of global progress toward the UN Sustainable Development Goals (SDGs) is less than encouraging. According to Bill Gates, the goals are still far out of reach, as he lamented the world is “nowhere near improving fast enough” to meet them. The same could be said for investors—when it comes to addressing SDGs in their investments, there’s still much progress to be made.
One can hardly blame investors for lack of good intention. Adoption of ESG strategies has been on the rise over the past decade, and many investors who are already applying ESG considerations still believe they could be making a greater impact through their investments.
The SDGs might appear the logical next step for these investors looking to take ESG to the next level, as they lay out 17 global goals spanning environmental, social and development issues—representing the closest we have to a global sustainability strategy. The SDGs can offer the framework for identifying many of the issues that really matter to employees, stakeholders, companies, and investors alike. The goals can also bring a sharper focus to climate, gender, employment and job creation, urbanization, and importantly the role of financial markets in sustainable global growth and development.
However, there are several reasons why SDG adoption in investment strategies hasn’t been more widespread. For one, the SDGs are by design mostly targeted at governments, making it difficult for investors to determine how to go about applying them to investments. There’s also the question as to how they should best be used—are they a measurement tool for impact investors? A framework for identifying areas for shareholder engagement? Or a tool for identifying future investment risks to global portfolios?
These are the questions that characterize the early stages of SDG adoption in investment strategies. And should investor SDG adoption continue to grow, there’s a good chance the ultimate answer is the SDGs will be suited for all of these uses. Because just as a broad range of tools, indexes and investment products has been developed to support the rise of ESG integration, the same will likely be done to support SDG adoption. An initial challenge is the ability to obtain meaningful company level data related to specific SDGs, in particular when you are working with a large global universe. However, new techniques for collecting and processing large amounts of data – both company reported, and data from other public sources – are providing exciting opportunities to clear this hurdle.
These early innings of SDG adoption are also characterized by varying approaches. To date, many of those looking to adopt SDGs are impact investors seeking a measurable impact or outcome in relation to specific SDGs. At FTSE Russell, large institutional investors have sought a different approach, asking us to create custom indexes applying the SDG framework to both broad market equity and debt portfolios. This approach of aligning a passive portfolio with the SDGs focuses on identifying overlaps between the goals and existing ways of assessing corporate sustainability practices e.g. using a mixture of company ESG scores, data on revenues from sustainable products and services (e.g. green revenue data) and product level exclusions data.
We drew on nearly two decades of experience constructing indexes that integrate ESG considerations in order to come up with a simple approach. Our objective is to shift capital towards companies demonstrating greater progress on a range of sustainability issues that are aligned with the SDGs e.g. labor relations, human rights, climate change, anti-corruption and biodiversity. Behind this objective is a belief that a more sustainable global economy is one of a number of necessary conditions required to fulfil the SDGs.
While still in its nascent stage, the future for SDG-aligned indexes looks promising. Indexes and benchmarks that capture sustainability considerations can help push us toward a more sustainable global economy by encouraging better corporate ESG practices and disclosures. Indeed, the growth in investor allocations to investment strategies linked to social and environmental objectives – many of which will be aligned to the SDGs – has been spectacular. Data collected by the Global Sustainable Investment Alliance shows that in 2018, global assets in ‘sustainability themed’ and ‘impact’ strategies reached approximately $1.5 trillion, up from around $500 billion in 2016. Ultimately, if enough money moves into these types of strategies, then investors can indeed have a material impact—as this rising tide could lift all boats across an entire market.
Further reading:
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”), (7) The Yield Book Inc (“YB”) and (8) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.
