Asset Class: Responsible Investing

Advancing the Sustainable Development Goals through investor engagement

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  • Why: The Sustainable Development Goals (SDGs) provide a universally-recognized framework for assessing and accelerating progress towards a more sustainable world.
  • What: As shareholders we discuss important environmental and social issues with the companies we, and our clients, invest in to create positive behavioral change.
  • How: We are engaging with companies on SDG targets where we can have the most impact and influence.

What are the Sustainable Development Goals?

The Sustainable Development Goals (SDGs) set out a road-map for a more sustainable global economy and society by 2030. Developed by the United Nations, they were endorsed in 2015 by all 193 member states. They build on the Millennium Development Goals (MDGs), but are broader in scope, and have a critical difference – while the Millennium Development Goals focused on government actions, the Sustainable Development Goals look to all stakeholders, including the financial sector and business, to support implementation.

The SDGs are structured around 17 Goals. Each Goal has a set of targets setting out specific objectives to achieve the Goal, with a total of 169 targets across the 17 Goals.

Sustainable Development Goals
Source: United Nations Development Programme. http://www.undp.org/content/undp/en/home/sustainable-development-goals.html

Since the SDGs came into force in January 2016, they have been increasingly widely adopted as a common and consistent way to articulate sustainability; a survey of 470 corporate sustainability reports by PwC1 found that 62% referenced the SDGs. Among policymakers, the SDGs are one of the key foundations of the European Commission’s Action Plan on Sustainable Finance, as well as the G7 Summit which took place this year in Canada.

What is the role of investors?

Finance has a critical role to play in achieving the Sustainable Development Goals, by channeling capital towards solutions. We believe that the financial sector cannot be a passive bystander to sustainability challenges, and should work actively alongside corporates and governments within their privileged and trusted position as stewards of capital.

We also believe that utilizing the SDGs can have advantages from a fiduciary duty standpoint2, by providing a macroeconomic view of the key trends in sustainability that can help to shape investor thinking about future opportunities.

Ultimately, achieving the vision of the 2030 Agenda, of a stable environment and society, is essential for laying the foundations to long-term global prosperity and investment performance.

Recognizing these points, a growing number of investors are already working to embed the SDGs in their processes. Examples of actions include:

  • Selecting one or more SDGs to frame the social and environmental objectives of a pension fund
  • Mapping existing investments to the SDGs, across portfolios or asset classes
  • Setting targets for a proportion of future investments to align with SDGs
  • Using SDGs in company engagement
  • Referencing SDGs in reporting on responsible investment activities

Goal 17 (Partnership for the Goals) strongly promotes a collaborative approach, and investors are joining together to share information about their approach to the SDGs, given the importance of the Goals. One example is the PRI-led ‘SDGs in Active Ownership Working Group’, which we are an active member of. This group is looking at SDG application from a listed equity and corporate fixed income perspective.

A road map for SDG engagement

The link between the Sustainable Development Goals and engagement, in our view, is one of the most direct ways that investors can see real sustainability impact from the actions they take.

The principle of using investor engagement to promote positive financial impact, through working with companies to address material ESG risks, is well-established. What is so far less discussed is how we can articulate the positive societal and environmental impacts of engagement. We believe the SDGs provide an ideal framework to analyse this wider impact, by providing a comprehensive taxonomy for describing sustainability objectives which is commonly understood by investors, corporates and governments.

At BMO Global Asset Management our starting point was to establish a baseline by analyzing the links between our existing engagement activities and the SDGs. This process started in 2016, when our approach was based on mapping our seven high-level engagement topics3to the 17 SDGs.

Sustainable development goals
2017 engagement data

In 2017, we took our analysis further by matching our 43 more granular engagement sub-themes to the 17 Goals4.

The highest proportion of SDG-linked engagement related to Goal 13 (Climate Action). Other engagement activities linked strongly to Goal 12 (Responsible Production and Consumption), Goal 5 (Gender Equality) and Goal 6 (Clean Water and Sanitation).

17% of our engagement activities didn’t directly support a specific SDG; these were instances where we engaged on corporate governance issues alone. In our mapping work, we concluded that corporate governance engagement does not have a link to any single Goal. Rather, we see good governance and board-level oversight as a foundation for the achievement of all 17 Goals, with well-governed companies better able to manage sustainability risks and opportunities. The main exception in this mapping is our engagement on board diversity, much of which covers gender diversity issues, which we see as supporting Goal 5 (Gender Equality).

We have continued to develop our methodology in 2018 on how to engage in relation to the SDGs and have now mapped the 169 SDG targets to our engagement sub-themes, and vice versa, enabling us to have a more granular approach.

Not all 169 targets are directly applicable for investors and companies, as some are more effectively addressed by other stakeholders, such as policy makers. We have, therefore, identified 40-50 targets to initially focus on, where we believe our engagement can have the most impact to influence positive change.

Mapping is a key step towards establishing a baseline and to be able to report effectively on how actions support the SDGs. But investors can go further by using the SDGs as a way to shape the engagement agenda itself. For us, the process of analyzing the targets underpinning the SDGs has helped to strengthen our asks and recommendations to companies, and we are increasingly referencing specific SDG targets in our communication with companies.

Sustainable Development Goals

Our experience so far is that corporates welcome this development in engagement approach. With demands growing for sustainability reporting that is time intensive to produce, there is increasing pressure to prioritize and find ways to communicate on sustainability effectively, to satisfy a wide range of stakeholders. By working with the common language of the SDGs, investors and corporates can build a more effective engagement relationship.

A shift in perspective

We see the Sustainable Development Goals and their application as emblematic of a shift in perspective in the investment industry. There has already been progression within responsible investment from values to valuation, as investors came to realize that the ESG issues previously seen as purely ethical could be financially material, and then worked to integrate these into mainstream investment processes. We believe a further shift is now taking place towards impact, as the financial sector takes greater responsibility for the consequences of its decisions on the wider economy and society; and the SDGs are at the heart of this. We believe this a positive trajectory for our industry and and we will continue to strive for leadership within this area.

 

1 Global SDG Reporting Challenge, PwC, 2017
2 See ‘The SDG investment case’, UN PRI (2017)
3 At the time these were: Environmental Standards, Business Ethics, Human Rights, Labor Standards, Public Health, Corporate Governance and Social and Environmental Governance
4 See 2017 Responsible Investment Review, BMO (2018)
5 UN, 2016
6 FAO, 2016
7 UNESCO, 2014
8 UNEP, 2018
9 OECD, 2016

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