Responsible investing and the Sustainable Development Goals

By Carol A Adams

Photo by Who is Danny ShutterstockAs institutional investors try to work out what the Sustainable Development Goals (SDGs) or Global Goals mean for them and how they fit with their work on the Principles for Responsible Investment (PRI) and Environmental, Social and Governance (ESG) issues, companies are starting to link the SDGs with their corporate strategy.

Companies leading the way in doing this include AkzoNobel, British Telecommunications Plc (BT), Grupo Nutresa, SAB Miller Plc, Tridos Bank, TSKB and Woolworths Holdings Ltd. They’ve identified SDGs which they can contribute to while delivering on their business strategy and objectives.

But it isn’t just about making a contribution. As BT noted in their 2016 ‘Delivering our Purpose’ report there are also “…potential impacts on our business, if the Global Goals are not achieved by 2030 in the markets where we operate”. This matters to long term investors. But how do they assess whether companies they invest in are addressing it?

Last month the International Integrated Reporting Council (IIRC) and ICAS (the Institute of Chartered Accountants of Scotland) published a report I authored titled “The Sustainable Development Goals, integrated thinking and integrated reporting” which includes a framework for organisations to follow in order to integrate the SDGs into strategy and reporting. In the same way that the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) provide investors with a framework for assessing climate related risks and opportunities, this report provides investors with a means of assessing the extent to which the companies they invest in have considered risks and opportunities associated with the sustainable development issues that the SDGs address.

Source: Adams (2017)

The framework sets out five steps for companies, investors and other organisations to follow and practical guidance on how to do it. Briefly these steps are:
1. Understand sustainable development issues relevant to the organization’s external environment;
2. Identify material sustainable development issues that influence value creation;
3. Develop strategy to contribute to the SDGs through the business model;
4. Develop integrated thinking, connectivity and governance;
5. Prepare the integrated report.

Each step is linked to relevant parts of the International <IR> Framework which is a mainstream reporting development for communicating about value creation and the value creation process over time. The <IR> Framework was developed with a key aim to help investors understand how organisations create value. Value is much more broadly defined than financial gains – a response to the fact that the balance sheet has encapsulated a decreasing proportion of a company’s worth. Further, the Framework can be used to aid understanding of the relationship between sustainable development and value creation. And it also aids the understanding of trade-offs across interdependent and potentially conflicting SDGs.

Of relevance to the SDGs, the <IR> Framework considers: benefits to stakeholders (recognising that this is important in creating value for shareholders); both preservation and diminution of value; the role of social and environmental externalities in increasing or decreasing the value created by organizations; the availability and stewardship of multiple capitals (including for example natural capital, social and relationship capital, intellectual capital and human capital); trade-offs in relation to use of the capitals; the implications of evolving societal expectations and resource shortages as planetary limits are approached; and, the need to articulate how the continued availability, quality and affordability of significant capitals contribute to the organisation’s ability to achieve its strategic objectives in the future and create value.

Cbus, based in Australia, is one pension fund that has indicated (in its Annual Integrated Report 2017) that it is seeking ways to contribute to the SDGs through both active engagement and its investment strategy. The report includes a timeline infographic showing how the fund’s thinking about Responsible Investment and ESG issues has evolved to developing approaches to addressing climate change and the SDGs.

“At Cbus our priority is investing to generate the best outcomes for our members and ensuring our strategy delivers sustained value. A sustainable global financial system requires the realisation of the SDGs. They need to be considered in order to understand the risks and opportunities evident in our operating environment and to inform strategy. That is why we are committed to investing in a way that contributes to the achievement of these ambitious goals and encourage others to join us.” David Atkin, CEO Cbus

So how exactly can pension funds and other long term investors help build a stable financial system through their contribution to the SDGs? One way is to develop portfolios with the aim of prioritising specific SDGs. Another is to widen the range of wider factors in their risk profiling and appraisal of investment opportunities and deepen their consideration. Further, leading investors are embedding wider value creation risk factors, including sustainable development, into their overall investment policy and governance processes. In their external annual reporting they are starting to integrate their ESG activities into the discussion of their investment processes indicating that it is a mainstream activity.

“Increasingly companies and institutional investors are reflecting on their corporate purpose and strategy and seeking to understand how they align with the SDGs. The framework set out in the report provides a very practical way to achieve this and to link this thinking into external reporting.” Russell Picot, Chair of the Advisory Group for the report, Former Group Chief Accounting Officer, HSBC and Chair of the Trustee board of the HSBC Bank (UK) Pension Fund

In future pension funds and other long term investors will be able to ask the companies they invest in to follow the process set out in The Sustainable Development Goals, Integrated Thinking and Integrated Reporting. Anne Adrain explains why ICAS funded the project:

“The UN Sustainable Development Goals represent the means by which business, governments and civil society can achieve the 2030 Sustainable Development Agenda for the benefit of all. ICAS recognises the significance of the role this important research to inform this process.” Anne Adrain, Institute of Chartered Accountants of Scotland (ICAS)

Neil Stevenson explains why the IIRC commissioned it:

“Integrated Reporting offers a means for investors to evaluate the extent to which SDGs are embedded in an organisation’s strategy and business model. We believe it is important to show how Integrated Reporting can be used by companies to support their alignment to the SDGs, as part of their overall focus on value creation over time.” Neil Stevenson, International Integrated Reporting Council (IIRC)

This article was first published by ESG Magazine It must not be reproduced without complying with Copyright information here 

Carol Adams PhD CA FAICD is a Professor at Durham University Business School, UK and consults on corporate reporting, including to Cbus mentioned in this article.

Adams, C A (2017) “The Sustainable Development Goals, integrated thinking and the integrated report”, IIRC and ICAS  is available here.

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