From the time that the UN Sustainable Development Goals were adopted in 2015, private finance was seen as a key component of financing the investments needed to achieve the goals by 2030. Since then, investors have been faced with the challenge of how to report their contribution to achieving the SDGs, without being accused of ‘rainbow-washing’ – making claims about the SDGs that don’t stand up to scrutiny.
That means they need to show how their investments contribute to filling gaps in provision of goods and services needed to achieve the SDGs.
Many have adopted the simpler task of reporting on whether their activities – their products and services, and their production processes – align with the SDGs. That is, they are consistent with a world where the SDGs are met. But we may find that in 2030 everyone is reporting great alignment with the SDGs, but we still won’t have achieved the goals – because getting there requires providing products and services which make a difference to meeting the SDGs, based on who consumes them and/or how they are produced.
So investors need to go beyond SDG alignment and measure and report on SDG contribution: that is, how far the firms they have invested in have made a difference to achieving the SDGs. Today, this is mostly voluntary, but regulators are catching up. For example, the newly published UK FCA regulations require that funds using the label ‘sustainable impact’ explain and measure their contribution to achieving impact.
To do so, investors need to first assess whether the firms they are investing in contribute to achieving the SDGs. Some impact metrics have an inbuilt assessment of product targeting towards gaps, for example, provision of financial services to previously excluded consumers, or provision of affordable housing.
Where they don’t, you can often get closer to SDG contribution by mapping where a firm’s products are sold. The first iteration of this may be simply by country, which can be compared to available information about SDG gaps by country. But a more nuanced assessment would get more granular. For example, the US government has tagged which census tracts exhibit high rates of poverty and deprivation. So this allows you to get much more specific about the link between products and needs.
Another way to get more specific is to unpack products further. For example, rather than just measure the number of patients treated, you can disaggregate by type of treatment, to measure the number of patients treated for underserved healthcare needs. Or for products where women have less access today, seek gender disaggregated data.
The firm’s production process can also contribute positively or negatively to the achievement of the SDGs. Again, the location of production matters for some metrics – creating decent jobs only contributes to SDG No. 8 if they are created in areas of high unemployment or informal employment, for example.
Similarly, in the value chain of the firm, where and how a firm sources its inputs may make a difference to its SDG contribution. Fortunately, some important impacts are not location specific: a reduction in GHG emissions has the same contribution to reducing global emissions wherever in the world it occurs.
There will always be data limitations in how granular you can get in assessing a firm’s contribution to the SDGs, but data availability is improving all the time, and pushing in this direction will encourage firms and other data providers to generate more location specific, gender-specific, or otherwise disaggregated information. And being aware of when you are unable to be so specific can allow you to be suitably cautious in not overclaiming the contribution of firms to the SDGs.
Second, you need to assess your contribution as an investor to achievement of impact. In public markets few investors can credibly claim to make a contribution to what firms they invest in do, because most investments are too small relative to the market to make any difference to the investee firm. Buying or selling a small equity stake in a firm or a small piece of a green bond won’t make any material difference to the firm’s cost of capital.
Investors can make a difference through stakeholder engagement, but that requires sufficient scale to gain influence over management. Blackrock can do it, large pension funds can do it, but most investors cannot, at least not individually. This is why regulators are increasingly concerned about greenwashing or rainbow-washing in the marketing of funds.
There is greater scope to credibly claim investor contribution in private market investments, where investors provide additional capital to firms allowing them to grow or restructure, and where typically pool their investments through fund structures, allowing fund managers significant influence, if not outright control, over the actions of investee firms.
There is also greater credibility in claiming investor contribution when investments are made in capital scarce areas, such as frontier markets or social enterprises. This suggests that investor contribution should be assessed as much on the asset allocation strategy as on the specific investments made within each asset category.
Smart investors will get ahead of impending regulations, and upgrade their SDG reporting from alignment to contribution. This means seeking out more disaggregated data on firms which shows how its activities fill gaps in achieving the SDGs, and being transparent and credible in claiming investor contribution.
Neil Gregory is a lecturer at Johns Hopkins University School of Advanced International Studies, senior research associate at ODI, and an advisor to West Potomac Capital and Net Purpose.