Sustainable Development Goal (SDG) investing can change the corporate world, by aligning money with truly holistic, sustainable investment opportunities. But what are the SDGs and what issues to they address?
Any analysis of this space starts with the basics. Some time ago, the United Nations developed what it calls its Sustainable Development Goals (SDGs). There are 17 in total. They recognise that ending poverty and other deprivation must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth, all while tackling climate change and working to preserve our oceans and forests.
So, the SDGs essentially represent a framework for aligning the world more sustainably. If met, so the logic runs, we will live in a more equitable, less polluted world, where climate change is managed and mitigated and poverty alleviated by global opportunities within greener businesses.
It’s a beautiful dream. But at the heart of any such ambitions lie the financial realities of deep-rooted change, within a capitalist structure that historically aligns to profit not purpose. Herein comes the purpose of SDG investing.
What is SDG investing?
SDG investment, first and foremost, is about scaling up private sector participation in development finance though investments in SDG-advancing projects. On the whole, though not entirely, these will be taking place in developing countries.
If your business wants to use money to encourage global sustainable development, then SDG investing is for you. There is of course another aspect to this picture.
Plenty of savvy investors and corporates looking for a place to park cash have worked out something rather pivotal. On balance, an SDG investment is likely to offer tasty, but long-term returns. Here’s why.
SDG investment is always going to sit squarely within criteria like poverty alleviation or climate mitigation, forest restoration or sustainable agriculture. Let’s take climate mitigation as our example.
All the science tells us climate mitigation is essential and that climate change is happening at pace. That’s the future. The climate path is defined. So, what does any wise investor normally do when seeking a parking slot for their cash?
The answer is they too use futureproofing. They look at business, geopolitical and other trends to judge where societies, businesses and governments are heading. Then they apply this knowledge across a suite of investments, picking out the opportunities they feel suit the future they’ve accurately predicted.
Returning to our case in point, our investor knows climate change is coming and he or she also knows it’s urgent to seek solutions. Therefore, it’s likely to make sense to invest in a company that has a nifty, perhaps unique product or service that helps within the wider climate agenda.
Next, is this company also working in the developing world? That’s where most of the toughest impacts of climate change are going to hit, but it’s also where a lot of money is going to be made in finding more equitable solutions than previously exploitative, legacy business approaches.
Our investor has by now arrived at the position that an SDG investment, whilst one for the longer term, offers both environmental, human and ethical advantages, underlined by what should in theory be appealing cash returns based on futurism and the prevalence and need for companies providing development solutions in this space. Just don’t expect returns overnight.
And there you have it. SDG investment is good for the planet and good for the purse strings.
How to get into SDG investment
Any corporate or investor seeking to enter this space has plenty to learn. It’s complex, albeit largely logical. One of the big risks is that these investments can often be into nascent sectors or environmental solutions that aren’t yet fully proven out in the real world.
A very good place to start therefore, beyond the basic UN pages on what SDGs are, would be the Principles for Responsible Investment (PRI).
PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
And it seeks to deliver more equitable financial markets and economies in which they operate, ultimately for environment and society as a whole.
Rather more specifically, PRI also produces guides and case studies to inform investors on how to incorporate ESG considerations into investment decision-making and ownership practices in a systematic way, within each asset class.
These handy guides are available here and represent an ideal starting point for any SDG learner. There’s lots more available too.
For example, PRI reckons that today there are some six key priorities for responsible investment. In detail they include elevating social or human rights issues, ending tax avoidance and ensuring fairness, driving Net Zero commitments and halting negative corporate lobbying.
Additionally, responsible investment should also seek to boost policy engagement and ensure accountability while preventing greenwashing.
PRI notes that on Net Zero, now that COP26 is done and dusted, it’s clear that climate action is accelerating, but we need to see more investors stepping up to the plate if we’re going to reach Net Zero in time. Of course, this includes engaging with governments and businesses, but critically it also involves investors making their own Net Zero commitments backed by short term targets and investing in climate solutions.
Also, PRI has plenty to say about less than positive corporate practice. It argues that as an industry, we must acknowledge that one of the key reasons the world is so far off the curve in limiting warming to 1.5 degrees is that negative corporate climate lobbying has been winning the day with delay, obfuscation and denial. In turn, this is slowing political, financial and business action.
Negative corporate climate lobbying has long been identified as an obstacle, and the watering down of the outcomes of the Glasgow Agreement clearly illustrates that it remains one. If we are to address the climate emergency, political leaders, business, finance and civil society all need to work together to overcome this.
Facing these realities head on is part of SDG investment. Money is there to be made and genuinely valuable social and environmental benefits are to hand, but the landscape is littered with challenges too.
The next steps in SDG investment
PRI believes gone are the days when ESG was a sideline activity, only tangentially considered by marketing teams. Today, a growing number of investors have dedicated ESG resources, with direct lines into the executive and the board, and many are even considering their role in driving sustainability outcomes.
Hence, PRI forecasts responsible investment is becoming a core consideration in investment strategy and asset allocation, saying you need to look no further than COP26 to see that broader society has finally recognised the integral role of private finance in delivering a sustainable future.
Others appear to agree. Investment Monitor reckons investment in education, and more specifically in educational technology (edtech), has seen its profile rocket because of widespread school closures across the world following the outbreak of the Covid pandemic.
Elsewhere, it points to opportunities within asset building and infrastructure creation, such as clean water provision, safe toilets and waste management, handwash stations, faecal sludge management and treatment plants.
And further, quality investments could be in biodiesel production plants, and biofuel and ethanol production, in energy storage and energy transmission infrastructure, hybrid mini-grids, dry sanitation technologies and in recycling systems and plans for the reuse of solid waste.
Backing such investments promotes sustainable development and the achievement of SDG13, which targets combatting climate change and its impact upon the world.
The final word
So long as corporate investors carry out sufficient due diligence, there is no reason why SDG investment shouldn’t make up a part or indeed the whole of their investment portfolio.
SDG investment offers decent if longer term returns, promises on good beyond the dollar sign, and it also can be fed into internal reporting on ESG or corporate social responsibility (CSR). For this to work well, as aforementioned, proper due diligence is vital to ensure the investments are shining and transparent in every way.
For the developing world beneficiaries of SDG investment, pace can’t hasten rapidly enough. Indeed, elements of the SDGs themselves like climate change don’t have much time to spare.
But rushing into any investment is unwise. Taking the time to truly understand the landscape, the opportunities and the challenges is a much surer way to both make money and ensure that money does some wider good.