03 Feb 2023
Investing and the SDGs: is the industry wide of the mark?
As the investment industry faces criticism for falling behind in its investment in projects aligned with the Sustainable Development Goals, what more can be done?
Pressure is building on the financial sector to drive progress towards sustainability, with reports suggesting too little is happening to facilitate climate finance and increase access to environmental, social and governance (ESG) investing. As a result, the Organisation for Economic Co-operation and Development (OECD) estimates there is a $3.7trn annual gap between current investment and the funding needed to meet the UN Sustainable Development Goals (SDGs) by 2030.
Lack of funding is apparently slowing progress, with the recent Measuring Up 2.0 report from the UN Global Compact Network UK revealing that of the 132 targets linked to the United Nations’ 17 SDGs, the UK is performing well on just 17%.
“The message is clear that the UK is not on track to meet the SDGs by 2030,” says Bradley Davidson, ESG lead for RBS International. “To ensure capital flows towards the goals and unlocks the innovative development required, the financial community needs to prioritise sustainable growth.”
A common purpose?
The growth of purpose-led investing is giving asset managers and financial institutions an influential role in meeting the SDGs, with more funds assessing investments against the goals and focusing on specific SDG-linked targets. However, David Marriage, sustainability, disruption and innovation lead at PwC, says the inconsistency of ESG ratings and frameworks is making progress challenging. “Asset managers are trying to provide funds that have an ESG mandate, but the market isn’t able from a data perspective to answer that ask. There are structural changes that need to happen so the market can get there.”
Within asset management, general partners (GPs) and limited partners (LPs) have distinct roles in achieving the SDGs. LPs can drive change by making their expectations clear and aligning their investment to incentivise the managers funding the transition. GPs, meanwhile, should continue to seek innovative solutions to achieve a more equitable society. “They no longer have to choose between positive impact and financing returns, but there will still be challenges along the way that require the expertise of GPs,” points out Davidson.
With 132 targets, there is extensive scope for fund managers to deliver positive impact, but also a risk of spreading investment too thinly to achieve all the SDG ambitions. The net-zero investment gap, for example, is sizeable, and represents just one goal. Managers need to identify where they positively move the dial, says Davidson: “I’d encourage introspection to recognise the SDGs most aligned to asset managers’ strategies and in-house expertise, rather than overhauling the approach to investment.”
Answering investor demand
Hand in hand with self-examination, says Marriage, is understanding investor priorities. Doing so requires a clearer demand signal from investors to indicate where their sustainability focus is. “At the moment, there’s no way of articulating that. Investors can do a general ESG request when they invest in a fund but can’t be specific about what element of ESG they actually care about, so it’s difficult for the market to respond.”
“I’d like to see asset managers understand which Sustainable Development Goals align to their existing or emerging focus areas and targeting impact alongside financial returns. The SDGs are vital to long-term economic prosperity so it’s not only the right thing to do; it’s also good for business”
Bradley Davidson, ESG lead, RBS International
Equally, asset managers have no clear way of illustrating the detailed ESG pedigree of their funds. “The data around sustainability is not readily available,” says Marriage. “For financial performance, we know what’s in every statement. Results are audited and everyone has democratic access to that data. None of that is true for sustainability data. There’s very little transparency to the supply chain, no universally accepted standard, no assurance. Asset managers then struggle to respond to the demand to do the right thing around sustainability.”
In response, the Principles for Responsible Investment (PRI) are helping to address the need for transparency across sustainable investment strategies, and therefore to direct capital towards the SDGs. “Trust between investors and managers has always been vital to market efficiency, and voluntary frameworks such as the PRI build upon developing regulation to ensure investors are confident that their capital is being mobilised in line with their beliefs,” says Davidson.
Standards like the PRI introduce credibility and comparable data into ESG-based investing, but they need to be unified to be truly useful. “The most powerful thing asset managers can do is collaborate on a framework that creates consistency so when they’re communicating on ESG, they’re able to put numbers behind what climate action is, or what clean water means,” adds Marriage.
Do any of the SDGs merit particular focus from asset managers? The goals are inextricably linked, making it hard to separate and rank one over another. But while everyone can agree on the need for climate action, education, equality and eradication of poverty, individual investors will give each issue a different weight. This makes the most important SDGs for asset managers the ones that most concern their investors. “That enables the market to create value from the values of the people using the market,” says Marriage.
Ultimately, there is also a need to generate returns from ESG investing, by aligning expertise with purpose. “I’d like to see asset managers understand which SDGs align to their existing or emerging focus areas and targeting impact alongside financial returns,” says Davidson. “The SDGs are vital to long-term economic prosperity so it’s not only the right thing to do; it’s also good for business.”
Where is the most progress being made?
Certain asset sub-sectors have greater leverage in achieving the SDGs. In the alternative investment market, for example, renewable infrastructure funds play a powerful role in the transition to low-carbon energy. “The cost-of-living crisis and war in Ukraine have exacerbated the need for alternative energy sources and boosted the asset class in the public consciousness,” says Davidson. “Expect larger capital flows into energy transition in the coming years, as nations target clean, affordable and accessible energy.”
Beyond renewables, the shift from public to private capital has heightened the need for funds to de-risk emerging sources, such as green hydrogen. “Asset managers may materialise benefits if they’re able to invest in the early stages of technology development and ‘crowd in’ to evidence the potential before public capital can scale up solutions,” believes Davidson.
The built environment is one of the largest contributors to carbon emissions, giving real estate funds SDG impact, with demand for energy efficient properties starting to outweigh less proficient assets. Davidson explains: “Private equity funds continue to invest in construction and development innovation, such as green steel, while real estate funds expand the supply of green buildings and transition existing stock to make it suitable for a net-zero future."
We’re joined by guest Paul Sutcliffe from sustainability consultancy Evora as our focus turns to the adoption of science-based targets in the current economic environment.
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