The Sustainable Development Goals
The Sustainable Development Goals (SDGs) are 17 goals tackling major world issues agreed by 193 UN member states to be achieved by 2030. These goals include zero hunger, decent work and economic growth, and reduced inequalities.
The SDGs apply to all countries and set the priorities for governments. Demographic and social change, shifts in global economic power, urbanisation, climate change, resource scarcity, inequality and technological breakthroughs demand a corporate response. The SDGs can provide insights for companies on how they can create economic, social and environmental value for their investors and other stakeholders. The goals will allow business to understand and better respond to the risks and opportunities created by rapid change across the various sectors.
There is increasing interest by the investors in understanding how businesses are developing SDGs. Investors seek information on the relevance of the SDGs to overall strategies, and thus entities providing relevant SDG data will help investors make informed decisions which can lead to capital being channelled to responsible businesses. Companies are developing business strategies that embrace the growth potential of responsible environmental and societal policies.
There are several reasons why companies should focus on sustainable business practices, and they include:
- the increased future government focus on sustainable business
- such business practices often improve performance as they lower operational, reputational and regulatory risk
- there are significant business growth opportunities in products and services that address the SDG challenges
- the fact that short term, profit based models are reducing in relevance. Companies and their stakeholders are changing how they measure success and this is becoming more than just about profit.
Investors realise that the SDGs will not all be equally relevant to all companies, with boilerplate disclosures having little relevance at all. Good disclosure will qualitatively show how the company’s SDG related activities affect the primary value drivers of the business. It would be natural to assume that SDG reporting should be based around the disclosure of information to mitigate business risk and the drive for improved predictability of investment decisions. However, if there is to be fair presentation, then there should also be disclosure of any negative and positive impacts on society and the environment.
Investors’ expectations will still be focused on companies realising their core business activities with financial sustainability as a prerequisite for attracting investment. However, institutional investors have a fiduciary duty to act in the best interests of their beneficiaries, and thus have to take into account environmental, social and governance (ESG) factors, which can be financially significant. Companies utilising more sustainable business practices provide new investment opportunities.
Investors screen companies as regards their ESG policies and integrate these factors into their valuation models. Additionally there is an increased practice of themed investing, whereby investors select a company for investment based upon specific ESG policy criteria such as clean technology, green real estate, education and health. Investors are increasingly factoring impact goals into their decision making whereby they evaluate how successful the company has been in a particular area for example, the reduction of educational inequality. This approach can help optimise financial returns and demonstrate their contribution to the SDGs through their portfolios. Investors are increasingly incentivised to promote sustainable economies and markets to improve their long-term financial performance.
Institutional investors realise that environmental events can create costs for their portfolio in the form of insurance premiums, taxes, and the physical cost related with disasters. Social issues can lead to unrest and instability, which carries business risks which may reduce future cash flows and financial returns.
Investors seek SDG information produced in line with widely-accepted recommendations. The Global Reporting Initiative (GRI) and the UN Global Compact amongst others, have developed guidance documents that mutually complement each other and create a reference point for companies.
Companies should disclose to investors how they have decided on their SDG strategy, philosophy and approach. The approach should be capable of measurable impacts and have a clear description of the material issues and a narrative that links the sustainability issues back to the business model and future outlook of the entity.
For investors, it is important that SDG-related reporting is presented in the context of the strategy, governance, performance and prospects of the entity. Stakeholders should be engaged from the beginning in order to identify any potential impact with some investors expecting companies to have a stakeholder dialogue that goes beyond financial matters. Investors often require an understanding of how the entity feels about the relevance of the SGDs to the overall corporate strategy, and this will include a discussion of any risks and opportunities identified and changes that have occurred in the business model as a result.
The SDGs and targets are likely to present some of the greatest business risks and opportunities for companies who should publish material SDG contributions, both positive and negative, as part of their report. For example, an inability to address negative social and environmental impacts may also be directly detrimental to short-term financial value for a business. Investors are increasingly seeking investment opportunities that can make a credible contribution to the realisation of the SDGs.
However, if an investor wants to have a positive impact on working conditions for example, they cannot assume that any investment in this area is relevant. The investor would need to be provided with additional information such as data on the lowest income workers, any potential income increase and how confident the company is that an increase in income will occur.
Investors can choose not to invest in, or to favour, certain investments. Alternatively, they can actively engage in new or previously overlooked opportunities that offer an attractive impact and financial opportunity, even though these may involve additional risk.
There is an assumption that the disclosure of ESG factors will ultimately affect the cost of capital; lowering it for sustainable businesses and increasing it for non-sustainable ones. It may also affect cash flow forecasts, business valuations and growth rates. Investors employ screening strategies, which may involve eliminating companies that have specific features, for example, low pay rates for employees and eliminating them on a ranking basis. They may also be eliminated on the basis of companies who are contributing or not, to a range of SDGs and targets. Investors will use SDG-related disclosures to identify risks and opportunities on which they will, or will not, engage with companies. Investors will see potential business opportunities in those companies that address the risks to people and the environment and those companies that develop new beneficial products, services and investments that may mitigate the business risks related to the SDGs.
Written by a member of the Strategic Business Reporting examining team