Sometimes, setting goals is the easy bit. The hard task is actually implementing them. Over the last two years, we have been examining how to integrate Sustainable Development Goals (SDGs) into our investment-decision-making approach for listed markets. This work has taken place against the backdrop of broader efforts to set aspirations and targets for economic development, social inclusion and environmental sustainability around the world.
Building on its previous Millennium Development Goals, the United Nations (UN) has set 17 SDGs, including Affordable and Clean Energy (SDG7), Climate Action (SDG13) and Good Health and Well-being (SDG3), the areas where the most prominent SDG investment opportunities are typically concentrated. Achieving them require governments, businesses, investors and civil society to join together in taking action.
Unlike the predecessor framework of the UN’s Millennium Development Goals, the current SDG agenda explicitly calls on the private sector to deliver solutions. Many companies around the world have already started to incorporate sustainability into their business activities. The SDGs take this commitment further, calling on companies to incorporate the SDGs into their business models, innovations and investments.
In its 2017 “Better Business, Better World Report,” the 35 chief executives and civil-society members of the Business and Sustainable Development Commission identified 60 major market opportunities across the food and agriculture, urban-development, energy and materials, and health and well-being sectors.1 Examples of business opportunities are reducing food waste, new farm technologies, affordable housing, energy-efficient buildings and public transport.
Which is all well and good, but how can such thinking be integrated into a coherent investment approach? Having done so for quite a while, we can tell you that it is by no means straightforward. Our work included research originally published in April 2018 outlining our proprietary methodology as to how best to invest through an SDG lens.2 During the current year, we have enhanced that methodology to deliver more granularity and asses not just issuers’ positive contributions but also their negative ones. With it, we believe that we can now deliver a more complete picture of an individual issuer’s overall net contribution to the SDGs.
Our investment universe for this analysis is the MSCI AC World Index. Within this index, we assess where companies’ product and services are contributing the most to specific SDGs. We find that company activities are typically clustered around five SDGs, namely Climate Action (SDG 13), Quality Education (4), Good Health and Well-being (3) as well as Responsible Production & Consumption (12). However, within the sectors, the exposure to the different SDGs varies substantially.
We start identifying companies with revenues positively linked to SDGs and they then face additional scrutiny through a risk-control layer designed to identify true leaders. Our analysis shows that most of the industries focus their efforts on contributing to SDG 13 (Climate Action). However, this reveals significant variations both within and across sectors.
When examining the results from our in-depth analysis, we find that the sub-sectors that have the highest contribution to the SDGs are within healthcare, technology and real estate. By contrast, the sectors with the lowest share of “True SDG leaders” and “SDG leaders” are energy and communication services.
In spite of norm violations in product safety which penalizes the SDG rating across the healthcare sector, both the sub-sectors of pharmaceuticals, biotechnology & life sciences and health care equipment & services have high proportions of “true SDG leaders” and “SDG leaders” (81% and 82% of the market cap in their sub-sectors respectively).
In the IT sector, all three sub-sectors have a high proportion of SDG leaders. We find that IT products are typically deployed for energy-efficiency purposes and are associated with SDG13; the same also applies to certain devices in the semiconductor sub-sector.
In the food and beverages sub-sector, we often observe a lower exposure to the SDGs than one might have expected. These companies are contributing to the SDGs, but nevertheless have disappointing ratings due to their net negative SDG contribution particularly to SDG 2 (Zero Hunger – Nutrition). This includes companies producing soft drinks, confectionary, desserts, red-meat-based products and highly processed foods products.
Last but not least, most of the companies in the communication-services sector have little to no positive SDG revenue. As a result, and even though many companies may score highly in terms of ESG quality they will be marked down on an SDG basis, achieving an SDG rating of “D” at best. By contrast, SDG leaders are rated “A” or “B.”
So, what does it all mean? Our analysis illustrates the usefulness of having a formal framework to assess issuers across consistent criteria sets in deriving our global outlook for our sector-allocation and security-selection processes. By including ESG information in general and SDG information in particular, we aim to reduce our investment risks, capture investment opportunities and facilitate efforts to improve environmental and social challenges faced by society.
Column by Petra Pflaum, EMEA Co-Head of Equities & CIO for Responsible Investments in DWS
1. Business and sustainable Development Commission (January 2017). Better Business, Better World
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