Andrew Parry: The danger of SDG washing

Investors are keen to use the UN's SDGs as a 'convenient label' when boosting their own credentials, writes Newton IM's Andrew Parry

Despite the near ubiquitous presence of the UN Sustainable Development Goals (SDGs) in investment and corporate reports, the flow of capital and tangible action needed to deliver on them is behind target, with an estimated $5-7trn of annual expenditure needed

The Goals clearly make enormous economic sense with the UN estimating that their delivery could add $12trn to the global economy alongside 380 million new jobs. In a world beset by the challenge of recovering from the Covid-19 crisis, this represents a much welcome growth opportunity.

Increasing enthusiasm for sustainable investment has led to a greater awareness of the role of the Goals in potentially identifying exciting new areas for growth and mitigating risk, as well as opportunities for corporate engagement. While the Goals captured the imagination of the investment and corporate worlds, actions have often belied good words.

See also: – Andrew Parry: A new environmental and social order is about to be ushered in

Investors keen to burnish their sustainability credentials have often been too ready to use the Goals as a convenient label that focuses on existing activities and only then on positive associations. Achieving a sustainable future is as much about minimising harm as it is about delivering solutions.

The same charge can be levelled at companies where they rarely get beyond the headline goal in the relevant SDG. A simple test of ‘SDG-washing’ is to see if there is any mention of the 169 underlying targets – the granular opportunity backed by research – or the 231 unique key performance indicators used to guide measurement of the better outcome delivered.

The latest report by the World Business Council for Sustainable Development illustrated the inconsistency in the corporate world when reporting on SDGs. While 84% of member companies referenced specific Goals in their sustainability report, only 15% had aligned their business strategy to specific target-level SDG criteria, and only 6% used the key performance indicators for measurement purposes. More concerning was that only 1-2% made reference to human rights in relation to the Goals. This goes to show the extent to which the Goals are used as a communicative tool rather than as a framework for capital allocation.

Using the Goals as a simple mapping exercise renders them no more than a simple relabelling tool replacing existing index sector classifications. However, used well, the Goals can selectively identify the areas of social and environmental deficit that investors and companies can address. The UN is aware that despite the growing adornment in reports using the Goals, more urgent action is needed over the next decade as we recover from the Covid-19 crisis.

Partnership is a key element of the Goals and for first the first time in living memory we have an opportunity to cement an alliance between public and private sectors to mobilise capital now that the dogma of government intervention in the economy appears to have been swept aside.

The UN Conference on Trade and Development set out six policy packages to help address the short-fall in sustainable finance that will only be exacerbated by the pandemic. In a world awash with liquidity, but short of attractively priced risk assets, this represents an opportunity for the financial sector to work in partnership with civil society to find innovative solutions to tackle some of the major issues in the global system. 

A mistake of the past has been to assume that the launch of a fund aligned to delivering on the SDGs or “impact” is what is needed to tackle an area of deficit. As we have discovered through the shortfall in funding the Goals, the money raised goes instead largely to existing activities or entities, without delivering additional funding.

A better approach is to acknowledge these global challenges that the Goals seek to address, to develop solutions to these, and subsequently how these solutions can be funded.

Once that is done, there will be investors – public or private or a combination – who can buy the instruments to support the delivery of the solution to a particular problem.  The best impact strategies work on this basis, often in partnership with communities, local government or not-for-profit organisations.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...