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Wall Street Tackles Sustainable Development Goals

In 2015 the United Nations defined 17 Sustainable Development Goals [no poverty, no hunger, health & well-being, etc.] along with 169 targets that were devised to allow for quantitative measurement of progress. It also set 2030 as the bull’s eye for the attainment of the goals.

Since governments alone are unlikely to be able to come up with the huge sums of money necessary to achieve these ambitions goals and targets, the UN has explicitly asked for private participation in the effort.

This invitation to the private sector is not entirely voluntary. The world’s governments through “fines, compensation, and potential license withdrawal” are in a position to inflict severe financial consequences on companies that do not get with the program, such as “car manufacturers that do not adapt quickly enough to a world of electric vehicles.”

There are related concerns. Investors in firms that drill for fossil fuels must worry about spills, both the legal consequences and the headline effect, and investors in a wide range of corporations must be on the alert for disclosures about bribery, since there is always a temptation on the front lines of private/public interaction to “grease a few palms” to speed things up.

Putting Credits on the Agenda

An association of institutional investors in Holland, the VBDO, found that SDGs are on the agenda of many pension fund boards, although some of those interested have not yet integrated SDGs into their portfolios.

So, if SDG itself in on the agenda, where do SDG credits come in? Robeco, the asset management firm which offers SDG products, recently published a guide to SDG credits, intended to help those investors who, as Robeco puts it, “remain unsure of how to go about it, or what tools can be used to measure the actual impact.”

The guide explains that Robeco has a three-step process for assigning scores for companies that contribute to the causes on the UN’s list. It looks at what a company produces (Coal? Telecom infrastructure? EVs?). Then it looks at how the company works. Does it have state-of-the-art scrubbers in its smokestacks? Does it respect labor rights? Does it have diverse management? Robeco looks at existing controversies centered on the corporation. Here we come to issues of spills, bribery, fraud, money laundering, etc. From these considerations the company gets a score: positive, negative, or net zero.

The idea behind the scoring is that a company’s credit, and accordingly the value of its bonds, ought to be evaluated in a way that incorporates social considerations.

Based on its proprietary scoring, Robeco screens the world of corporate and excludes from its investment universe bonds of companies with negative scores. It then applies a credit investment process to create a portfolio that, in its view, both makes a positive contribution to the SDGs and looks likely to deliver attractive financial returns. The process also involves old-fashioned fundamental research bearing on the latter.