Aligning impact portfolios of listed assets with the UN’s SDGs

07/05/2020

Are impact investing and liquid instruments reconcilable? In what context can managers of liquid portfolios demonstrate an impact on the United Nations Sustainable Development Goals?

In a world where social inequalities and environmental issues loom large, impact investing is proliferating in a fundamental shift that the coronavirus pandemic looks set to intensify.  It’s moving beyond niche and illiquid strategies such as private equity, private debt, micro-finance, community investing and social business, into the mainstream of listed stocks and bonds.

As it does so, asset managers are launching impact investment products linked to the United Nations’ 17 sustainable development goals (SDGs). They aim to make a positive impact in line with one or more of the SDGs, which range from clean energy, to peace and justice, to ending poverty. 

Yet there is a danger that as impact investing expands from the unlisted to the listed space, it becomes more difficult to be sure of SDG-related impacts. 
 

«  What are the conditions to develop measurable and additional SDG impacts in the listed space? In short, how do we make sure that SDG-washing or impact-washing is not just a new form of green washing?  »

Isabelle Millat
Head of Sustainable Investment Solutions at Societe Generale

According to the Global Impact Investment Network (GIIN), impact investments are those that are made with the intention to generate measurable positive social and environmental impacts, alongside a financial return. Furthermore, impact investing is generally said to require “additionality”, which means that an environmental or social outcome should be beyond what would have otherwise occurred without the presence of the impact investor. 

Quantifying impact is key

The focus on SDGs has shifted the goal posts in sustainable investing from focusing on companies’ environmental social and governance (ESG) scores to investing in businesses that will contribute to achieving the SDGs. That is a big conceptual shift and one more likely to close the funding gap identified by the UN. Yet the key to it is being able to report quantifiable environmental and social impacts – just as asset managers report their investment performance. But quantifying impact remains hard.

Asset managers must rely on the underlying companies in their portfolios reporting data in a way that is both reliable and consistent. Explains Cesare Vitali, head of Socially Responsible Investment at Ecofi Investissements:

It is not easy to quantify the contribution of each company to one of the 17 SDGs. We need concrete quantitative indicators about the impact of each company. If we don’t follow this approach, all the asset management industry is highly exposed to an SDG washing risk. I think that this kind of approach should be followed across the asset management industry, not only the asset management companies themselves, but also the ESG rating agencies and rated companies.

Ecofi Investissements introduced an impact reporting model in 2015 – which includes social metrics such as job creation and gender diversity, as well as environmental measures such as carbon footprint.
For instance, says Vitali, some healthcare companies declare themselves compliant with SDG number three, “Good Health and Wellbeing,” because they have projects linked to access to healthcare. But in Vitali’s view this is insufficient. “For example, the enterprises who declare them self as complaint with SDG number 3 have to demonstrate that they have integrated access to medicine issues in their governance, their strategy, their risk management and their disclosures,” he says.  

Focusing on a single SDG

Like Ecofi Investissements, RobecoSAM has developed an SDG/impact framework and reporting metrics. But Nicolas Beneton, the asset manager’s sustainability investment specialist, believes it’s only possible to concentrate on a single SDG theme within a portfolio:

The key for impact in the listed assets field is focus. Let me take a straightforward example. We run a gender equality portfolio and have pretty nice impact metrics regarding the pay-out ratio, diversity within the workforce, talent retention policy, or even well-being in the workplace. Does it make sense to add an environmental footprint to it? The obvious answer would be yes, but if we get back to the intentionality requirement, can you guarantee that within a listed and diversified portfolio you can really pursue both objectives at the same time? In a broader context, reporting on a global contribution to SDGs, expressed in percentage of sales for instance, probably makes more sense.

Work in progress

For investors and asset owners, there is still a gap to be bridged before they become entirely comfortable with impact investing in the listed space. Pension funds, especially, need to be provided with hard evidence from asset managers that shows progress towards the SDGs. 

Emmy Labovitch, a trustee for several pension funds, says that consistent data and financial proof is required. Her wish list includes corporates starting to report on SDGs in a consistent way that asset managers can use in their analysis, as well as asset managers stating their investment objectives and asset owners targeting specific metrics such as the carbon footprint or gender pay gap. “I think that would simplify things and certainly make it easier for trustees to understand what is going on, because we do get a lot of data and a lot of demand, but maybe simplifying would help asset managers really create portfolios that fit in with our needs,” she notes.

There is some movement towards introducing specific metrics in Europe at least. Initiatives like the proposed EU taxonomy regulation for classifying environmentally sustainable activities are a significant step, reducing the risk of SDG-washing as far as the sub-set of “environmental SDGs” is concerned. “The financial services industry is great at coming up with new products when there is a demand for it,” concludes Labovitch.“I think that there are real challenges, but they are at last being addressed and resolved.”