What are The SDGs? A Tool for Impact Investing

The United Nations’ Sustainable Development Goals: Changing The Face of Impact

The UN Sustainable Development Goals

The UN Sustainable Development Goals

By Cara Kennedy-Cuomo, SDG Applied Research Associate, 17 Asset Management and
Grace Stone, WIIP Investment Associate and MBA ‘20

As impact investors, asset managers, and high net worth individuals look to turn Impact Investing mainstream, the question of which frameworks to use to define this impact is an exciting but daunting one. While a plethora of measurement tools and targets are in discussions by massive financial players looking to enter this space, we offer that the United Nations’ Sustainable Development Goals (SDGs) serve as a powerful tool for investment firms to measure impact and drive market-rate returns while achieving superior impact. The SDGs provide a language, an initial investment framework, and an impact measurement tool which can potentially be used by businesses to reduce risk and increase impact and return.

In short, the SDGs are an agenda agreed to by 193 countries to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. The SDGs are unique in that, instead of placing sole responsibility in the hands of government, they were designed in consultation with a wide range of stakeholders, including corporations, asset owners and private investors. In fact, they specifically call upon the private sector to take action. The Goals are comprehensive in the data, and therefore action, they require: the 17 SDGs include 169 specific targets, which are further broken down into 232 measurable indicators. By laying out these indicators, the UN has allowed for investors to break down what are initially broad goals into tangible and more achievable milestones--for example, an indicator under goal 3 of “ensuring healthy lives and promote wellbeing for all at all ages” is to specifically reduce the “number of new HIV infections per 1,000 uninfected population, by sex, age and key populations.” It is these measurable indicators that provide an actionable framework and opportunity for investors.

SDGs as a Shared Language for Impact Measurement: The SDGs are a powerful tool to communicate to investors and portfolio companies about expectations. While terms such as “achieving sustainability,” “eco-friendly” and “value-based investing” can be nebulous and difficult to track, the SDGs’ targets and indicators are clear, specific, measurable, and demand time-bound outcomes. The Goals are both broad, covering  more areas than are typically included in systems such as ESG (Environmental, Social and Governance); and very defined, with 169 measurable targets. Companies’ performance in some SDG targets can be material to financial performance. Simply put, the SDGs standardize and categorize the language of impact. This language can bring together investors, financial intermediaries, companies, and community stakeholders in shared visions, values, challenges, and outcome expectations. As companies report their SDG-impact, investors can make informed investment decisions and channel more capital to the most impactful companies. This process incentivizes and accelerates sustainable development.

Another important part of using a shared language is that it is replicable. As first-movers create portfolios and can easily convey their structure and impact in a shared language, others can then iterate on those ideas. This helps novel, and profitable, ideas spread and grow faster.

An example of the SDGs in use as a guiding tool for companies is the SDG Industry Matrix, developed by the Global Compact. This matrix is in fact a map of how companies within shared industries can take corporate action aligned with the SDGs.  Another example is a report by SASB on how the SDGs can be used by companies and investors to better understand and act on related global risks. The report covers how-tos on assessment of both business risk and growth potential aligned with sustainable outcomes.

SDG language is also an important tool for tapping into Blended Finance opportunities. Blended Finance is the combination of philanthropic and concessionary finance, such as from major foundations or development agencies such as OPIC or the United Nations, with catalytic private capital in order to encourage risk-averse investors into emerging markets. Blended Finance presents a tremendous investment and impact opportunity for pioneering investors and can be accelerated with the use of a shared, SDG-based language.

The use of SDG language has already facilitated field-building. According to the 2017 Global Impact Investing Network (GIIN) survey of impact investors managing $114 billion, 60% of impact investors reported that they actively track or plan to track the financial performance of their investments with respect to the SDGs. The UN Global Compact for companies pledging to follow sustainable business practices has over 7,000 corporate signatories in 135 countries. This shared language available through the SDGs helps create coalitions, communicate risk and value, and open up opportunities for sustainable investment.

Screening and Identifying Investment Opportunities: The SDGs can help investors along all parts of the deal-cycle. Once investors are familiar with the language of the SDGs, they can employ it as a way to actively structure a portfolio. Investors may want to employ an (at minimum) “do no harm” approach and use the SDGs as a screening tool for potential investments. Investors can then steer companies towards more sustainable business practices that can answer the above questions to their satisfaction.

