To mark the launch of SDG Fundamentals, we examine why it is essential that we improve data on the contribution of investments to the 17 SDGs.
As sustainable finance evolves from ESG[1]ratings and risk management, investors are increasingly asking for tools to help align their investments with actual sustainable outcomes. Now, Danish fintech Matter and BNP Paribas Asset Management have developed a dataset that provides a detailed, conservative analysis of how revenues of more than 53 000 companies align with the UN SDGs.[2]The new offering is called SDG Fundamentals.
To mark the launch of SDG Fundamentals, Lise Pretorius from Matter and Berenice Lasfargues from BNPP AM examine why it is essential that we improve data on the contribution of investments to the 17 United Nations Sustainable Development Goals and what can be done to bridge the ‘SDG data gap’.
The SDGs are the closest thing humanity has to a roadmap for achieving a sustainable future for all. They outline an ambitious set of objectives to tackle inequality, end poverty and hunger and address climate change, while simultaneously encouraging inclusive and just economic outcomes.
When the SDGs were announced in 2015, they came with a target to achieve them by 2030. This will require an estimated USD 5-7 trillion annually. Yet the SDGs have been underfinanced by USD 2.5 - 3.5 trillion annually since 2015.
The private sector is expected to contribute a substantial amount through conventional market mechanisms. To do so, large amounts of institutional cash will need to be reallocated from activities that are misaligned with the SDGs and be used to back those companies that produce goods and services that bring us closer to the 2030 target.
At the same time, there have been considerable inflows into ESG and sustainable investment strategies: According to the Global Sustainable Investment Review, USD 35.3 trillion was managed in sustainable investments as of 2020.
However, as the recent IPCC reports have painfully demonstrated, all stakeholders, public and private, have not been taking the necessary steps on climate adaptation and mitigation. Furthermore, Covid-19 has starkly exposed global inequalities, with the global poverty rate having increased from 7.8% to 9.1% as a result of the pandemic.
According to some estimates, the USD 2.5 trillion gap is widening, not contracting. As Marcos Athias Neto, Director of the UNDP Sustainable Finance Hub, neatly summarised:
“If ESG could save the world, then arguably the SDG financing gap should be contracting rather than expanding and we should have solved the SDGs several times over by now.”
Why isn’t finance driving the achievement of the UN SDGs?
There are several reasons including misaligned incentives and a lack of clear and comparable standards. Crucially, however, there is a lack of adequate data helping investors understand how the companies they finance contribute to, or take us further away from, the achievement of the SDGs.
This is in large part due to the nature of the SDGs themselves. They were not developed to be an investable framework, and the underlying targets are often qualitative and intangible, and therefore difficult to measure and compare.
The upshot is that SDG methodologies can vary widely in what constitutes supportive investments. More rigour and conservatism is required to understand how investments align with the goals if they are to be met by 2030.
Bridging the SDG data gap unlocks opportunities
There is a clear ethical imperative in achieving the SDGs: failure threaten the long-term prosperity of the planet, as well as that of current and future generations inhabiting it.
There are also business and regulatory opportunities to be unlocked. Prioritising investment in the SDGs could create opportunities worth about USD 12 trillion and 380 million jobs a year by 2030, the UN has said.
In addition, regulators are putting greater emphasis on what is considered sustainable investment – a definition and disclosure is now required under the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the second Markets In Financial Instruments Directive (MiFID II).
How can the gap be bridged? Introducing SDG Fundamentals
SDG Fundamentals is a data solution for analysing how the different revenue streams generated by companies are aligned or misaligned to the SDGs.
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By looking at revenue, SDG Fundamentals looks past the spin and to the core of a company’s impact: the products and services it sells.
Updated monthly and covering over 53 000 companies, the tool provides investors with a clear picture of how investments interact with the SDGs at the individual SDG, SDG target and aggregate SDG level.
SDG Fundamentals differentiates itself from other SDG alignment datasets in three core ways:
1. Each of a company’s different revenue streams are mapped against the SDGs – Impact data tends to oversimplify a company’s economic activity by e.g. assuming that companies operating in the healthcare industry automatically are contributing to “good health and wellbeing” – SDG 3. The reality is often more nuanced. Some healthcare services (think cosmetic plastic surgery) may not always be aligned with sustainable development. This new dataset analyses a company’s SDG profile based on all its reported revenue streams.
2. Economic activities can be either aligned or misaligned to the SDGs – For example, a company that produces fruit can align with SDG 2, Zero Hunger, while also potentially having a negative impact on SDG 15, Life on Land. For a dataset to objectively try and understand the relationship between companies and the SDGs, it must acknowledge that certain economic activities can both move us towards and away from the achievement of the SDGs.
