SDGs and the common language of understanding impact in sustainable finance
Debt-market-relevant institutions are increasingly integrating the UN sustainable development goals (SDGs) into their sustainability agendas, with potential consequences for green and social funding. The critical role of the SDGs is to provide a common language for capital-markets participants to assess impact.
While large companies can legitimately claim to have some interaction with all 17 SDGs, the consensus appears to be that the optimal strategy is to focus on the goals in which an organisation can have the most meaningful impact.
Responsible Investment Association Australasia (RIAA) hosted a webinar on 10 July in which industry leaders shared their SDG strategies and progress. The organisations involved all have sustainability policies which predate the SDGs, and they say integration with the goals is more about developing a common language to facilitate things like sustainable funding.
Eliza Mathews, Sydney-based associate director, sustainable finance at ANZ, says the SDGs broadly correlated with the bank’s existing purpose and corporate-sustainability framework. This led to the identification and selection of nine SDG goals that fit into the framework which ANZ used to issue the first-ever SDG bond from an Australian issuer.
Of these nine goals, six are currently being addressed by funds raised from the €750 million (US$876.1 million), five-year deal. “Importantly, it is not only the goals we are looking at addressing but the specific targets and indicators that fit within those goals,” says Mathews.
Our investment committee has approved new responsible-investment policies, which is how we formally brought the SDGs into our investment process. This not only guides how we invest, but also how we engage with companies and our external fund managers.
One of the most commonly expressed criticisms of the green-bond asset class is that it directs financing exclusively to existing qualifying assets – in effect, that it allows issuers and investors to label their ‘good’ assets but does not facilitate funding of more complex, but potentially more meaningful, environmental transition. Some market users believe the SDGs provide solid foundations for a more dynamic sustainable capital market.
With a business model based on the use of toll roads, Matthew Brennan, head of sustainability at Transurban in Sydney, acknowledges that a certain level of carbon intensity is currently unavoidable for the company. At the same time, when the company studied the individual SDGs Brennan says it discovered consistent alignment with Transurban’s established sustainability aspirations.
The company has launched initiatives based around specific SDGs in areas Transurban can have a significant impact, such as in helping customers facing financial hardship, encouraging carpooling to decrease emissions, increasing road safety and designing and operating roads in ways that reduce emissions and congestion.
On the investor side, asset managers say identifying goals they can address through their investment choices is helping move the conversation around responsible investment to a focus on positive impact rather than risk management.
Piet Klop, senior advisor responsible investment at PGGM in Zeist, reveals that the pension fund has chosen four areas in which it wants to have impact: climate, water, food and health. It has therefore chosen to focus on the specific SDGs that relate to these.
“We wanted to map the solutions we could think of to each of the targeted SDGs. Once this was done we could establish rules and criteria by which investments qualify as sustainable development investments,” he says.
Closer to home, Nicole Bradford, Melbourne-based portfolio head, responsible investment at Cbus Super, says the fund has integrated the SDGs into its process. “Our investment committee has approved new responsible-investment policies, which is how we formally brought the SDGs into our investment process. This not only guides how we invest, but also how we engage with companies and our external fund managers,” says Bradford.
We are more focused on the measurement of tangible impact. Ultimately the purpose of aligning with the SDGs is to demonstrate and measure real difference rather than the euro value.
The critical piece
Identifying SDGs that are a good fit with a company’s sustainability agenda or an investor’s goals is one thing. The next step is quantifying impact. Proving that a company’s commitment to certain SDGs is having real-world effects is the critical piece in assessing the impact of corporate SDG alignment.
Market participants broadly acknowledge that reporting on the impact of company decisions is one of the most important and challenging aspects of SDG integration. Klop says some funds in Europe have established how much of their portfolios are SDG-compliant and have thus been able to assign a euro value to compliance.
This is impressive at face value, but Klop argues it that it is probably not the end game for SDG integration on the buy side. “We are more focused on the measurement of tangible impact. Ultimately the purpose of aligning with the SDGs is to demonstrate and measure real difference rather than the euro value,” he says.
Mathews acknowledges the ongoing importance of ensuring that ANZ’s SDG bond complies with the framework set out for it. The bank is committed to reporting on the use of proceeds semi-annually and the impact annually.
Furthermore, it is important that the funds continue to be fully allocated to assets that align with ANZ’s chosen SDGs. “The assets are mostly amortising loans so we want to ensure full allocation throughout the life of the bond. We monitor the assets on a monthly basis and continue to analyse our loan books for assets that qualify against the criteria,” says Mathews.