As the Covid-19 pandemic continues its spread through countries and affects their economies, the private sector is discovering positive ways to support overwhelmed health and social care systems. Fashion houses are replenishing hospital clothing supplies; cosmetic companies are contributing disinfectants; aerospace, sporting and academic institutions are manufacturing medical equipment; staffing agencies are adapting their benefits policies; and several corporations are pledging financial donations to support the response. Evidence is also emerging that investors are signaling a preference for products that favor companies with a positive societal impact. ESG funds are continuing to gain assets[i], even during one of the most significant disruption to markets, and as of April 6, the S&P 500 ESG Index was outperforming the S&P 500 by 2.47%.
But how will the financial system regenerate post-coronavirus? Will the private sector return to ‘business as usual’ or could there be a reframing of financial markets to align with global sustainability goals?
The United Nations Sustainable Development Goals (SDGs) are 17 high level goals designed to address major sustainability concerns such as climate change, water availability, and poverty. They have been formally adopted by 193 countries and the aim is that these goals will be met by 2030, so this is the decade of action[ii]. The SDGs harmonize the three pillars of sustainable development: social inclusion, environmental protection and economic growth. Many investors view these as a relevant and universal lens to track progress throughout the financial system. They also offer opportunity. According to the Business and Sustainable Development Commission, putting the SDGs at the heart of the world’s economic strategy could unlock USD12 trillion in opportunities and 380 million jobs a year by 2030[iii].
Financial institutions, along with the corporations they invest in, are increasingly evaluating the positive impact of their strategies alongside traditional financial measurements[iv]. But concerns prevail that the current response is not ambitious enough and a funding gap to address persists, principally among developing countries.
What does positive impact look like today?
To answer the question, we assessed the proportion of company revenues aligned to the SDGs across major global benchmarks via a two-step process:
- 1. SDG-aligned revenue: the share of company revenues derived from products, services and technologies that contribute to SDGs determined according to the Trucost SDG Positive Impact Taxonomy; a database of 164+ positive impact product and service categories that align with specific SDG targets. The Trucost SDG Positive Impact Taxonomy is mapped to Trucost’s register of major publicly listed companies to identify SDG-aligned revenues across the financial system.
- 2. SDG Additionality: the Trucost SDG Impact Weighting is applied to reflect the additional benefit (or SDG Additionally) associated with delivering products, services and technologies in those geographies where they are most needed.
We discovered that major public companies already have significant SDG-aligned revenue streams. By 2019, the world’s major global companies listed on the S&P Global 1200 had more than 42% of revenues aligned to SDGs. For major U.S. and Australian corporations listed on the S&P 500 and S&P/ASX 200 indices, SDG-aligned revenues topped 50%. 60-75% SDG Additionality is further achieved across the major global benchmarks assessed by delivering SDG-aligned products, services and technologies in those geographies where they are most needed; with the S&P 500 achieving 75% SDG Additionality.
Here’s the breakdown:
SDG-aligned revenue in focus
When we look at the share of SDG-aligned revenues across the indexes, we can see that the S&P/ASX 200 has a large proportion aligned with SDG 8 Decent Work and Economic Growth from companies in financial sectors (SDG Target 8.10) and educational services sectors (all SDG 4 Targets and Target 8.6). S&P/ASX 200 also has a large share contributing to SDG 2 No Hunger related to fresh food and food retail (SDG Target 2.1) and fertilizer manufacturing (SDG Target 2.4).
The S&P Europe 350 has a large proportion of SDG-aligned revenues contributing to SDG 3 Good Health and Wellbeing related to its composition of pharmaceutical, medical equipment manufacturing, health care facilities, R&D facilities and services for vaccines and medicines, (all SDG 3 Targets), as well as personal hygiene product manufacturing (SDG Target 3.9) companies.
The additional SDG benefit
The SDGs are indeed global goals, so it is important to also consider where companies with SDG-aligned business models are selling their products and services, and if these are countries with distinct need for progress related to these SDGs. The chart below looks at the same indexes, but presents the SDG Additionality contribution by SDG that takes into account where SDG-aligned revenue is generated.
Our SDG Additionality analysis shows that although the S&P/ASX 200 generates the largest proportion of revenue related to SDG 8 Decent Work and Economic Growth (26%), the Additionality (5.62%) is not as proportionally high and SDG 2 No Hunger has a nearly equal level of SDG Additionality (4.75%). The main markets for the S&P/ASX 200 are Australia, the United States, and New Zealand where major challenges remain on attaining SDG 2, specifically related to high rates of adult obesity. By containing companies that are selling fresh food and agricultural services, such as fertilizer, this index is providing support in achieving SDG 2.
In the S&P 500 and S&P Global 1200 there is a percentage of SDG Additionality related to SDG 9 Industry, Innovation and Infrastructure. This is linked to the proportion of companies selling items related to internet service provision (SDG Targets 9.C and 17.6.2) and computing and information technology (SDG Targets 9.C and 17. 8). These indexes sell the majority of these products to the United States and China, with a smaller proportion to Mexico and Brazil, all countries that according to the SDG Index (which informs the SDG Additionality score), are not on track to achieving SDG 9 by 2030. Thus, the sale of these products in these countries that are aligned with SDG 9 can provide an additional benefit towards achieving that goal.
While the contribution of SDG-aligned revenues are similar across some indexes, such as the S&P/TOPIX 150 and S&P Europe 350, we can see from the comparison that is it also useful to view where companies are selling SDG-aligned products in addition to the proportion of their revenues. This analysis also provides an important lens on where gaps persist on different SDG goals in regions of distinct need.
What does positive impact look like tomorrow?
As the financial system begins its recovery, the private sector may continue to seek new ways to achieve positive impact. The USD12 trillion opportunity of the United Nations Sustainable Development Goals could provide the critical focus needed to consider the positive impact of regenerative strategies alongside traditional financial measurements.
When considering how to allocate capital to sustainable development goals, asset managers have typically been disadvantaged by patchy company reporting. A focus on positive impact over risk assessment, cherry-picking of SDG reporting themes, and a lack of holistic context across the corporate value chain and operating regions present deficits and blind spots for investment decision making. The advancement of data modelling techniques provides an opportunity to create a consistent framework to measure how portfolios are aligned with the SDGs, as well as new insights to inform sustainable capital allocation that rewards efforts to align business models with the SDGs where it matters most.
A reframing of the way financial markets integrate considerations of positive impact alongside traditional financial measurements is needed if the world is to achieve the Sustainable Development Goals by 2030. The opportunity to restart the financial system post-pandemic, building on the positive response of the private sector, may indeed accelerate the alignment of capital markets with societal goals.
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