21 October 2019
More strategic thinking about investors' role in achieving the SDGs is needed, argues Cary Krosinsky
The Sustainable Development Goals (SDGs) are not particularly controversial – they stand out as a particularly excellent and important piece of work by the United Nations.
After all, who doesn't want to see poverty solved for good, or climate change fixed once and for all, or everyone live in peace? And the SDG sub-targets are an excellent set of desired outcomes.
However, the paths for solving each of these defined outcomes is perhaps more complicated than meets the eye.
It would seem to be particularly useful to better understand more specifically which categories of investment strategy and overall approaches would be most effective for achieving each goal, and it is surprising that more work and thinking hasn't gone into exactly what strategies are needed.
This calls for three seemingly urgent and important tasks; let's see how far we can take each of these in this one short piece but there's clearly room for more critical thinking, analysis and experimentation:
The first thing that needs to be done, arguably with the utmost urgency, is to separate the SDGs into those that are best addressed through direct investment strategies at scale, those that are systemic outcome categories requiring indirect and other varying systemic approaches – including ensuring the right policies and governmental/people/legal structures are in place, especially across the developing world – and those that are not solvable through investment at all.
This parsing seems to me to be essential, and something that will only speed up the effectiveness of attempts to successfully achieve desired outcomes when we focus investment where it's most needed and where it can be most effective
When one glances through the SDGs, the first few goals do seem to align neatly with the more micro definition of impact investing (which we see as one of the Seven Tribes of Sustainable Investing). Yet the goals towards the back end of the numeric list of SDGs are clearly not directly investible – certainly not goal 16, which aims to achieve just, peaceful and inclusive societies.
Investors have some role to play in all of these goals, but for maximum effectiveness they need to know specifically what they can do and what will be effective, especially as asset owners such as large city and state pension funds, by definition, have limited capacity and resources, and so prioritisation of possible impact is essential.
Perhaps even more important is the need to gain an understanding as to the relative size of the impact of public companies and other organisations, such as state-owned enterprises, versus the realistic potential impact of start-ups and other entrepreneurial and/or non-public company impact categories on a per-SDG basis. This includes a better common understanding of things like the relative impact per SDG of people and their decisions.
Investors have some role to play in all of these goals, but for maximum effectiveness they need to know specifically what they can do and what will be effective
(This is often underestimated – when considering climate change, for example, people are responsible for the majority of carbon emission impacts when you consider choices they make with transportation, regarding food they consume, etc. This makes one think there's a missing SDG, maybe the most important of all – one that accomplishes full awareness of and consensus on the SDGs themselves).
Lastly – and on this there clearly needs to be more research and experimentation – is that impact investing and sustainable investing more broadly needs to better understand up front what works best, what truly can improve the net positive impact of each SDG, and how these can be tied directly to each investment accordingly.
Here, it is believed that some impacts can be measured on a per investment basis, and some SDGs will instead require a "measuring the system" approach on a seasonal basis instead.
Such a three-step exercise could result in the conclusion that not all impact can be directly measured on a per company and per investment basis. Rather, what is more important is the collective intentionality of investment. This, too, is perhaps best measured on a per investment strategy or per institution basis, looking at the strategies they use, the culture they have in place, and what they aim to achieve.
This is work we do for financial institutions themselves as Real Impact Tracker, helping build a better understanding of what qualitative strategies can be prioritised to achieve more impact as an institution. This includes not only a gap analysis strategic assessment, but also an analysis of the culture in place. Real Impact Tracker has developed a Culture Score that we are fairly proud of in this regard, which allows financial institutions to see where they are and where they could truly go, using a balanced scorecard.
To achieve SDG outcomes we need to demonstrate what's working at both the strategy level (for both corporates and investors) to improve impact, and also from a business case perspective, to help provide confidence to asset owners who can then make investment allocations at the necessary scale.
This is the theme we have been featuring in recent events, including at Yale in September 2017 and in Shenzhen in January 2019, namely that in some ways we've had the ESG conversation exactly backwards.
It isn't so much "create an ESG database and then figure out what to do with it" – here we differ from the likes of BlackRock who rely on arguments surrounding inadequate data to justify a lack of increased uptake surrounding sustainable and impact investing.
Better data is always helpful and appreciated, but it isn't an excuse for inaction, nor should data be a key goal that we rely upon. For example, in Asia, which is half the world's economy, we simply won't have the sort of ESG data that is decision-useful any time soon, and the problems are urgent and time is wasting.
'Systems thinking' informs us that static data is only roughly 1% of what it takes to successfully transform a system, so let's get on with it! We can understand the strategy and culture of any organisation, if we want to, and it's up to investors to show what they want to see, or require.
Without further expressions of intentionality, investors are empowering the status quo, given that institutional investment is something like two-thirds of the ownership of many public companies, and time is wasting on issues such as climate change, human rights in supply chains and so much more. These issues won't be solved simply by rallying behind better static, two dimensional snapshots-in-time data.
Instead, we must seek better outcomes. This can only be achieved through the implementation of adequate strategies-for-purpose implemented with sufficient intentionality at necessary scale.
Better data is always helpful and appreciated, but it isn't an excuse for inaction, nor should data be a key goal that we rely upon
The three steps above – better parsing of the SDGs, gaining a better understanding of where the potential net positive impacts can be found by asset class, and understanding what strategies work best and that can be adequately scaled for impact – would seem the best way forward for achieving the sort of successful outcomes that the field of impact investing rightly seeks to achieve more generally.
Hopefully, we will go down this road with adequate thinking and resources to create an environment where there is adequate intentional demand from asset owners for better products from fund managers, creating the sort of supply-demand dynamic that can allow sustainable and impact investing to have the sort of impact that we all hope to see.
Cary Krosinsky is a lecturer at Yale and Brown universities; co-founder and director at Real Impact Tracker, the Carbon Tracker Initiative and Investor Watch; and an advisor on sustainable finance.