3. It assesses all 17 SDGs – SDG Fundamentals treats everySDG as potentially investable, although not every underlying target. It provides output for alignment/misalignment across all 17 SDGs.
4. Conservative and realistic – If the SDGs are to be achieved by 2030, we must be cautious not to paint an overly positive picture or give false impressions of progress towards the SDGs. SDG Fundamentals stays true to the SDGs by determining alignment/misalignment according to the underlying SDG targets and indicators, rather than relying on investable ‘themes’. Furthermore, if there is not enough information in revenue descriptions, it will be classified as ‘potentially aligned’ (‘potentially misaligned’) – signifying the need for e.g. engagement.
This conservatism means that SDG Fundamentals may demonstrate a less positive picture than other datasets, but the trade-off is insights that are more objective and realistic – and help analysts and asset managers avoid reputational risks.
For example, under an existing SDG revenue alignment dataset, a US healthcare company was scored as 100% aligned to the SDGs. We ran it through SDG Fundamentals to test that hypothesis.
US healthcare company’s SDG Revenue Alignment (% of total revenue)
According to SDG Fundamentals, the picture is still positive for the company, however it is not 100% aligned. 31% of its revenue is aligned via their provision of biopharmaceuticals for various non communicable diseases and psychiatric conditions. While 10% of its revenue related to cleaning products also has a potentially harmful impact on life on land and under water. 14.5% is contested, meaning that they generate 14.5% of their revenue from activities about which there remains debate over whether they are aligned or misaligned with the SDGs.
This view offers a greater degree of nuance to the SDG alignment of the company and is more conservative. It recognizes that there are still activities for which we cannot understand with certainty whether they are aligned or misaligned with the SDGs, either intrinsically or due to dependency on context or geography. The total percentage adds up to more than 100% because a product or service can be aligned to one SDG and misaligned with another.
The combination of these factors is a dataset which is rigorous, comprehensive, and realistic. Still, we believe this is just the start of the journey to understand the relationship between businesses, investment and the SDGs. Revenue is one way of looking at SDG alignment. Other ways include news coverage on a company in relation to the SDGs or company conduct.
Solutions such as SDG Fundamentals can help close the SDG data gap, so that more investments can be channelled to companies making meaningful contributions towards achieving the UN SDGs by 2030.
Sign up for a demo via Matter’s website if you want to know more about SDG Fundamentals and understand how we are integrating these insights into investment decisions.
[1] Using environmental, social and governance criteria
[2] Sustainable Development Goals; more at https://sdgs.un.org/goals
As sustainable finance evolves from ESG[1]ratings and risk management, investors are increasingly asking for tools to help align their investments with actual sustainable outcomes. Now, Danish fintech Matter and BNP Paribas Asset Management have developed a dataset that provides a detailed, conservative analysis of how revenues of more than 53 000 companies align with the UN SDGs.[2]The new offering is called SDG Fundamentals.
To mark the launch of SDG Fundamentals, Lise Pretorius from Matter and Berenice Lasfargues from BNPP AM examine why it is essential that we improve data on the contribution of investments to the 17 United Nations Sustainable Development Goals and what can be done to bridge the ‘SDG data gap’.
The SDGs are the closest thing humanity has to a roadmap for achieving a sustainable future for all. They outline an ambitious set of objectives to tackle inequality, end poverty and hunger and address climate change, while simultaneously encouraging inclusive and just economic outcomes.
When the SDGs were announced in 2015, they came with a target to achieve them by 2030. This will require an estimated USD 5-7 trillion annually. Yet the SDGs have been underfinanced by USD 2.5 - 3.5 trillion annually since 2015.
The private sector is expected to contribute a substantial amount through conventional market mechanisms. To do so, large amounts of institutional cash will need to be reallocated from activities that are misaligned with the SDGs and be used to back those companies that produce goods and services that bring us closer to the 2030 target.
At the same time, there have been considerable inflows into ESG and sustainable investment strategies: According to the Global Sustainable Investment Review, USD 35.3 trillion was managed in sustainable investments as of 2020.
However, as the recent IPCC reports have painfully demonstrated, all stakeholders, public and private, have not been taking the necessary steps on climate adaptation and mitigation. Furthermore, Covid-19 has starkly exposed global inequalities, with the global poverty rate having increased from 7.8% to 9.1% as a result of the pandemic.
According to some estimates, the USD 2.5 trillion gap is widening, not contracting. As Marcos Athias Neto, Director of the UNDP Sustainable Finance Hub, neatly summarised:
“If ESG could save the world, then arguably the SDG financing gap should be contracting rather than expanding and we should have solved the SDGs several times over by now.”
Why isn’t finance driving the achievement of the UN SDGs?
There are several reasons including misaligned incentives and a lack of clear and comparable standards. Crucially, however, there is a lack of adequate data helping investors understand how the companies they finance contribute to, or take us further away from, the achievement of the SDGs.
