How investing in the SDGs mixes good causes with great returns

The UN’s Sustainable Development Goals have captured investors’ imagination as a means of helping society while also capturing decent returns. And they’re gaining in popularity, with billions in inflows into strategies that follow them in the six years since their launch.

The 17 goals are unique, as it is the first time in history that a global plan has been drawn up to promote social well-being, economic development and ecological sustainability, using cash from businesses and investors that also generates returns on those investments. So, it’s not charity or philanthropy, but real business.

What is more, this plan applies to all countries and involves everyone – not just governments, NGOs or charities. Subsequently, contributing to the SDGs presents a business opportunity for companies, although opinions will differ on the preferred goals in which to invest.

A survey by the United Nations Development Program identified the three most popular goals in Uganda as being SDG 7 (affordable and clean energy), SDG 13 (climate action) and SDG 11 (sustainable cities and communities).

All three involve infrastructure and therefore provide a physical means of measurably adding value, while also achieving clear returns. SDG 16 (peace, justice and strong institutions) was not considered very investible, but ultimately any SDG can be invested in by making the right selections. Building telecommunications equipment, for example, improves access to information – a target under SDG 16. It depends on how and where you look.

Research has shown that even though massive investment is still needed to meet the SDGs, it would also create new markets. For example, renewable energy or medicines could be sold to people who previously had no access to them. One estimate suggested this could mean as much as US$12 trillion ($16.4 trillion) of market opportunities per year and that 380 million new jobs could be created, particularly in projects related to combating climate change.^1,2

A business opportunity

For companies and investors, the SDGs are therefore not a “nice to have” aspect of investing, or a PR exercise, but a clear business opportunity. Indeed, the SDGs could provide companies with a future competitive advantage by being a source of innovation and by encouraging process improvements and operational efficiencies – in other words, improving returns.

Meanwhile, regulations are changing fast, and the public is increasingly demanding a more sustainable approach to business. Companies and investors that embed SDGs into their strategy will subsequently be more likely to align with present and future governmental policies and regulations. This means they would then avoid the risk of losing their “social licence to operate,” or encountering high costs resulting from structural change that is eventually forced upon them.

This in turn reduces the risks inherent in investment portfolios. At the same time, sustainably minded companies will have a positive impact on societies and the environment, ensuring a win-win scenario.

Impact investing

Targeting the SDGs is a form of impact investing, which is defined as “the process of intentionally making investments with the aim of creating a measurable beneficial impact on the environment or society, as well as earning a positive financial return”.³

The SDGs are a popular means of engaging in impact investing, since they provide a good framework for investors to determine the intended social and environmental impact of their chosen investment.

Impact investing has three components:

• There must be intentionality: an investor is making a deliberate, targeted effort to exert a positive impact. This could be due to the feelgood factor of making a difference, coupled with an underlying business motivation.
• The investment should generate a positive financial return; this is the key differentiator between investing and descending into charity or philanthropy, where no return is expected.
• The benefits of impact investment should be measurable. This means the results of the investment should be tangible, such as how many hospitals were built.

Pension fund commitments

While such investment has captured the imagination of investors who want to engage in impact investing and assist progress with the SDGs, it has yet to enter the mainstream. Few of the world’s major professional investors such as pension funds currently allocate large sums to SDGs, viewing it as ‘niche’.

For example, in 2019, the Dutch Association of Investors for Sustainable Development, which represents about 95% of the Dutch pension savings market and has about EUR1.36 billion ($2.1 trillion) in assets, conducted a survey that found that only 19% of its members had set targets to allocate investment cash towards the goals.⁴

As with the UN survey, the Dutch research showed that some SDGs were more popular investment targets than others. SDG 13 (climate action) was seen as the one offering the biggest investment opportunity, particularly as it has quantifiable targets in terms of things like CO2 emissions.

The Focus of pension funds on investment opportunity and business responsibility of the 17 SDGs. Source: VBDO – Pension Funds and Sustainable Development Goals

Ultimately, achieving the SDGs is in everyone’s interest. If we reach them, our planet will be more stable and less likely to face natural and manmade hazards. And if such hazards do strike, such as the Covid-19 pandemic, then investments in our economies and in people’s basic needs will make us more resilient. In other words, the SDGs can create a world in which business can flourish.

You can find out more on Robeco’s bespoke SDG investing page and Guide to Investing in SDG Credits.

1. https://www.un.org/sustainabledevelopment/sg-finance-strategy/
2. Business & Sustainable Development Commission, 2017. “Valuing the SDG prize”. London: Business & Sustainable Development Commission.
3. https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/impact-investing.html
4. https://www.vbdo.nl/en/2018/11/vbdo-acceptation-sdgs-is-slow/

Industry Expert