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Acronyms of attracting sustainable investment

The SDG agenda as a strategic planning and risk management tool in the age of ESG investment.

· Catriona McNaughton,SDGs,Investment,Analysis

Adherence against Sustainable Development Goals is driving investment decisions. Unlike previous lukewarm efforts on CSR or ‘greenwashing’, companies are actively taking SDGs seriously. However, the ambitious breadth of the 169 SDG targets creates risk.

Activist investors, once known for their laser focus on rewriting an organisation's future direction and management for the purpose of seeking ever elusive profits, are now expanding their aim and exploring new paths including ensuring environment, social and governance (ESG) factors become the core of business operations. ESG investing, a term first coined in 2005 and based on the idea that these factors impact on profit and revenue and therefore should be considered alongside more traditional measure, is now driving more than one-quarter of investments in AUM globally. Navigating and implementing such principles can be treacherous as evidenced by the disastrous approach from major supermarkets in banning plastic bags this year.

The 2030 United Nations Sustainable Development Agenda presents a possible framework for business and organisations to map, plan and report on ESG. In September 2015, 193 countries signed on to the 2030 Agenda for Sustainable Development which consists of the 17 Sustainable Development Goals (SGDs) and 169 associated targets. While building on the previous Millennium Development Goals, the new SDGs were developed in consultation with business, and business is therefore given a greater responsibility in delivery alongside government. Despite early criticism that the goals were too broad and unwieldy to direct real change, too expansive to feel like anything is being accomplished and too complex to sell to the public, many organisations, communities and government bodies are now adopting them and driving action towards their achievement. In line with greater business responsibility and an increased focus on ESG investing, it is not unreasonable to foresee that large corporates and even smaller companies may increasingly be assessed in the public sphere through the lens of their contribution towards achieving the SDGs.

The breadth of the SDGs creates both threats and opportunities for achieving and demonstrating commitment to ESG factors. The sheer volume of targets under the SDGs provides opportunities for business in that there is an almost never-ending list of prospects to demonstrate contribution to the goals; from clean energy to jobs and gender equality, many current business practices are likely to align with contributing towards some goals and only need to be expanded. The SDGs also pose risk: current efforts focused on a single area may lose their weight if a broader scope is not taken; removing palm oil from products may no longer be good enough if you are not also reducing waste, removing other forms of exploitation from all supply chains or any number of other activities identified.

This is the issue Australia as a country currently faces. In the 2018 SDG Index, Australia ranks 37th (a significant slip from 20th in 2016). The top 40 are predominantly European countries with only exceptions, in addition to Australia, being Japan (15) New Zealand (17) Republic of Korea (19) and Canada (20) Costa Rica (33) and the United States (35). The 2018 Index highlights that no G20 country is on track to achieve all of the goals by 2030, largely as a result of not meeting one or more specific goals. Australia, while performing well across a number of indicators particularly those under SDG 1 – No Poverty, SDG 3 – Good Health and Wellbeing and SDG 4 – Quality Education, is performing particularly poorly among others such as those under SDG 13 – Climate Action and SDG 15 – Life on Land. We have become stuck in alignment rather than action as we assess how our current actions/policy/priorities contribute to the SDGs.

The real step to make change requires us to identify where we are lagging and create new action towards this. At the business level, this means changing the focus from current policies in this space, such as those that might promote employee wellbeing or equality in hiring, to assessing operations at a broader scale, such as encouraging and providing for employees to avoid cars for short trips by supplying bikes or public transport cards or assessing fair wages across your entire supply chain (both geographically but also in contractors and supplier inputs to goods and services).

In addition to providing a framework of options for progressing ESG factors, the comprehensive nature of the SDGs also provides context for assessing potential future business risk by identifying current issues, opportunities and threats which may contribute to both market trends and government policy. Over the course of the agenda to 2030 each of the countries committed to reviewing their progress towards to goals, with Australia’s first review submitted this year. The number of successive governments operating between now and 2030 will of course each take their own approach to meeting these goals, and as we progress towards a deadline the pressure will only increase. We can expect a carrot and stick approach regardless of the government’s specific agenda and those businesses prepared and progressing towards these goals will be best position to maximise the benefits of incentives and avoid the costs of new restrictions. They will also be best positioned to attract activist investors, as more business seek to achieve this and as community awareness and public scrutiny grows market trends will follow.

Businesses should dive into the SDG agenda as a both a strategic planning and risk management tool. Those that don’t will find their efforts fall short of growing investment trends, public expectations and the policy agenda. Those that do will find themselves as industry leaders not only progressing their business forward but also making a significant contribution to Australia’s ongoing progress towards achieving the goals by 2030.

Catriona McNaughton is the Communications Analyst at FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.