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A common purpose: the UN’s Sustainable Development Goals
Here are three reasons why rational investors should care about the UN’s SDGs.
How exactly do we go about achieving a better and more sustainable future for all?
The UN’s Sustainable Development Goals (SDGs), set out in September 2015 as part of a resolution called the ‘2030 Agenda‘, lays out a blueprint for realising the above vision. At the top level, it comprises a series of 17 interlinked goals.
Image courtesy of the United Nations.
Each goal has a series of specific indicators and targets that can be used to measure progress. These serve as a standard benchmark for impact investors – a subset of sustainable investing – when analysing potential investments.
If we discount impact investors, a question remains: should investors take note of these SDGs?
The answer is an unequivocal yes. In this article, we will explain why. We won’t discuss the “big reason” – pushing humankind forward to a more sustainable future. That is already a well-established fact. Instead, we will present our argument solely from the perspective of a rational investor.
Before we get into that, however, let us look at the opposite angle – why do investors matter to the SDGs?
Why investors matter in achieving the SDGs
Hitting these ambitious SDGs, especially within the targeted 2030 timeframe, requires monumental effort and capital. According to the UN Commission on Trade and Development, the number is about US$5 trillion to US$7 trillion each year. Although government spending and development assistance will form part of it, it is estimated they will only make up US$1 trillion each year.
This means private capital is vital. While substantial efforts have indeed been made, the annual funding gap has remained persistent about US$2.5 trillion. This was also before the global pandemic, which has widened the gap in many areas, such as in the provision of quality education.
In short, the UN SDGs will be unachievable without the assistance of investors – from the institutional down to the individual. Now, back to the original question.
Three reasons why rational investors should care about the SDGs
The perfectly rational investor is an ideal – they do not exist. Even if they did, there would still be a compelling case for them to care about the UN’s SDGs.
Reason #1: They are a reference for mitigating investment risks
The SDGs are noble aspirations. The flip side is that they also represent material risks. We can start with the obvious one: climate change. This is a high-level risk that can result in “stranded assets” – assets that suddenly lose value because of changes in our weather patterns. In fact, it is increasingly being recognised as a systemic financial risk that investors cannot afford to ignore.
The SDGs can, therefore, serve as a universal risk framework. This holds true even when drilling down to non-systemic and more specific risks. For example, inequality and a lack of strong institutions can quickly spiral into political and societal chaos. In such instances, the SDGs can be a lens for assessing investments in more turbulent economies.
Reason #2: They are a useful capital-allocation guide
According to the Business and Sustainable Development Commission, the SDGs could pave the way for at least US$12 trillion in economic opportunities by 2030 through the creation of sustainable business models. Furthermore, these were mainly across just four broad sectors: food and agriculture, cities, energy and materials, and health and wellbeing.
With these SDGs set to power growth in select sectors, they can act as a useful capital allocation guide. This speaks to the core of investing, which is, after all, nothing more than the skill of capital allocation.
Reason #3: Other investors and companies care about them
The market consists of other investors and the companies they invest in. No matter how big a single investor is, even at the institutional level, it is extremely difficult to move the market by themselves. The rational approach is, therefore, to look ahead and try to intelligently predict the movements of the mass of investors across various timeframes.
What this means is that if other investors care about the SDGs, you should too. Consider that, even back in 2018, PwC found that 72 per cent of companies mentioned the SDGs in their annual report, 50 per cent had identified priority SDGs, and 27 per cent had explicitly mentioned them in their business strategy.
Meanwhile, in the US, it is estimated that a quarter of all company shareholding is held by firms employing sustainable investing strategies. What’s more, a 2020 report by the US Forum for Sustainable and Responsible Investment discovered that 40 per cent of surveyed asset managers, representing US$2.15 trillion of ESG assets under management, used the SDGs as the motivating factor in their sustainable investing strategies.
The SDGs are well on their way to becoming a universal framework
To sum up our original question, yes, investors should care about the UN’s SDGs. Acceptance of their ability to serve as an effective risk management and capital allocation framework is only increasing. This will influence where capital flows, which means investors should pay close attention – even if they do not believe in its capability as a universal framework. It can also create a virtuous cycle, as increasing capital flows towards the SDGs will grant them even more significance as time passes.
Certainly, we should never lose sight of our guiding star – the quest for a better and more sustainable future for all. Even for the mythical ‘rational investor’ that cares not for anything other than the most optimal risk-adjusted returns, the SDGs still matter. That means every investor should care.
This article is written by Fidelity International.
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