Climate Change Responsible Investing (ESG) Equities Blog

UN Sustainability Goals

A Road Map for Responsible Investing

01 February 2017
5 min read
UN Sustainability Goals: A Road Map for Responsible Investing
| Chief Investment Officer—Sustainable Thematic Equities

Equity investors are increasingly thinking about how their decisions affect society. The United Nations’ Sustainable Development Goals (SDGs) provide a good road map for identifying investments that can contribute to positive environmental and social outcomes—and generate profits as well.

The UN SDGs represent an aspirational view of what the world could look like by 2030. Introduced in September 2015, the 17 goals and 169 specific targets address areas of critical importance to humanity, including eliminating poverty and hunger, improving access to education and healthcare, and addressing the negative impact of climate change (Display). Crafted and agreed to by 193 nations, the SDGs attempt to build on the earlier Millennium Development Goals. The SDG’s objective is to broaden the focus beyond developing markets and to explicitly consider a role for the private sector.

A Great Starting Point: UN Sustainable Development Goals
A Great Starting Point: UN Sustainable Development Goals

The SDGs are not without controversy. Critics argue that there are too many individual targets, while some goals lack focus, are vaguely worded, or are difficult to measure and track. Some goals are seen as too expensive to implement or even contradictory with other goals. There is some truth to each of those claims.

But does that mean that there is no value in the SDGs or that they are not relevant for investors? We’d say just the opposite. In our view, the SDGs provide a powerful investment framework for active equity investors looking to achieve strong long-term investment results and also have a positive societal impact. Despite the complexities, we view the SDGs as a 15-year blueprint that highlights key opportunities for businesses—and attractive, differentiated trends for investors.

Sizing the Opportunity

The costs of achieving the SDGs and, therefore, the opportunities for companies that can help address them are huge. Key areas of investment need are in basic infrastructure, notably transportation, energy and telecommunications. The UN estimates the annual price tag for meeting the SDGs globally in the US$5 trillion−$7 trillion range. Actual funding falls far short of that figure, equating to an annual gap of $2.5 trillion, with developing nations accounting for most of the deficit.1

Vital Role for Private Sector

Given the sheer size and scope of these goals, philanthropy and government spending alone won’t be enough to get the job done. It is imperative that the private sector—and equity investors—play a significant part in providing solutions. In the US, for example, the investment capacity of the 500 largest companies is more than 11 times larger than that of all of the country’s charitable foundations combined (Display).

SDG Progress Will Take Corporate Involvement
SDG Progress Will Take Corporate Involvement

As of December 31, 2016
*Includes 86,726 registered charitable foundations
†Includes 500 largest US nonfinancial companies
Source: George Serafeim, The Role of the Corporation in Society: An Alternative View and Opportunities for Future Research, Harvard Business School working paper, May 2014; and Foundation Center

Mobilizing private sector support for the SDGs will require solid evidence that such investments can pay adequate returns. There are reasons for optimism here. According to a recent comprehensive study from the Copenhagen Consensus Center, investing equally across all 169 individual SDG targets would yield $7 in benefits for every dollar invested. Focusing on the targets with the highest-expected social payback could boost that return on investment fourfold.2 That’s a powerful incentive.

In many cases, governments are also likely to implement financial or regulatory incentives to encourage such private sector participation. Companies are also coming under increased pressure from investor- led groups to pay more attention to sustainability issues. In our view, the goals that offer both financial incentives and positive social outcomes are likely to see the most rapid progress while those offering more limited profit potential will be achieved more slowly—and may ultimately be addressed through the non-profit sector (NGOs) and/or governments.

How Are We Doing So Far?

With efforts to establish standard benchmarks still being ironed out, it’s too soon to say how far along we’ve come. A recent study analyzing SDG progress found that we are on track to achieve only three of the 17 targets today.3 The rest will require significant reforms (nine of the 17) or an outright reversal of current trends (five of the 17).

This state of affairs should not be viewed as overly discouraging. Given these very long-term goals, and that many companies are investing to capture the potential profits associated with them, we believe that investors can build a portfolio to capture this opportunity. If we were on track to meet all of these aspirational goals after just one year, there wouldn’t have been much need for setting them in the first place. We also wouldn’t make light of the fact that 193 nations came together, in rare solidarity, and agreed to this set of goals. These are shared priorities, and we expect continued headway in fulfilling them.

Constructing a portfolio around this global agenda offers investors huge potential, in our view. The SDG’s require about $90 trillion of investment over 15 years, which represents a major long-term growth opportunity for companies that can help provide relevant solutions. What’s more, a large and growing body of academic research shows that companies with strong environmental and social policies and practices have lower financing costs, improved financial results and superior market performance (Display).4

Improving Economics Will DRIVE Renewable Investment
Improving Economics Will DRIVE Renewable Investment

Through December 31, 2016
*Levelized cost of energy (LCOE) is the net present value of the unit-cost of electricity over the lifetime of each  source of power generation.
Source: Bloomberg New Energy Finance, National Renewable Energy Laboratory  and US Department of Energy

Sustainability Makes Economic Sense

The political headwinds to SDG progress are omnipresent and look likely to intensify under the new US presidential administration. But it is important to remember that the sustainability movement is a growing global phenomenon with deep-rooted public support. Donations to social and environmental causes have surged in recent years, and investors across the globe are far more ESG-aware today. In particular, we expect the economic case for renewable energy to gain momentum in the years ahead as the costs of wind and solar power continue declining (Display). Leading wind player Vestas, for example, received 18 new wind turbine orders in the last three days of 2016, with December orders totaling a record 2.8 gigawatts. Notably, eight of those orders were placed by US customers.

We’ve identified more than a dozen specific sustainable investment themes that align with the SDGs and a large, diverse universe of companies whose businesses align with these themes. Each theme represents a significant global unmet need and, in our view, provides attractive growth opportunities for innovative companies to earn favorable rates of return and boost shareholder value.

Owning a concentrated, high-conviction portfolio of companies that are levered to high-impact sustainable themes allows investors to “do well by doing good.”

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

Daniel C. Roarty, Chief Investment Officer—Global Growth and Thematic

  1. United Nations Conference on Trade and Development, World Investment Report, September 2014
  2. Copenhagen Consensus Center, Expert Panel Recommendation Report, 2016
  3. Susan Nicolai, Chris Hoy, Tom Berliner and Thomas Aedy, Projecting Progress: Reaching the SDGs by 2030, Overseas Development Institute, September 2015
  4. Deutsche Bank Climate Change Advisors, Sustainable Investing: Establishing Long-Term Value and Performance, June 2012
About the Author

Daniel C. Roarty can boast that at a phase in life when coolness matters, his daughters think his job on Wall Street is cool. The reason? His investment strategy revolves around identifying the biggest issues facing the world and constructing thematic investment portfolios around them.

World hunger, climate change, access to healthcare—these themes play primary roles in the strategies Roarty crafts every day. His work gives him the opportunity to do good by merging his professional life with pressing issues.

Roarty feels lucky to be at a firm like AB that has given him the freedom to take a holistic, global approach to investing and build out his own team and strategy since he joined in 2011.

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