Updated: Apr 4, 2022
As mentioned in our previous blog post related to sustainable development, an increasing number of mainstream investments vehicles such as ETFs and mutual funds are supporting the fulfillment of the UN Sustainable Development Goals. Indeed, these funds are built to have a significant and measurable effect on the environment and society and thus invest in companies which products or services seek to achieving the SDGs.
For example, an energy company producing wind energy is contributing to reaching SDG seven, ensure access to affordable, reliable, sustainable and modern energy for all, whereas a company that is active in clean water treatment is contributing to SDG 6, ensure availability and sustainable management of water and sanitation for all.
However, measuring the sustainability of an investment is not as straightforward as measuring its financial performance. Indeed, companies can often have both positive and negative impacts on the SDGs. For instance, an energy company might be transitioning to clean energy and developing its wind energy production but might still be active in coal mining. To cope with such situations where the SDG contribution of a company is not clear, asset managers use scoring and filtering systems to assess the overall contribution of companies on SDGs.
The scoring systems differ across asset managers, but usually consist of three steps: They start by analysing the activities of the company. Then, they analyse how the company undertakes these activities. Finally, they assess whether the firm has been involved in any controversies.
For asset managers, the rationale for investing in companies that support SDGs is twofold. Firstly, they seek to create social and environmental benefits by reallocating capital to more sustainable companies. Secondly, they believe that sustainable investing will result in lower financial risk and higher returns in the long run. In other words, SDGs funds both aim to drive a positive change and to obtain financial exposure to themes related to the SDGs.
While academia has not yet thoroughly analysed the performance of SDG funds, as these were only launched in 2015, the relation between ESG investing and fund performance has already been widely discussed. To avoid any confusion, it is worth to briefly recall how SDG and ESG are closely related yet different. On the one hand, SDG relates to the seventeen Sustainable Development Goals launched by the United Nations which target global issues such as poverty, climate change, and gender inequality. On the other hand, ESG stands for Environmental, Social, Governance and refers to the three central dimensions encompassing the activities of a company that may have impacts on society and the environment. Friede, Busch and Bassen (2015) conducted a meta-analysis aggregating more than 2000 empirical studies discussing the effect of ESG investing on financial performance. The co-authors observe that roughly 90% of studies find a non-negative relation between ESG and financial performance. Moreover, they report that most considered studies find a positive relation between ESG and financial performance. This is great news for sustainable investing, and hopefully, upcoming research will find a similar relation between SDG-focused funds and financial performance.
To conclude, by reallocating their capital into investments which support the SDGs, investors can benefit both society and the environment and might also improve their financial performance in the long run.
Robecco. (2021). SDG Funds
SDG Invest. (2021). Sustainable Investments in Global Equities
Triodos. (2021). Measuring the Impact of Sustainable Investments
Friede, Busch and Bassen. (2015). ESG and Financial Performance: aggregated evidence from more than 2000 empirical studies