Money Matters - why responsible investment is key to financing the SDGs

The UN Sustainable Development Goals (SDGs) have been part of the global business conversation ever since 193 nations voted to adopt them in 2015.

Three years later, however, the SDGs still lack the real momentum and commitment from business that is required if they stand any hope of being achieved on schedule by 2030.

A key factor in jumpstarting SDG progress is financing.  It is estimated that the SDGs will need investment of $5 - $7 trillion a year, and that the annual financing gap in developing countries alone is $2.5 trillion. That is surely achievable when you consider that global GDP is approximately $115 trillion. The potential rewards for investors and business are huge - an estimated $12 trillion in market opportunities (through business savings and revenue). Yet, until recently, the investment community has been slow to grasp the potential of sustainable finance and the SDGs in particular.

That finally seems to be changing.  Over the last year the asset value of impact investing funds has doubled and new SDG-specific funds have launched. The green bond market is now worth an estimated $250 billion and influential industry leaders like Blackrock CEO, Larry Fink, have urged the corporate world to meet the needs of society and not just shareholders.

Our latest Private Equity Responsible Investment survey suggests this sector too is becoming more aware and aligned to the SDGs.  Sixty seven percent of respondents said they had already identified and prioritised SDGs that are relevant to their investments (up from 38% in 2016). And 43% say they had adopted a proactive approach to monitoring and reporting portfolio company performance against the SDGs. A third (33%) have also factored the SDGs into their responsible investment or Environmental, Social and Governance (ESG) approach or strategy.

However, even as private equity and the investment sector more broadly gears up to finance the SDGs, are companies prepared to take the necessary steps towards this more responsible way of operating? Have they clearly identified and articulated the SDGs that have the greatest impact on and value to their business? And have they incorporated the SDGs into their overall business strategy or are they classifying them as just another non-financial accounting issue?  

Based on our SDG Reporting Challenge – an analysis of the corporate and sustainability reporting of over 700 companies globally – it would appear that companies still have a way to go. While half of the companies we studied had clearly prioritised the SDGs in their public statements, just 27% had integrated those SDGs into business strategy.

Prioritising the relevant goals undoubtedly is an important first step to moving beyond paying lip service to the SDGs. However companies aren’t going to make progress on the Goals or gain the benefits of aligning with them if they can’t embed those priorities into strategy. When they do, the SDGs can act as a lens to help business take a systematic approach to understanding their total impacts. In doing so organisations can mitigate negative impacts and focus attention on those areas where they can have a positive impact – whether it be investment decisions, research and development or innovative new product offerings.

How then to bridge the gap between good intentions and real business strategy? Certainly leadership plays a key role. CEOs and senior executives need to take an active interest in driving progress. It was notable from our research that just 19% of CEO or Chair statements in annual reports mention the SDGs.

By setting a leadership tone the board also can make clear that every part of the organisation has a role to play in meeting the SDGs – they aren’t simply the responsibility of the sustainability or CSR departments.

To reinforce that the SDGs are everyone’s responsibility companies will need to establish meaningful KPIs for meeting the goals – ones that are specific both to the business as a whole and to individual functions and roles within the business. This will embed the goals into the heart of everyday activities, targets and also rewards.

With the right leadership, employee buy-in and KPIs companies can start to measure and report on SDG progress with the same rigour that they currently apply to their financial performance. Only by integrating the reporting of financial and non-financial (and establishing a consistent benchmark for both) will companies and investors be able to accurately evaluate the value that meeting the SDGs is delivering for the business.

Moving forward, the SDGs can help companies address the areas where they have the greatest impact and also provide the framework to give the financial services sector the right information to give the Goals a much needed investment jumpstart.