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Blog Posts — March 13, 2023

Asset-owner panel discusses drivers, merits of integrating SDGs into investment portfolios

Integrating the United Nations’ Sustainable Development Goals (SDGs) into investment portfolios is becoming both a prerequisite and a medium for responsible investors, a panel of asset-owner practitioners said at a recent roundtable. 

The discussion during a Savvy Investor webinar on Feb. 16 centered around ways to measure investee companies’ contribution towards achieving the SDGs. The experts exchanged views about what’s driving the adoption of the goals, and how they are employing them as a broad classification to manage their own sustainability journey. 

“We like to take a holistic approach to sustainability and not focus on a more narrow area such as climate or green investments,” said Sandra Metoyer, Head of Sustainable Investments at Velliv, which provides pension solutions to more than 390,000 Danes. “We feel that the SDGs cover the whole spectrum when speaking sustainability, when speaking climate, when speaking society, and how investments affect us humans.”

“And we also believe that when speaking about the SDGs, it is something that our clients are already familiar with and something they can easily relate to and also understand,” she added.

The 17 SDGs, which include eradicating hunger and poverty, and promoting good health and well-being, were introduced in 2015 and are helping investors guide their investment policies. A key landmark was the launch by four of the world’s largest asset owners of the Sustainable Development Investments Asset Owner Platform (SDI AOP), a groundbreaking tool to assess businesses’ revenue streams based on their contribution to the SDGs.

‘Makes investment sense’

A first driver for adoption of the SDG framework has been client demand. Hans Op ‘t Veld, Principal Director of Responsible Investment at PGGM, explained during the webinar that his firm’s pension beneficiaries have for years had an interest in sustainability objectives that are related to, and predate, the SDGs.  

“The ability to contribute to society through their pension schemes is something that they find very attractive,” said Op ‘t Veld. “We had a framework in place that talked about four themes — water, food, climate and healthcare — that was embedded into our investment policy. When the SDGs came around, we finally had a language in which we could communicate on these.”

“But it also makes investment sense to us because it raises our knowledge of business models,” he added.  

Mapping sustainable outcome

Trent Sparrow, Manager of Impact Investments at Wespath Benefits and Investments, similarly explained that the SDGs offer a classification system for its clients’ long-established sustainability ambitions.

“The main driver of our interest in measuring and managing impact comes from our desire to invest in such a way that we can create a sustainable, global economy,” Sparrow told the audience. “And that’s one that we define where there is social cohesion, environmental health and economic prosperity for all. One thing that we particularly like about measuring a company’s impact on society via the SDGs is that it helps us map to those three broader categories.”

Wespath manages the pension funds of more than 100,000 active and retired clergy and lay employees of the United Methodist Church as well as the funds of over 150 Methodist-related foundations and endowments.

From stock-picking to reporting

A second driver for adoption of the SDGs has been regulation, according to the panel. 

“We are required to report certain sustainability indicators on our products,” said Metoyer. “Here we find the SDGs to be a very good fit for that purpose.”

Portfolio reporting is one of several uses of the SDI AOP, explained James Leaton, Research Director at the platform. Others include stock-picking and building SDI portfolios, managing risk, and monitoring exposure to SDIs. In fact, the SDI AOP helps investors imbed the SDGs across the entire investment process.

Introduced in 2020 by a consortium of asset owners APG, AustralianSuper, British Columbia Investment Management Corporation and PGGM, the SDI AOP is committed to accelerating the market adoption of Sustainable Development Investments (SDIs). Qontigo is the SDI AOP’s exclusive distribution partner. Velliv and PGGM are SDI AOP subscribers. Wespath is set to subscribe to the SDI AOP in 2023. Wespath currently uses an alternative SDG dataset and feels there is value in having data from two independent sources, especially one that is managed by a design authority comprised of leading asset owners.

Leaton explained that the SDI AOP maps companies’ revenues to an SDG taxonomy designed by the platform’s partners and their research teams. Looking at revenues gives investors an objective, consistent and transparent dataset that has been audited and is universally available, he added. The data, which has grown to include negative contribution to the SDGs and SDGs-aligned patents, goes through a quality assurance process with the input of expert analysts, and benefits from the continuous feedback of users.   

“We are always very transparent in what we provide,” Leaton said. “We want people to see the actual data point underlying the work that we’ve done, and that they understand how we derive the overall percentage that we consider is aligned with SDGs.”

Data transparency was a recurrent point throughout the presentation, as panelists highlighted the importance of basing investment decisions on reliable information and eliminating the risk of greenwashing. 

Alpha signal

A recent Qontigo whitepaper1 looked into the effectiveness of the SDI AOP’s SDI Innovation Outlook score in predicting equity returns. The findings show that the score can be used as a signal to generate outperformance

“We should definitely be trying to use this data as another point of information that we can use to enhance long-term returns for our institutional investors,” said Wespath’s Sparrow.

Taking ownership

Closing his presentation, Op ‘t Veld said using the SDI AOP allows his firm to trace all data back to its origin, and it gives them the ability to work with other asset owners in integrating the data and advancing SDIs. 

“The ability to track the companies beyond what they put in writing themselves is rather helpful,” said Op ‘t Veld. “We need to take ownership of where we are invested. The role that we play in allocating capital to those pockets where we see there is an opportunity to accelerate investments in things that help us to resolve the world’s problems is quite important.”

Sparrow agreed. He said Wespath’s three main uses of the SDGs are: engaging with asset managers to discuss the SDG profile of investee companies; reporting to pension participants about the sustainability impact of their investments; and lastly, measuring progress over time. 

“It is early days, data is going to change, and that’s something we are comfortable with,” said Sparrow. Yet, ultimately, his firm is also comfortable with having taken action to support the SDGs: “Recognizing that we are doing something rather sitting on the sidelines.”

To watch the webinar, please click here.

1 ‘Outperformance with SDI Outlook Score,’ Qontigo, February 2023.