Why aren’t investors focused on the SDGs?

Trillions of dollars are expected to flow into sustainable funds over the next few years. But how will this translate into the change needed to achieve the SDGs?

The rise of ESG investing

Most investors are taking a proactive and targeted approach to environmental, social and governance (ESG) investing. More than eight in 10 firms (81 per cent) have moved beyond screening to a more focused and integrated ESG approach.Increasingly, investors are considering ESG issues when making decisions, motivated by risk mitigation and outperformance. Trillions of dollars are expected to flow into ESG funds over the next three years: the panel’s assets under management (AUM) in ESG-rated investments is set to rise by four per cent between now and 2023.However, while ESG investing has grown, this comprises a number of different approaches and the vast proportion of strategies do not relate directly to meeting the Sustainable Development Goals (SDGs). Without conscious consideration of how impact can be delivered to meet the world’s greatest needs – as laid out by the SDGs – it’s almost impossible that ESG investment will deliver the 2030 target.

The SDGs: Beyond ESG

Eight in 10 investors believe the asset management sector has a critical role to play in SDG investment, suggesting those who know the SDGs understand their value and relevance.There is a risk, however, that good intentions will not translate into action. Broadly, investors don’t navigate using the SDGs, but investment strategists are twice as likely to view the SDGs as an investment framework compared to the fund managers making the investment decisions. Currently, firms are directing an average of just 8 per cent of their total AUM in emerging markets towards SDG-linked investments.Almost all (97 per cent) of the firms investing in the SDGs plan on increasing their investments over the next decade. While this is encouraging, broader focus on the SDGs among investment firms is needed, if the 2030 deadline is to be met.

_{¹These are the most investable infrastructure-focussed SDGs (Clean Water and Sanitation), SDG 7 (Affordable and Clean Energy) and SDG 9 (Industry, Innovation and Infrastructure).}

How do we overcome the barriers to SDG investment?

Investors are being held back by a lack of quality measurement. Portfolio managers are struggling to provide evidence for the performance of SDG-related funds, both in emerging and developed markets. Many of the measurement challenges are the same in Africa as they are in Europe.

Measuring and quantifying impact isn’t impossible but it’s an area that the finance sector needs to develop urgently. We at Standard Chartered have worked hard to improve access to information and it is something that we can help others with too. But it takes time. Investors can start by measuring the ‘E’ in ESG, which already offers more direct and standardised measurement than the ‘S’.

Improved data and disclosure is an important factor in encouraging investment in the SDGs.