Impact investing - Embracing the UN sustainable development goals

Embracing the UN Sustainable Development Goals

Impact investing is ready to enter the mainstream. According to research by JP Morgan, demand for such strategies could reach $1 trillion by 2020. The United Nation’s (UN’s) Sustainable Development Goals (SDGs) and targets provide widely accepted measures that can be used to unlock impact investing for mainstream investors.

Impact investing seeks to generate attractive returns while having a measurable positive environmental and societal impact. This approach provides a compelling opportunity for global asset managers to support the UN’s ambitious aims to eradicate poverty, address climate change and rising inequality, as well as cut unsustainable production and consumption – while still seeking to achieve strong financial performance.

The UN’s aims are encompassed in its agenda for sustainable development, which came into force in 2016, with 17 SDGs and 169 associated targets. Estimates of the cost of achieving these goals range from $2-7 trillion a year. This level of support can only be reached through partnership between governments, regulators, academia, philanthropists and the corporate world. Global asset managers – with over $80 trillion of assets under management – will have an increasingly important role to play if the SDGs are to be met. Aberdeen Standard Investments recognises the need for these actors to collaborate and have actively worked to support this.

We propose that these goals can be incorporated into an impact investment framework in the listed equity space. Many mission-led businesses enjoy a competitive advantage thanks to improved operations, employee engagement and customer loyalty; and the pool of companies that aim to have a positive impact is growing. In addition, socially conscious entrepreneurs are establishing new commercial businesses focused on tackling society’s problems.

Within this framework, the main criteria applied by Aberdeen Standard Investments to assess a company’s suitability for an equity impact portfolio are financial conviction, impact conviction and impact reporting.

  • Financial Conviction: the company must be a compelling investment opportunity, backed by fundamental analysis. An assessment of corporate strategy, the balance sheet and the profit and loss account should form the starting point for any potential investment.
  • Impact conviction: using eight pillars, Aberdeen Standard Life Investments aligns the analysis of a company’s products and services with the SDG. This assessment focuses on a company’s attention, efforts and success in providing solutions to long-term challenges identified in each of the pillars.
  • Impact reporting: while the reporting of impact is still in its infancy, it is an essential component in building investor trust. Data collection provides a quantitative measure, but the ultimate goal is to go beyond presenting the key performance indicators as standalone outputs and demonstrate a fund’s direct involvement in achieving the SDGs.

Active management is an essential component of successful impact investing. Engagement with management is necessary to understand a company’s impact strategy, alongside traditional financial metrics. Engagement also encourages better behaviours and disclosures.

Asset owners have an important role to play in understanding the time horizon of this type of investment. Solutions to the world’s most pressing challenges do not come overnight;

impact investment strategies are long term in their nature. Asset owners must be willing and able to assess the success of their impact portfolio over the long term.

As the benefits of impact investing become clear, we expect the industry to grow. This will see more capital directed towards companies that are best-placed to meet today’s global challenges – to the ultimate benefit of our climate, society and investors as a whole.

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The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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