SUSTAINABILITY IN FOCUS
Systematic Integration of the UN SDGs into the Investment Processes
The UN Sustainable Development Goals (SDGs), which were launched in 2015, represent the member states’ shared vision of the broader development objectives the world has as a society. The global community of countries made clear that it will heavily rely on the private sector to solve some of the most urgent problems the world is facing. As founding signatories of both the Principles for Responsible Investments and the Principles for Responsible Banking, we have made a commitment to include SDG considerations in our business decisions. The following article describes our approach in including SDG data and criteria into our sustainable investment process, as well as our ESG (environmental, social, governance) reporting and active ownership activities.
UN SDGs – the global strategy for economic, social and environmental development
The 2030 Agenda for Sustainable Development adopted by all United Nations (UN) Member States in 2015 provides a shared blueprint for peace and prosperity for people and the planet. They represent an articulation of the world’s most pressing sustainability issues and act as the global framework for sustainable development. The SDGs build on decades of work by countries and the UN, and are also aimed at the private sector. Both companies and (institutional) investors are encouraged to contribute to the SDGs through their business activities, asset allocation and investment decisions. Achieving the SDGs will be a key driver of economic growth going forward, which ultimately is the only structural source of long-term financial returns.
Chart 1: SDG-specific enhancements in our sustainable investment process
Source: Sustainable Investment Research, Bank J. Safra Sarasin Ltd
Therefore, from a macro point of view, institutional asset owners depend on sustainable economies and markets to achieve their desired returns. From a micro-economic perspective, companies that provide solutions to sustainability challenges are likely to offer attractive investment opportunities. As a pioneer and thought-leader in the field of sustainable investments, we see the explicit integration of SDG considerations in the investment process as a natural evolution.
Enhancing the existing sustainable investment philosophy and process
Over the last few years, we have analysed how to include SDG considerations in our investment process. While some elements represent incremental adjustments to existing process steps, we have also created a proprietary SDG engine and dedicated reporting. Chart 1 gives an overview of how we systematically integrate SDGs into the investment process.
Universe Definition: Our sustainability analysis has always reflected a number of aspects needed to achieve the SDGs, which are mostly related to sustainable business practices. Examples include the assessment of companies’ environmental performance and carbon emissions management (SDG 13: Climate Action) or our proxy voting activities, where we have always been strong advocates of gender diversity (SDG 5: Gender Equality). Naturally, we also exclude a limited number of business activities (e.g. tobacco or coal) that are counterproductive to certain SDGs. This has been a long-standing sustainable investment tool to avoid specific negative societal and environmental impacts.
In order to be able to identify the contribution of portfolio companies to the SDGs, we have introduced our own proprietary SDG classification system (chart 2), which allows us to track SDG-related revenues of products and services on a company level as well as on an aggregated portfolio level.
Chart 2: Translating the SDGs into four investable products & services sub-themes
Source: Sustainable Investment Research, Bank J. Safra Sarasin Ltd
Generating investment ideas by tracking SDG products and services revenues
Investment Analysis: Turning sustainability challenges into market solutions is a powerful driver for innovation and long-term business opportunities. The granularity of the 17 SDGs and their respective 169 underlying targets allow us to create a comprehensive mapping of products and services that directly support the achievement of the goals. In summary, the SDGs address four environmental and social challenges, as shown in Chart 2.
While not all SDGs offer direct investment opportunities based on their products and services, for the majority of them that do, we were able to deduce concrete solutions that we grouped into twelve sub-themes. This newly created “SDG engine” allows investment teams to apply various screens for related SDG investment ideas. When integrating SDG considerations into fundamental analysis and financial modelling, our goal is to tangibly show the SDGs’ contribution to an investment’s fair value by illustrating its relevancy. This is often done through metrics such as, capital expenditure deployment, revenue growth estimates, or potential margin improvements.
Portfolio Construction: For our listed equity and fixed income products, we can introduce specific and revenue-based SDG objectives, on top of climate targets, based on the wishes of our clients.
Being informed and active owners as a key condition to target SDG-aligned outcomes Continuous Monitoring: Comprehensive and dedicated SDG-related reporting is needed to understand and actively target SDG opportunities. We have built a detailed SDG reporting framework with portfolio and company level information. On top of offering standard ESG reporting elements such as overall portfolio ESG performance, carbon footprints, stranded asset exposures and controversies monitoring, we can share a clear picture of how our investments are directly related to the SDGs. We achieve this by actively tracking the portfolio companies’ revenue streams that are directly related to products and services, which contribute to SDGs. In addition, we are able to disclose the proportion of portfolio holdings that offer solutions in one of our four SDG sub-themes, the concrete revenue share numbers, as well as the number of products and services types.
Engagement and proxy voting, together termed as “Active Ownership”, are crucial tools for sustainable investors who aim to influence the behaviour of corporates. While many of our past dialogues with companies were already related to SDGs, we have recently begun SDG-dedicated conversations as well. Our customized proxy voting guidelines are also fully aligned with the SDGs.
Entering the “Decade of Action”
The UN Development Programme (UNDP) estimates that achieving the SDGs will require USD 2.5 trillion in investments a year from 2015 to 2030. Furthermore, it notes that there is currently about USD 256 trillion in private wealth in the global capital markets, meaning that investing just 1% of this amount in a targeted way would be sufficient to fulfil the SDGs. While this is absolutely achievable, COVID-19 has in some ways, impeded the global development agenda. While the pandemic continues to spread across the globe, the poorest and most vulnerable populations are the ones that are being hit the hardest and face the greatest socio-economic risks.
What is next?
Following the creation of our concept for systematically integrating the SDGs, we will continue strengthening our related research and reporting capabilities. This will enable us to better communicate to clients and show how their investments contribute to the broader goals of our society. We believe that an investment concept that intentionally targets the opportunities embedded in the SDGs will add a new dimension to a portfolio and increase their visibility to investors.