By encouraging better corporate disclosure, more effective infrastructure investment and improved regulation, financial markets can make a big contribution to the UN’s sustainable development drive.
Amid the snow and ice of the World Economic Forum’s annual meeting in Davos in January 2016, an ambitious new initiative was launched: the Business and Sustainable Development Commission (BSDC). Its aim is to explore how business, finance and civil society can contribute to the United Nations’ Sustainable Development Goals (SDGs), 17 objectives designed to end poverty, fight inequality and tackle climate change.
BSDC’s flagship report, published last month, is the fruit of 12 months of research and consultation. It leads with a striking figure: achieving the SDGs could unlock $12 trillion in business savings and added revenue every year. So what can investors do to contribute to the goals and capture their share of this prize?
According to the BSDC, achieving the SDGs will require $2.4 trillion in additional annual investment in infrastructure and other long-term projects. There is enough capital available to reach this target: total global financial assets stand at $290 trillion and counting. But various factors – including a lack of comparable corporate data, inhibitive regulation and a lingering culture of short-termism – prevent investors from identifying and acting upon these opportunities.
The BSDC believes investors can solve this problem by pushing for a financial system orientated towards longer-term sustainable investment. Their recommendations focus on three areas: transparent, consistent league tables of sustainability performance linked to the SDGs; wider and more efficient use of blended finance instruments to attract more private capital into sustainable infrastructure projects; and regulatory reform.
Sustainability league tables
At Aviva, we fully endorse these recommendations as part of our wider effort to integrate sustainability and long-term thinking into our business – or, as Aviva CEO and BSDC Commissioner Mark Wilson puts it, to be ‘better ancestors’.
Work on the first objective has already begun. Aviva has teamed up with the BSDC, Index Initiative and the UN Foundation to create the World Benchmarking Alliance (WBA), an international mechanism that will measure how companies perform in relation to the SDGs. The WBA would produce league tables that will enable asset owners, policymakers and private citizens to see how companies rank compared with their sector peers on – for instance – gender equality, employee welfare or climate change.
While we want companies to publish more comprehensive data on how they deal with these issues, much of the information needed to assemble the league tables is already available, thanks to a quiet revolution in disclosure on sustainability performance in recent years. The WBA will aggregate this data and make it publicly available.
We hope the WBA will promote a ‘race to the top’ among companies and provide the catalyst for more effective investor engagement. The WBA will establish a clear methodology so that investors will be able to see where companies are underperforming and engage with them to bring about improvements in specific areas.Infrastructure investment
The second objective identified by the BSDC is wider implementation of blended finance, or deal structures that enable public investors such as governments and multilateral institutions to mobilise private capital for investment projects through risk-sharing mechanisms.
The International Finance Corporation (IFC), the World Bank’s asset management arm, has led the way: using its triple-A credit rating, the IFC has financed over $200 billion of private sector projects using only $2.6 billion of paid-in capital from member governments.
But more can be done to ensure sustainable infrastructure projects get off the ground. BSDC research shows a highly efficient blended finance strategy, one that attracts $20 of private capital for each dollar of public money, could raise the $2.4 trillion of additional capital needed each year at an annual cost to governments of only $125 billion.
With this in mind, we endorse the Commission’s plan to mobilise a task force of institutional investors, sovereign wealth funds, development finance institutions and private companies in 2017 to lay out an ‘blended finance action plan’ for facilitating more sustainable infrastructure investment.
Aviva has pledged to allocate $500 million annually to low-carbon infrastructure, but regulation hinders our ability to hit this target. This brings us to the third BSDC recommendation.
Following the financial crisis of 2008-09, global regulators introduced new rules to make the financial system more resilient, but the focus on stability is hindering progress that could be made on long-term investment and achieving the SDGs. Solvency II, the regulatory regime for European insurers which requires institutions to hold more capital to reduce risk, is a case in point.
Solvency II’s capital requirements effectively impose higher capital charges on sustainable infrastructure investments. We estimate insurers that invest in large-scale wind-farm assets in Europe need to reserve $12 million of equity capital for every $100 million invested; by comparison, the reserve requirements for an equivalent investment in Canada is only $3 million (1). We believe that elements of the Solvency II framework should be reconsidered through a sustainability lens.
We would also like regulation to support better, more consistent disclosure from listed companies. Specifically, the International Organisation of Securities Commissions (IOSCO) should look at making non-financial reporting provisions consistent and comparable across jurisdictions. We would also recommend that the voluntary guidelines suggested by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures be made mandatory.
Achieving the SDGs will open up growth opportunities and reduce risk across financial markets. To ensure this happens, investors, companies and governments need to work together to deliver on the BSDC’s recommendations on sustainability league tables, infrastructure investment and regulation. By delivering on these objectives we can all become better ancestors.
Steve Waygood is Chief Responsible Investment Officer at Aviva Investors.
(1) ‘UK life insurers can help boost infrastructure’, Mark Wilson, Financial Times, November 2016 (link)