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Steps to Attain Sustainable Development Goals

February 19, 2019

Amber Fairbanks, a portfolio manager at Mirova, a division of Natixis, recently talked to Clarice Avery, a Natixis investment strategist on Asset TV about potential long-term investment opportunity in the ESG space.

She described ESG as a way in which investors can benefit from long-term secular trends rather than trying to time the effects of cyclical events such as the Fed’s tightenings and loosenings. The world must undergo certain “transitions,” she said. It must, for example, address issues surrounding climate change. Thus it makes sense for a portfolio to include solution providers for those issues and transitions.

That observation brings to mind Natixis’ recent and more full rendered discussion of some of the broad issues in ESG, which it also likes to call Sustainable Development Goals, or SDG (because the world needs more acronyms).

Investing Trillions of Dollars

In September 2018, Natixis posted its report, “Solving Sustainable Development Goals.”

That report drew on a survey of 42 institutional investors with combined assets under management of $14 trillion. Among them are Robeco, Schroders and SCOR Investment Partners. On the one hand, “they are all committed to further integrate the SDGs in their portfolio management and a large portion of them already has SDG funds.” On the other hand, these investors aren’t satisfied. Their expectations of their portfolio companies aren’t being met.

Part of the problem is that the portfolio companies may think they are reporting on sustainable development when all they are really doing is relating heartwarming anecdotes. The report says, “boilerplate disclosure and nice SDG stories are not enough to use the incredibly rich tool that are SDGs.”

Getting Beyond Anecdotes

To get beyond that, investors and companies both should bear in mind that SDGs are, in essence, attached to populations and territory, and they must be monitored as such, in what Natixis calls “geospatial foot printing.”

To claim, legitimately and robustly, that an SDG has been met, one must, by this report’s test, demonstrate progress over a specific span of time, upon SDGs and sub-targets, as evidenced by outcome or impact key performance indicators (KPIs), with attention to issues of attribution. Can we show that actions X caused beneficial change Y? If not, can we at least show enough correlation between X and Y to make causality plausible? Where X is the operational activity of a company, its services, products, or a specific project?

Also, the report cautions against the ESG equivalents of robbing Peter to pay Paul, cleaning the air by polluting the water, etc. It cautions that when SDGs are monitored, positive outcomes (Y) for one goal must not come about in ways that are detrimental to another.

Two Phases, 10 Steps

There are two distinct phases in Natixis’s “generic approach” to SDGs: diagnosis and contributions. There are three steps to diagnosis. A company should screen the positive and negative SDG hotspots along its whole value chain; identify its stakeholders and their position vis-a-vis those hotspots; and it should in accord with the geospatial notion mentioned above, define those hotspots in terms of the locations where the organization has a strong foothold or where the project is planned.

The notion of a “strong foothold” here includes for example the location of assets, workforce, and customer base.

There are seven steps to the contribution phase. A company should determine its objectives; identify the specific actions needed to achieve them; “be explicit as to the causal cascade;” collect the pertinent data over the lifetime of a project or program aimed at these goals; publish output and outcome results for the world to see,  include in this transparency matters of imputability, i.e. whether the observed progress can plausibly be imputed to the intervention or would have happened anyway; and maintain a focus on “how to do better tomorrow.”