Just like life, sustainable investing is a journey. When investors take their first step, they tend to focus on risk and look to exclude the most egregious companies from their funds.
As they become more comfortable with this way of building portfolios they think about doing more, such as mitigating climate change. Over time, protecting the planet and improving society becomes as important as generating investment returns.
In other words, investors tend work their way along the spectrum of capital starting with responsible investing, moving into sustainable and finally focusing on impact investing.
Sustainable development goals
But while impact investing hints at what investors are trying to achieve, it doesn’t provide a full explanation of the philosophy.
As this investment style gives equal priority to creating positive change as generating returns, many managers look to create links with the United Nations’ 17 sustainable development goals (SDGs).
For an example, a fund which focuses on investing in green energy companies would address the seventh goal which wants to provide clean, sustainable and affordable energy for all. And a real estate fund dedicated to upgrading existing offices to today’s environmental standards would help to achieve the 11th goal of creating sustainable cities and communities.
Implicit as well as explicit
But not all impact investment styles will have an explicit link to a specific SDG. For example, an equity manager’s central philosophy could be to select companies which have mediocre ESG scores and to use an effective engagement program to improve those characteristics.
If that manager were, for example, to invest in fast-moving consumer-goods companies and persuade them to build a more sustainable business model it could address goal 12. This aims to provide responsible consumption and production patterns. In other words, this fund would still be linked to a SDG even though it was not its explicit purpose.
Effective engagement is the only way certain SDGs can be achieved. For example, goal five – reducing gender inequality – is less about which companies a manager selects for their fund and more about ensuring the companies in the portfolio have robust diversity and inclusion policies.
Funds focused on engagement often invest across multiple industrial sectors and so could address multiple SDGs. As would a technology fund which worked with companies to ensure artificial intelligence is not misused. This investment aim could be seen as being linked to goal nine – building sustainable innovation – as well as goal 16 – building accountable institutions at all levels.
Beware the limits
Even though investment strategies can go a long way to help to address many of the UN’s SDGs, investors need to be aware government policy and multinational co-operation are vital to make many of these goals a reality.
For example, the first and second goals, which aim to eradicate poverty and hunger, can not be achieved by the private sector alone.