The 17 standards reshaping investment

The increasing sophistication with which sustainability development goals (SDGs) are being incorporated by investment firms means individuals can see how their investments are making a difference in line with their own personal goals and in the context of the broader economy and society, experts have said.

Using SDGs as a framework gives investors the ability to measure a company’s impact on society and the environment in an “inside-out way” as distinct from using more “outside in” thinking associated with incorporating ESG where more thought is given to how external risks might impact a company’s performance, Jan Anton van Zanten, Robeco’s sustainable development goals strategist told Professional Planner’s Researcher Forum in December from his base in Holland.

SDGs – the 17 standards that contain 169 targets and 200 indicators – have made investing with a sustainability lens much more actionable, van Zanten said.

Robeco has created a proprietary framework to analyse companies based on their impacts on SDGs which importantly takes into account trade offs companies make to achieve one sustainability goal over another, Van Zanten explained.

“They’re interconnected – one [SDG] might influence another, for instance renewable energy might have positive impacts on climate change mitigation, but there is also a lot of trade offs. It’s especially those trade offs we need to take into account,” van Zanten said.

Indeed, it’s in measuring and understanding the trade offs companies are making relating to their sustainability efforts where the sophistication comes in from investors, the experts agreed.

Jenn-Hui Tan, Fidelity’s global head of stewardship and sustainable investing, who joined van Zanten alongside Tony Adams, Lonsec’s head of investment research on the panel, commented that “trade offs” is not something people in the ESG community always want to hear.

“People like to think all the SDGs are satisfied simultaneously, but they’re not,” Tan said.

“As this field professionalises and as we get better with disclosure, we have to get much crisper about the trade offs in the financial decisions we are making and then allow clients to make their own decisions about appropriate use of funds,” he said.

There is some way to go for the investing community to integrate ESG more fully and create meaningful sustainability outcomes. For instance so called negative inclusions to date dominate the process of funds with an ESG approach; exclusions will be less a part of the ESG investing toolkit as sophistication continues to grow, Tan said.

“Like every system capitalism needs to reshape itself, it needs to reform so it can more explicitly prioritise the issues we are talking about and this is the journey we are on,” Tan commented.

“Equally, sustainable investing – a bit like sustainable capitalism – we won‘t call it that, at some point in the future it will just be investing. The difference [between now and that point in the future] is the investors who understand this today will still have the right to call themselves investors, while those who don’t will face an uphill battle,” he said.