This is in large part due to the nature of the SDGs themselves. They were not developed to be an investable framework, and the underlying targets are often qualitative and intangible, and therefore difficult to measure and compare.
The upshot is that SDG methodologies can vary widely in what constitutes supportive investments. More rigour and conservatism is required to understand how investments align with the goals if they are to be met by 2030.
Bridging the SDG data gap unlocks opportunities
There is a clear ethical imperative in achieving the SDGs: failure threaten the long-term prosperity of the planet, as well as that of current and future generations inhabiting it.
There are also business and regulatory opportunities to be unlocked. Prioritising investment in the SDGs could create opportunities worth about USD 12 trillion and 380 million jobs a year by 2030, the UN has said.
In addition, regulators are putting greater emphasis on what is considered sustainable investment – a definition and disclosure is now required under the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the second Markets In Financial Instruments Directive (MiFID II).
How can the gap be bridged? Introducing SDG Fundamentals
SDG Fundamentals is a data solution for analysing how the different revenue streams generated by companies are aligned or misaligned to the SDGs.
By looking at revenue, SDG Fundamentals looks past the spin and to the core of a company’s impact: the products and services it sells.
Updated monthly and covering over 53 000 companies, the tool provides investors with a clear picture of how investments interact with the SDGs at the individual SDG, SDG target and aggregate SDG level.
SDG Fundamentals differentiates itself from other SDG alignment datasets in three core ways:
1. Each of a company’s different revenue streams are mapped against the SDGs – Impact data tends to oversimplify a company’s economic activity by e.g. assuming that companies operating in the healthcare industry automatically are contributing to “good health and wellbeing” – SDG 3. The reality is often more nuanced. Some healthcare services (think cosmetic plastic surgery) may not always be aligned with sustainable development. This new dataset analyses a company’s SDG profile based on all its reported revenue streams.
2. Economic activities can be either aligned or misaligned to the SDGs – For example, a company that produces fruit can align with SDG 2, Zero Hunger, while also potentially having a negative impact on SDG 15, Life on Land. For a dataset to objectively try and understand the relationship between companies and the SDGs, it must acknowledge that certain economic activities can both move us towards and away from the achievement of the SDGs.
3. It assesses all 17 SDGs – SDG Fundamentals treats everySDG as potentially investable, although not every underlying target. It provides output for alignment/misalignment across all 17 SDGs.
4. Conservative and realistic – If the SDGs are to be achieved by 2030, we must be cautious not to paint an overly positive picture or give false impressions of progress towards the SDGs. SDG Fundamentals stays true to the SDGs by determining alignment/misalignment according to the underlying SDG targets and indicators, rather than relying on investable ‘themes’. Furthermore, if there is not enough information in revenue descriptions, it will be classified as ‘potentially aligned’ (‘potentially misaligned’) – signifying the need for e.g. engagement.
This conservatism means that SDG Fundamentals may demonstrate a less positive picture than other datasets, but the trade-off is insights that are more objective and realistic – and help analysts and asset managers avoid reputational risks.
For example, under an existing SDG revenue alignment dataset, a US healthcare company was scored as 100% aligned to the SDGs. We ran it through SDG Fundamentals to test that hypothesis.
US healthcare company’s SDG Revenue Alignment (% of total revenue)
According to SDG Fundamentals, the picture is still positive for the company, however it is not 100% aligned. 31% of its revenue is aligned via their provision of biopharmaceuticals for various non communicable diseases and psychiatric conditions. While 10% of its revenue related to cleaning products also has a potentially harmful impact on life on land and under water. 14.5% is contested, meaning that they generate 14.5% of their revenue from activities about which there remains debate over whether they are aligned or misaligned with the SDGs.
This view offers a greater degree of nuance to the SDG alignment of the company and is more conservative. It recognizes that there are still activities for which we cannot understand with certainty whether they are aligned or misaligned with the SDGs, either intrinsically or due to dependency on context or geography. The total percentage adds up to more than 100% because a product or service can be aligned to one SDG and misaligned with another.
The combination of these factors is a dataset which is rigorous, comprehensive, and realistic. Still, we believe this is just the start of the journey to understand the relationship between businesses, investment and the SDGs. Revenue is one way of looking at SDG alignment. Other ways include news coverage on a company in relation to the SDGs or company conduct.
Solutions such as SDG Fundamentals can help close the SDG data gap, so that more investments can be channelled to companies making meaningful contributions towards achieving the UN SDGs by 2030.
Sign up for a demo via Matter’s website if you want to know more about SDG Fundamentals and understand how we are integrating these insights into investment decisions.
[1] Using environmental, social and governance criteria
[2] Sustainable Development Goals; more at https://sdgs.un.org/goals
