This series is supported by our partner Aegon Asset Management. It explores how financial institutions are using the SDGs in their financial products across a range of asset classes. The series also includes briefings on the move from ESG to the SDGs and the SDG Impact Standards.
Scotland was among of the first countries in the world to adopt the UN’s Sustainable Development Goals (SDGs), the world’s official developmental agenda, in 2015. Later in 2018, to localise the SDGs, the Scottish Government launched a refreshed National Performance Framework. But more needs to be done to encourage financial institutions to consider SDGs in financial decision making.
Financial institutions are now offering financial products aligned with the SDGs. Some financial products explicitly labelled as ‘SDG’ have been introduced, such as HSBC’s SDG Bond and Federated Hermes’ SDG Engagement Equity Fund. There are other examples where SDGs have been embedded in the investment process without explicit SDG labelling, such as the Aegon Global Sustainable Sovereign Bond Fund, which aims to add value by investing in financially strong countries that contribute to the improvements in sustainability targets as defined by the UN SDGs.
Links between specific SDGs, environmental, social, and governance (ESG) considerations, business and investing are not hard to identify, such as clean energy (SDG 7) or gender (SDG 5). The difference between ESG and the SDGs is that the former primarily represents risk considerations (e.g., climate change, gender and diversity) and associated methodologies for addressing these (e.g., exclusion, best-in-class selection) whereas the latter are primarily goals (e.g., gender equality, affordable and clean energy) for a sustainable future for all. Adopted by over 190 United Nations member states since 2015, SDGs have become the language of sustainable development.
Governments globally need the financial service sector to align with the SDGs because there simply isn’t sufficient public sector funding available to realise the goals. But why do private sector shareholder-owned for-profit financial institutions need to consider SDGs? At its core, the business case for taking the SDGs into account can be perceived as that for considering ESG issues: they represent economic risks and opportunities. Taking a more holistic view, the SDGs help financial institutions to look beyond the impact people and planet are having on their portfolio to the impact their portfolio is having on people and planet.
To help quantify outcomes and guide implementation, 169 targets and 231 unique indicators sit underneath the 17 SDGs, bridging themes and actions. A survey by the Global Impact Investor Network (GIIN) found that as of 2020, 73% of impact investors are using SDGs for measuring performance.
However, amid corporate scandals and the war in Ukraine, ESG considerations, which precede the SDGs, are facing a strong backlash for alleged greenwashing and, it is argued, diverting investments away from profitable opportunities in conventional energy and defence, thereby causing adverse impact. SDGs aligned finance also faces the risk of accusations of ‘SDG washing’, that is, using the SDGs as mere colourful logos.
Critics of SDG-aligned financial services argue that goals such as no-poverty (SDG 1) and zero hunger (SDG 2) have been around as long as there has been poverty and hunger. They say that driven by the profit motive, business and finance organically do good and help reduce poverty and hunger. According to the critics, financial institutions should not be pressurised into formally aligning with SDGs and consequently adding to their burgeoning compliance and reporting burden.
Proponents of SDG aligned financial services on the other hand point out that while larger companies operate under a social licence they can often be a part of the problem, rather than the solution. They highlight high profile corporate scandals and the 2008 global financial crisis. They argue that such ideas as greed-is-good, markets-are-efficient, and leave-us-alone (laissez faire) have proven harmful to society and that ecology and aligning with SDGs is the way forward.
Even those not fully aligned to either of these two camps would probably agree that disregarding the SDGs is likely to increase reputational, regulatory, and taxation risks for large financial institutions.
It is still early days for SDG aligned finance, but if the history of ESG considerations is any guide, the future of SDG-alignment will depend a great deal on the rigour and transparency of offerings by financial institutions.
SDG Financial Products was launched at COP26 by GEFI and showcases commercial financial products that are aligned to the SDG in order to share learnings and grow the ecosystem of SDG aligned financial products across asset classes.
The SDG Impact Standards provide guidance on developing an appropriate strategy, management approach, transparency and governance to assist businesses and investors in contributing positively to sustainable development and achieving the SDGs. The Impact Standards also provide a decision-making framework to make sense of existing relevant principles, frameworks and tools.
