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The US SIF Foundation recently released a report for the US investor community, Investing to Achieve the UN Sustainable Development Goals, which examines the role of the Sustainable Development Goals (SDGs) in sustainable investing trends in the US. In the report, we examine whether the SDGs have led to a change in investment strategies, new investment products or new investment flows. We also sought to identify what more investors should do in seeking to achieve the SDGs.
Our research found that many new SDG-focused investment strategies and products have appeared – primarily in bonds and in equity mutual funds and ETFs – that are attracting investment flows. However, a number of the investors we interviewed for the report warned that some investment firms or bond issuers may seek to capitalise on interest in the SDGs in the form of products or statements that provide lip service to the SDGs but fall short on impact.
This phenomenon of ‘greenwashing’ can undermine investor confidence in the impact they expect their investments to have. Given that the UN estimates there is a $2.5trn annual shortfall in development finance and investment needed to achieve the SDGs in emerging markets alone, investors cannot afford to have their faith undermined.
To this end, there are three main actions that investors can take to ensure they avoid greenwashing, real or perceived, in the context of investing to achieve the SDGs.
The first, for investors considering SDG-themed equity funds, is to carefully read each fund’s prospectus to determine which SDGs the fund seeks to address and what impact metrics will be used. For instance, one fund cited in our paper specifically lists the “poverty, inequality, climate change, peace and justice” goals of the SDGs as priorities. Another important step is to ask a fund manager what their policies are regarding shareholder advocacy, and how their company engagement and proxy voting efforts relate to specific Goals. Ideally, the fund managers should plan to push issuers to demonstrate their impact. Some of the prospectuses of the new SDG-themed funds we reviewed were silent on the subject of shareholder engagement and proxy voting, but one fund specifically stated that it uses voting and company engagement as “an additional sustainability overlay for the strategy.”
Bond issuers and fund managers that purport to invest in the SDGs should be able to report which indicators they are tracking and the impact they have achieved against these indicators
The second method, in the fixed-income space, is to seek to invest in use-of-proceeds bonds geared to specific sustainability projects. This aligns with the guidelines of the International Capital Markets Association, which encourage issuers of SDG-themed bonds to structure them as use-of-proceeds bonds designated for specific projects. This is particularly important, as one type of new, SDG-adjacent fixed-income product – the transition bond – provides capital for firms generally not considered sustainable to ‘transition’ to more sustainable business practices. A debate exists within the investment community over whether transition bonds for companies with carbon-intensive or other unsustainable practices are at all meaningful in helping to achieve the SDGs. Additionally, there have been ‘general use’ sustainability bond issuances, in which the proceeds raised are not allocated to a specific sustainability project, making it difficult to track the impact of these bonds.
Third, investors should take a closer look at the ‘targets and indicators’ that undergird each of the Goals. In all, there are 169 targets and 232 indicators across the 17 Goals. The targets provide a level of specificity to the Goals to make them less opaque to stakeholders For instance, the first target under Goal 13, Climate Action, is to “strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries”. Meanwhile, the indicators provide the data-gathering and statistical analysis tools to track progress across each target and Goal. For example, the first indicator under Goal 13’s first target focuses on the “number of deaths, missing persons and persons affected by disaster per 100,000 people”. Bond issuers and fund managers that purport to invest in the SDGs should be able to report which indicators they are tracking and the impact they have achieved against these indicators.
There is a strong business case for fulfilling the SDGs. A healthier planet and more equitable society will boost global growth and open significant new market opportunities, and this vision has driven investor interest in allocating their capital to help achieve the Goals. Precisely because the SDGs are so critical to achieve, it is important to hold securities issuers and fund managers accountable for their words and actions. Here are three ways for investors to do this: carefully read equity fund prospectuses to ensure there is rigorous analysis, impact reporting and shareholder engagement policies; seek out use-of-proceeds, fixed-income SDG-related products; utilise the SDGs’ targets and indicators – or make sure the issuers or fund managers do – to improve data gathering and impact reporting.
With only 10 years to go to achieve the SDGs, it is imperative to avoid greenwashing, maintain investor confidence and achieve the results for which we all hope.
Chris Phalen is a Research Manager at US SIF: The Forum for Sustainable and Responsible Investment