The UN Sustainable Development Goals (SDGs) were established to provide a pathway to achieve a better and more sustainable future for all. Global investors increasingly see the SDGs as a vehicle to further complement the integration of environmental, social and governance (ESG) factors in their investment decisions. The challenge they face is a familiar one in the ESG investment universe – a lack of consistent and comparable data.
The SDGs were formally adopted in 2015 as governments united to address urgent global issues such as water scarcity, healthcare access and protecting the environment. Some 170 countries and territories have signed on to reach those milestones by 2030. Tied to that is a growing expectation that private sector capital should contribute positively to SDGs.
The Principles for Responsible Investing (PRI), an international organization supporting and promoting ESG principles, have called the SDGs “a blueprint for responsible investment.” Yet how do investors measure SDG contributions in a meaningful and objective way? There is a foundation required to translate the world of SDGs into sustainable development investments: standardization.
The need for global SDI standards
As a PRI signatory, BCI continues to play an active role in contributing to the development of a standard for SDG alignment and reporting. There are two key drivers to accelerating the market adoption of sustainable development investments (SDI): (1) creating a standard defined by investors, for investors, and (2) establishing immediate credibility with the broad-based support of global asset owners and asset managers.
For an investment framework, there needs to be broad coverage of global capital markets portfolios that focuses on companies’ product or service-related contributions to the SDGs. The data needs to be objective, based on audited financial metrics and rules-based and auditable classification.
BCI, AustralianSuper, APG, and PGGM – representing more than US$1 trillion combined assets under management – have partnered to establish a globally consistent SDG measurement framework. We launched the Sustainable Development Investment Asset Owner Platform (SDI AOP) last year to help investors embed SDGs in their investment processes by providing a standard definition, taxonomy, and data source.
The platform utilizes the expertise of data science team Entis that employs natural language processing and artificial intelligence to identify actual company business lines based on their contribution to the SDGs. The service is available through analytics and index provider Qontigo. The universe of companies covered is large at about 8,000, with plans to go up to 10,000 publicly traded instruments.
Most companies are measured based on the portion of revenues associated with product categories linked to the range of SDGs. Using SDI AOP allows an investor to learn to what extent a company’s revenues align quickly and easily with these product categories.
Earlier this year, we published the 2020-2021 classifications for the SDI AOP data, which revealed an increase in the number of companies classified as SDIs. One-fifth of SDI eligible companies in the Platform’s coverage universe already contribute to making the economy and society more sustainable – a meaningful beginning.
Use cases
The platform serves as a complement to an investor’s overall ESG strategy, not a substitute. There are many use cases for SDI AOP, including:
- Identifying thematic investment opportunities;
- Tracking portfolio exposure to SDGs over time;
- Evaluating external managers on SDG alignment;
- An input for quantitative portfolios;
- Building data into ESG integration in active portfolios;
- An engagement tool with companies; and
- Assist in PRI reporting on real-world outcomes.
At BCI, we manage a significant number of assets in-house. We are beginning to incorporate SDI AOP data as part of the detailed ESG assessments we carry out when making our investment decisions. We now have better data informing to what degree a particular company contributes to SDGs. Although we manage a significant amount of funds within public markets, we will look to apply the methodology and decision rules across asset classes so we can evaluate our overall total portfolio exposure.
The work of the SDI AOP fully aligns with the priority the PRI places on the SDGs and the expectation that investors report out on their alignment with them. We also believe that a common asset owner-led initiative improves credibility through standardization, brings efficiencies in implementation and allows for a high degree of transparency by providing clear references to the underlying data. In future, we will further strengthen the standard by including more forward-looking metrics and a measurable outcomes dimension.
Over time, we imagine the investor use cases will only grow as the initiative gathers feedback from users and continues to evolve the product based on that feedback.
Jennifer Coulson is Vice President, ESG, Public Markets, at BCI. For information on SDI AOP, click here.