If investors believe that providing solutions to sustainability challenges offers attractive investment opportunities, they can implement investment strategies that explicitly target SDG themes and sectors.
In many cases, investors are implicitly taking these factors into account already, but not articulating it: the SDGs give a common language with which to shape and articulate such an investment strategy. Opportunities are available in most asset classes, for example: clean technology stocks in listed equity, private equity and venture capital; low-carbon infrastructure; green bonds; green real estate, sustainable forestry and agriculture.
The SDGs offer investors the opportunity to use a different lens through which to filter future investment decisions. There is a growing school of thought that investment strategies should focus upon investments that create a positive impact on society and/or the environment, in addition to fulfilling their future financial risk and return requirements, thereby simultaneously creating benefits for both business and society.
In 2015 researchers from ShareAction interviewed 52 institutional investors, based in every region of the world, on their attitudes and intentions in relation to the SDGs and they found that:
- 95% of respondents plan to engage with investee companies about issues covered by the SDGs;
- 84% will allocate capital to investments supporting the SDGs;
- 89% will support regulatory reforms that promote the SDGs.
PwC’s 2015 survey of business and consumers found that 78% of citizens were more likely to buy goods and services from a company that had signed up to the SDGs.
“Every challenge presented by the UN Sustainable Development Goals also presents an opportunity. Investors can therefore contribute to the attainment of these global goals. Through our sustainable development activities and the investments we make, the fund contributes in various ways towards the UN’s Sustainable Development Goals.”
Eva Halvarsson, CEO, AP2
The SDGs also bring opportunities to reach relatively untapped markets and geographies, and to develop innovative financial products.
Performance of long-term focused companies
Recent research by McKinsey Global Institute has shown that companies that operate with a true long-term mindset perform better, consistently outperforming their industry peers since 2001 across almost every financial measure that matters.
Among the firms they identified as focused on the long term, in 2014 average revenue and earnings growth were 47% and 36% higher than for companies that weren’t, and their market capitalisation grew faster. Companies that were managed for the long term also provided greater returns to the overall economy and to society between 2001 and 2015, adding on average nearly 12,000 more jobs than their peers.
McKinsey calculated that US GDP over the past decade could have grown an additional US$1 trillion if the whole economy had performed at the level that the long-term stalwarts delivered, and generated more than five million additional jobs.
Blended finance instruments
Several countries and financial institutions started to experiment with public-private finance long before the SDGs, but as the SDGs are becoming a language that is spoken and understood by the public and private sector alike, they offer a way to communicate and set targets using a shared impact framework. This has rekindled interest in blended solutions, as evidenced by a recent qualitative assessment and review of existing blended finance vehicles by Dutch development bank FMO and asset manager PGGM.
Signatories to the Dutch SDG Investing Agenda have identified the systematic deployment of blended finance instruments as one of the avenues that will enable private investors to increase their involvement in sectors such as energy, infrastructure, water, agriculture and food and healthcare – all sectors that constitute a largely untapped potential in higher risk markets, where private investors would not venture alone, but will invest alongside development finance institutions and sovereign wealth funds.
Financial product innovation
The SDGs can be a driving force for financial product innovation. Examples include specific SDG-related bonds – for instance, those issued by the World Bank and BNP Paribas – but also the refining and growing of existing products such as green bonds, or insurance and banking products for peripheral groups. Examples include:
- the Climate Policy Initiative, which provides lessons and innovations to spur green investment in developing countries;
- the Climate Finance Lab, which identifies, develops, and pilots transformative climate finance instruments with the aim of driving billions of dollars of private investment into climate change mitigation and adaptation in developing countries;
- the Green Infrastructure Investment Coalition, launched at COP21, which is dedicated to reducing investment barriers to green infrastructure.
A recent PwC report describes an example from Australia’s Westpac Group:
Westpac Group tackles financial exclusion within the Pacific region
SDG 5 and SDG 10
Global Challenge: Vast numbers of people across the world are still regarded as “unbankable”. This could be due to their gender, social status, physical ability or poor infrastructure where they live. In order to improve the financial and economic status of those currently excluded from the system, there is a need for more financial institutions to recognise this as an issue and also to recognise the opportunity.
Business Response: Westpac has focused on issues which are material to them as a financial institution and where they can use their skills and resources to make a meaningful impact. One of their sustainability objectives is to “increase access to financial services in the Pacific”. The region’s geography and limited infrastructure as well as the subsistence livelihoods of many Pacific Islanders all contribute to poor financial inclusion. Within their 2013- 2017 sustainability strategy, Westpac set out a target to provide access to basic and affordable banking to an additional 300,000 Pacific Islanders, with the aspiration that 50% of these will be women; their approach includes a combination of ‘in-store’ banking, the choice of a basic account, and a financial literacy programme.
Benefits: For many, having a bank account is a fundamental step for improving their money management as well as having a safe place to store their income or savings. Financial literacy support will help new customers to make better financial decisions. This is especially crucial in the case of women who often don’t hold the social status but are responsible for running households and managing their family finances; their improved financial knowledge might empower them and increase their status within their household and community.
Over time this strategy will increase Westpac’s customer base and revenue. An additional benefit to the company is that by diversifying and looking for new customers, Westpac is also planning ahead for the demographic trend of an aging population in Australia.
Improved access to financial services within Pacific Islands will make it easier to receive remittances, encourage the creation of small businesses and in turn, contribute to the economic development of the region.
Existing research highlights the following areas as presenting some concrete opportunities for blended instruments and SDG-targeted products:
SDG 3: Good health and well-being
Healthcare and education providers in emerging markets
- Demand for quality healthcare and education is increasing in emerging markets and developing countries, as shown by the growing engagement of multilateral investors in these sectors. The IFC, CDC, FMO and Dutch Good Growth Fund (DGGF) are just some of the examples of development finance institutions that have invested in companies providing education and healthcare in developing countries. These investments are often being done via fund-of-funds structures, with funds funnelled to the companies via financial intermediaries such as local private equity funds that have built their portfolios around the notions of innovation and quality services that cater to a growing middle class. In the last two years, the ESG team at PwC (which is responsible for handling the ESG assessments of intermediaries on behalf of the Dutch Good Growth Fund) has assessed the ESG profiles of intermediaries financing education and healthcare in markets such as Ghana, Democratic Republic of the Congo and India.
SDG 6: Clean water and sanitation
Water infrastructure, treatment and management
- Investments are needed along the entire water value chain, in developed and emerging markets alike. Global water infrastructure projects alone are expected to see annual growth of 5%-8%, according to 2016 figures by Bank of America Merrill Lynch. Examples of areas where investors could play a role – including via blended instruments – include exploration, desalination and wastewater treatment plants.
SDG 7: Affordable and clean energy
Energy efficiency opportunities, from tech/software to transport/logistics
- Demand for energy efficiency has driven innovative financial products and a new range of blended solutions. Research from Bain & Company shows some concrete examples from India. India’s Bureau of Energy Efficiency develops policies and initiatives to help reduce the country’s energy intensity, including innovative financing of energy-efficiency projects. Private domestic bank ICICI was one of several to embrace the programme, introducing a loan scheme to help commercial and industrial companies, small and medium-sized enterprises and public sector organisations to finance energy-efficiency services and purchase equipment and lighting for energy-efficiency projects. A US$350 million loan from the World Bank supports these efforts, with most loans delivered over 3-5 years at 7%-9% annual rates. Energy savings from these projects range from 15%-30%.
The steps that investors have taken in these areas show the work towards engaging with the SDGs and connecting them with investment opportunities has already begun.
Produced in collaboration with PwC