In efforts to embrace the SDGs throughout the investment process, some asset owners have taken an active approach, investing solely in companies that directly impact an SDG target. In this line, the two major Dutch pension funds, APG and PPGM, have created a decision tree to find “sustainable development investments.” Using this methodology, APG and PPGM are able to make investments that meet the financial risk and return requirements and support positive social and/or environment impacts. Some firms can go a step further in using the SDGs as a way to identify existing opportunities based on gaps. For instance, 17 Asset Management engaged in an extensive community engagement process using the SDGs as a shared language with local NGOs, UN representatives, and small business owners to get a better understanding of not only where there are gaps in achieving the SDGs, but which of those gaps matter most to people on the ground. This is useful information for increasing impact, but also for registering “consumer sentiment” and demand for a potential new service or product. After this exercise, an investor or asset management firm can actively design a portfolio that incorporates local priorities, information on investments that may be the best received, where lie the greatest investable opportunities.

Managing Risk in Current Investments: In addition to the benefit of a global investment lens, the SDGs also offer an opportunity for investors and asset managers to manage and report on their current portfolios.  Already, consultancies and nonprofits are developing both guidelines on how the SDGs can be used to manage risk as well as industry-specific guides on how to better align business practices with the SDGs. Investors may individually have a stake in the long-term health of the economy, compelling them to invest in sustainable development. According to the PRI’s SDGs Investment Case, the SDGs represent an unavoidable consideration for “universal owners”. These large institutional investors have highly-diversified, long-term portfolios representative of global capital markets. Universal owners effectively hold a slice of the overall market, so their returns are correlated to the continuing good health of the global economy.

There are many reports explaining the benefits of adhering to an Environmental Social and Government (ESG) lens when investing, all of which can be applied to the SDGs. They can reduce the risk of supply chain disruption, lower employee turnover, protect brand reputation, lower costs through the use of sustainable materials and energy supplies, facilitate access to capital via impact investors and development agencies, increase valuation, and provide a market advantage where customers value a sustainability-oriented company.

An Impact Measurement Framework: The intentionality of investing with an SDG focus would not be nearly as powerful without impact measurement. As a result, industry leaders are developing benchmarks for impact performance (outcomes); and best practices to generate  those outcomes (process).

Impact tracking and reporting is a huge obstacle for many businesses. It is even more complicated when tracking a portfolio of companies across industries. That is why setting these benchmarks and most efficient processes for impact measurement will be so consequential. The first movers in this space, such as those who can be first to develop an “SDG certificate,” will have the advantage of not only being ahead of the market but also setting the industry standard.

As more major corporations have begun reporting on the SDGs, it has become easier for investors to align their portfolios, and therefore report on impact. And asset managers are now increasingly reporting against the SDGs as they evaluate the impact of their investments. This is particularly important for liquid asset classes in public markets, as the impact investing is traditionally done through private equity or private debt with limited liquidity.

Conclusion: The SDGs are a practical, usable tool for investors that also offer many advantages. The SDGs are just 3 years into their 15 year time horizon, launched in 2015 and set to be achieved by 2030. As more companies adopt SDG practices and investors adopt a SDG lens, there will be more innovation in how the SDGs are applied and utilized to create more profitable and impactful business practices. The achievement of the SDGs would provide undeniable good for the planet, people globally, and for the world economy. And if the private sector can learn to engage and invest in a way that will meet or exceed market-rate returns, the SDGs might very well be achievable

Author Highlight

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Cara Kennedy-Cuomo is a Research Associate at 17 Asset Management, where she provides insight into SDG-alignment and performance measurement across our investment strategy and for client advisory. Her most recent position was with a United Nations initiative led by Jeffrey Sachs, for which she traveled between Rwanda, Malaysia, and Colombia coordinating regional Centers of Excellence for the SDGs. She serves as an advisor for the initiative’s Youth Solutions Hub, a platform to accelerate the impact of young leaders’ nonprofits and business solutions for local action on the SDGs. Previously she founded a social enterprise to counter food insecurity in the Boston area, which continues to operate today. Cara holds a A.B. from Harvard College.

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Grace Stone is a first-year  investment associate in Wharton Impact Investing Partners. She is pursuing a joint MBA-MPA in The Wharton School and Harvard Kennedy School, focused upon the intersection of the private and public sectors in achieving economic and social impact. Previously, she worked with The Good Capital Project and helped initiate 17Jordan, a non-profit centered around community engagement and sourcing investment opportunities that align with the SDGs. Before that, she lived and worked in Jordan for an NGO focused on Syrian refugees. She received her B.A. from Princeton University.