This article is one in a series of thought leadership pieces written for Responsible Investor by members of the European Commission’s High Level Expert Group on Sustainable Finance. To see other HLEG coverage, see here, or to comment, visit our discussion page.
In its recently published interim report, the High Level Expert Group (HLEG) on sustainable finance recommends that the European Commission incorporates the ‘Think Sustainable First’ principle as a core component of the Better Regulation Guidelines. As such, sustainability (or ESG) factors should be considered to ensure that a chosen financial policy or legislation proposal contributes to the Sustainable Development Goals (SDGs), developed by the United Nations. Since their introduction in September 2015, the UN SDGs have emerged as a key reference, not only for governments and policymakers but also for investors and other capital market actors. The Principles for Responsible Investment (PRI), in its Blueprint for Responsible Investment, states: “The SDGs also provide investors with a clear vision of how government decision making and company behaviour will shape how the global economy develops over the next 15 years.
By setting policy makers’ priorities, the SDGs will be a key driver of global GDP growth and source of investment opportunities”. The EU has committed to implementing the SDGs and developing indicators to monitor the SDGs from 2017 onwards. While the HLEG recommendation on taxonomies rightfully prioritises climate change and other pressing environmental issues, it also refers to the SDGs and broader sustainability dimensions. Several large asset owners are already taking steps to contribute to the SDGs through their investments and some, like ABP and PFZW, have set specific targets as to how their invested capital will support these. Led by APG and PGGM (the fiduciary managers of ABP and PFZW), a group of European and Australian institutional investors recently published a definition of Sustainable Development Investments (SDIs) and a taxonomy describing for each SDG potential investable opportunities. This asset owner-led initiative seeks to promote the development of a market standard for SDIs that is conceptually challenging and will be an iterative, collective process, but is key to stimulating investment.Moreover, investors and companies alike need to be able to measure and report on their contribution to the SDGs. This requires disclosures that go beyond risk to capture impact, on both environmental as well as social dimensions.
Finding actual suitable investments that meet our risk and return expectations is equally challenging. APG has long been calling for national and regional governments to establish pipelines of investable projects to attract institutional capital. By example, National Capital Raising Plans to meet countries’ 2030 and 2050 energy and climate goals could be a helpful accelerator for investment. Moreover, the scale of infrastructure investments with positive environmental and social impacts would likely increase if it was made easier for local authorities, municipalities and others to structure their needs into an investment opportunity that could be understood and considered by potential investors at an EU level.
National Capital Raising Plans to meet countries’ 2030 and 2050 energy and climate goals could be a helpful accelerator for investment.
At the end of the day, investing in the SDGs is about affecting positive changes in the real economy. Consulting with beneficiaries on their investment and sustainability preferences is key to aligning those with how their money is invested, as some of the leading funds already do. By developing a set of fiduciary duty principles, as recommended by the HLEG, sustainability risks could become a crucial issue in fiduciaries decision-making across the investment chain, as argued in an earlier piece in this series. This can be a real catalyst for a more sustainable financial system, supporting more sustainable growth for all.
Claudia Kruse is the Managing Director of Responsible Investment and Corporate Governance at Dutch asset manager APG, which manages some €389bn on behalf of ABP pension fund. She is a member of the German Corporate Governance Code Commission and a member of the board of governors at the International Corporate Governance Network.
To give feedback on the group’s interim report, published in July, see here.