The SDGs and the capital market
According to experts, making SDGs a reality requires an investment of about 5 to 7 trillion US dollars per year. However, when you look at the current situation, there is a significant gap between what is needed to achieve the SDGs and what is currently available in financial resources. Experts refer in this context to the so-called “SDG funding or financing gap”, which needs to be closed from 2015 to 2030. But who is to close this gap and how?
At the latest with this question, the SDGs – along with governments worldwide – have reached the capital market. After all, private financing and private capital in particular have the potential to close the SDG financing gap. And so the call goes out to investors to redirect their investment flows to the new innovative products and services that focus on achieving SDGs. “In contrast to the ESG approach, the focus on the SDGs contributes to the active solving of problems. This is why we operate the SDG INVESTMENTS platform, which focuses exclusively on arranging financing for companies whose services and product solutions have a positive contribution to the SDGs“, emphasises Frank Ackermann, Managing Partner at SDG Investments. The Business & Sustainable Development Commission and the United Nations Principles for Responsible Investment (UN PRI) also point out that there is a clear “SDG Investment Case” for private sector investors: After all, the SDGs could open up market opportunities of up to 12 trillion US dollars in food, agriculture, cities and municipalities, energy and raw materials and health care alone, and create 380 million new jobs by 2030.3
In addition, the 21st century fiduciary duty states that investors, as part of their duty to beneficiaries, must consider all material financial factors, regardless of their origin. This means that environmental, social and governance issues (ESG criteria) and risks must play a central role in financial analysis and portfolio building strategies in addition to strictly financial factors. The most prominent example at present is the integration of climate-related risks into existing risk processes, as recommended by the German Federal Financial Supervisory Authority (BaFin) in its leaflet on dealing with sustainability risks. And so the UN PRI initiative defines responsible investment as a strategy and practice for integrating ESG factors into investment decisions. And at the same time, the UN PRI signatories make a clear commitment to the SDGs in the preamble to the “6 Principles for Responsible Investment”: “We recognise that applying these principles may better align investors with the broader objectives of society”. Furthermore, in its 2017 publication “The SDG Investment Case”, UN PRI stresses that never before have these “broader objectives of society” been more explicitly defined than in the SDGs.4
UN PRI marks the “SDG Investment Case”
The United Nations initiative “UN PRI” with its “6 principles for responsible investing” and its clear statement of position has had a significant impact on the current debate around the “SDG Investment Case”. The over 2,400 signatories of the principles jointly commit themselves to an ambitious mission: “We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole.”5
Consistent with this mission, the UN PRI, in partnership with the UN Alliance for SDG Finance and others, is advancing the SDG investment case and is calling on investors to adopt impact-oriented strategies. With the publication “The SDG Investment Case”, UN PRI sets the tone for responsible investing in the sense of the SDGs and provides an answer to the question why the SDGs are so relevant to investment strategies, asset allocation and investment decisions.
Here 5 arguments are in the focus6:
- The SDGs are the globally agreed sustainability framework to be financed until 2030 by investing money in long-term and sustainable companies and economies.
- The SDGs are part of fiduciary duty, as they give global concrete form to environmental, social and governance issues (in short: ESG).
- The SDGs will drive global economic growth and create enormous market opportunities.
- The SDGs are suitable for microeconomic risk management by identifying external costs and their financial materiality, thus strengthening ESG risk frameworks among investors.
- The SDGs can be translated into a capital allocation guide for various asset classes as more and more companies align their business models with the SDGs.
This argumentation is comprehensible to most investors, which is why many consider the role of the SDGs to be central to the development of a responsible investment agenda for the next 10 years. And yet, for many, the “SDG investment case” is still in its early stages: many investors still have no answer to the question of whether and how the SDGs will influence their investment strategy, policies, asset allocation and other investment decisions. The planned EU taxonomy is supposed to contribute to answering this question. “For each industry, the taxonomy defines criteria for climate-friendly measures to avoid emissions (mitigation) or to adapt (adaptation), such as emission limits for cars or green steel processes in the production of steel. Investors who finance measures and comply with these criteria can mark their investment as green and call it taxonomy-compliant.”8
The role of Big Data for the “SDG Investment Case”
In the real economy and on the capital market, more and more players are using the SDGs as a framework to make the impact of sustainability or ESG activities measurable. And where the word “measurability” is used, the topic of “big data” is not too far away. And so data also represents a central potential for transformation in this context. “New sources of data – such as satellite data -, new technologies, and new analytical approaches, if applied responsibly, can enable more agile, efficient and evidence-based decision-making and can better measure progress on the Sustainable Development Goals (SDGs) in a way that is both inclusive and fair”9, underlines the United Nations in its statement “Big Data for Sustainable Development”.
And here too, the private sector plays a key role, as it does on the capital market to close the SDG financing gap. Because a lot of data is currently being collected by the private sector. Arturo Martinez, statistician in the Department of Economic Research and Regional Cooperation, and Jose Ramon Albert, research fellow at the “Philippine Institute for Development Studies” explore in their blog post “Big Data can transform SDG performance” the opportunities and challenges in measuring the impact of the SDGs. Their main assessment is: “The Sustainable Development Goals (SDGs) offer specific, time-bound, and quantifiable targets in sync with national development plans and priorities. However, with over 230 SDG indicators—many of which require disaggregation by location, sex, gender, age, income, and other relevant dimensions—collecting the necessary granular data to monitor all SDGs and targets is no easy feat for national statistical systems (NSS).”10
The trend towards “Big Data”, which the two scientists likewise describe, thus plays into the cards for impact measurement in the sense of the SDGs: the enormous amount of data generated by increasingly digitised processes and modern technologies such as software solutions in the private sector can create the basis for reliable measurement. As a result, first companies are beginning to match their business activities and their additional commitment to these 17 SDGs in order to identify which of the goals they can make a measurable contribution to. However, impact measurement along the SDGs, as well as the “SDG Investment Case”, is still in its early stages. In practice, there is often a lack of reliable management tools to collect and analyse the relevant data for impact measurement. The software provider for responsible business management – WeSustain – as an example has detected this need of companies and is now supporting with its “Impact Management Software” to professionalise their operational impact measurement along the SDGs. With the help of numerous features, users can reliably collect data, evaluate the impact of individual projects using targets such as the SDGs and generate reports.
The SDGs as guideline for a sustainable transformation
The “SDG Investment Case” drawn here and promoted by the UN PRI initiative shows that we have matured in terms of sustainable development: Leaving the age of “do no harm” and entering the age of “real-world impacts”. It is becoming increasingly clear that “doing safe by doing good” in the form of a proactive ESG strategy is a factor of success for investors. The orientation towards the SDGs offers immense market opportunities – both for the real economy and for investors. But only if we manage to close the financing gap, i.e. by bringing together capital and sustainable business solutions to tackle the world’s most pressing problems addressed in the SDGs. Capital flows from the private sector will be of crucial importance in this process, which is why we can look forward with anticipation to the EU taxonomy becoming more concrete. For the implementation of the SDGs, Big Data and smart data-based tools will become a new standard, so that the “real-world impact” in terms of the SDGs will be steerable, measurable and transparent in the future. This is the only way we will be able to steer and work concretely towards the target picture for 2030.