First State Investments SDG case study

Why engage with companies on the SDGs

First State Investments (FSI) fundamentally believes that excellent ESG integration is good for business, improving long-term investment returns and ensuring sustainable long-term value. The SDGs build on that, by providing a roadmap for solving some of the most urgent problems the world is facing, and are a universally recognised framework to define, measure and communicate contributions to sustainable development. By aligning our investment activities more directly to the SDGs, we can therefore better identify and manage risks and opportunities and so further enhance long-term returns and value.

How we engage with companies

We encourage and promote the use of the SDGs through our portfolio companies in selecting, defining and communicating ambitious medium- and long-term sustainability targets. We work alongside the organisations we invest in, supporting them in recognising where they already contribute to the SDGs, and where there are opportunities to increase contribution.

At the overall portfolio level, FSI has five ESG standards, derived from issues we believe are common across our portfolio, that can have material financial impact and align with our core beliefs. These standards are non-negotiable, although other ESG factors may also be relevant depending on the asset type. We then map the standards to the SDGs to understand how each investment is aligned, as a minimum requirement:

1. Corporate governance: SDG 8 (Decent Work and Economic Growth), SDG 3 (Good Health and Well-Being), SDG 11 (Sustainable Cities and Communities);
2. Health and safety: SDG 3 (Good Health and Well-Being);
3. Reducing carbon emissions: SDG 13 (Climate Action);
4. Equality and representation: SDG 5 (Gender Equality) and SDG 10 (Reduced Inequalities); and
5. Encouraging apprenticeship and continuous development: SDG 4 (Quality Education)

We work with portfolio companies to develop their own short-, medium- and long-term goals for environmental and social outcomes and assist and encourage them to link these to the SDGs. The SDG Compass^[1] has provided guidance for goal-setting in this regard, by highlighting the type of goals required to meet global needs, rather than internal business ones.

Each company can develop their own methodology for achieving those goals, but our asset managers take an active role in this process – for example, sharing guidance that we have developed, to support the companies’ approaches to achieving SDG outcomes. Progress towards these goals, as well as compliance with our minimum environmental and social standards, and any other ESG issues identified during due diligence, are communicated at board meetings and in the portfolio companies’ quarterly and annual reports. These KPIs are also directly linked to the financial incentives of management and staff.

We act if the outcomes fall short of intended goals. For example, we assisted management with the restructuring of health and safety responsibilities within one of our portfolio companies, including the nomination of a fully dedicated staff member who would report directly to the CEO. This was in response to the company’s failure to respond effectively to health and safety weaknesses identified during the due diligence process, which in turn meant that it was not supporting sufficiently our commitments to SDG 3.

Example: ForSea

ForSea is the largest ferry operator between Denmark and Sweden. It operates a short-distance route between the cities of Helsingør and Helsingborg – a vital maritime transportation link between both countries, with up to 150 daily departures.

FSI has a majority stake in ForSea, and since 2018 we have been working with the company to link its sustainability programmes to the SDGs. This involved helping ForSea understand the SDGs, defining priorities, and identifying which SDGs it could contribute best towards. Of the 17 SDGs, seven were selected, covering the areas where ForSea could support the most positive outcomes.

Since then, FSI has been working with ForSea to develop targets for 2024 and 2030 towards the achievement of these seven SDGs. For example, on SDG 13 (Climate Action), ForSea began implementing an energy management system in accordance with ISO 50001:2011, contributing towards improved energy performance across the business. All ferries have since achieved Clean Shipping Index certification. By switching to alternative fuels, ForSea aims to reduce its Scope 1 CO₂ emissions from ferry operation, from a 2018 baseline of 33,500 tCO₂e, to 9,800 tCO₂e by 2024, to zero by 2030. To achieve this, ForSea has converted two of its ferries to battery power – a world-first for this type of passenger ferry.

A summary of ForSea’s SDG targets, and the steps taken towards meeting them, are included in the table below.