The SDGs: investing in the future

ELZA HOLMSTEDT PELLTuesday 12 February 2019

Business and investors need to play a huge role in financing the UN’s Sustainable Development Goals over the next decade but, three years into the journey, progress is proving slow. Global Insight explores the challenges facing companies and legal practitioners in closing the gap between ambition and action.

The UN Secretary-General’s latest strategy for financing sustainable development makes for encouraging reading. Launched by António Guterres in September 2018, the strategy document says that investment and financial instruments to help drive the UN Sustainable Development Goals (SDGs) have grown rapidly since their launch in 2015. It points to the ‘explosive growth’ of green bonds – where the proceeds are used for green projects, typically climate mitigation and adaptation projects.

But the document – which sets out the 2018–2021 financing strategy for the UN’s 2030 sustainable development agenda – is also clear that meeting the SDGs will be no mean feat. ‘Progress is still insufficient and too slow,’ it says. ‘The finance needs for SDG investments are vast and urgent’, but sustainable finance continues to make up a small fraction of overall financial activity and is only just beginning to be ‘mainstreamed’ into business models.

‘We’re already three years in, but we’re still just talking about the SDGs and trying to set out a blueprint,’ says Kevin Hyland, Chief Executive Officer of ChildFund Ireland and the former Independent Anti-Slavery Commissioner for the United Kingdom. He emphasises that efforts to meet the goals need to be integrated into the ways companies do business. It’s a viewpoint that echoes that of the UN, which has called for urgent action to ‘galvanise political support, build momentum for change in corporate boardrooms, and do better in tapping resources that sit idle’.

The successor to the Millennium Development Goals, the SDGs call for developed and developing countries to work in a global partnership to deliver peace and prosperity for people and the planet. Comprised of 17 goals to be met by 2030, the SDGs recognise that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, spur economic growth and tackle climate change.

An estimated $5–7tn of investment annually is needed to meet the SDGs. The UN has emphasised the importance of aligning global financial and economic policies with its sustainability agenda, as well as exploiting the potential of financial innovations and new technologies.

There’s broad momentum to tackle the problem... I don’t think it’s a problem of philosophy – people have taken this on board

Gregor Paterson-Jones
Independent development and renewable energy finance adviser

Businesses and investment organisations also have a vital role in making the SDGs a reality. On the face of it, corporates are engaging on sustainable development. Most major multinationals in some way acknowledge the SDGs and some have developed specific strategies.

Companies in extractive industries, which are often in the spotlight and under significant investor pressure over sustainability and climate impact, are also committing publicly to address sustainable development. In November 2018, mining giant Anglo American hosted its first ‘SDG accountability dialogue’ with stakeholders, and its sustainability framework incorporates the SDGs.

‘There’s broad momentum to tackle the problem, there’s no doubt about that,’ says Gregor Paterson-Jones, an independent development and renewable energy finance adviser. ‘I don’t think it’s a problem of philosophy – people have taken this on board.’

Instead, the challenge is developing practical strategies and solutions to implement the SDGs. ‘It’s very complex. The way we live our lives, what we eat, the toothpaste we use, how it’s packaged, how we get to work – all of this contributes in some way to a [negative impact] on some SDG goal,’ says Paterson-Jones. ‘There’s a gap between what’s being done and what needs to be done.’

A spokesperson for Swedish multinational IKEA, which reports on its contributions towards each SDG, tells Global Insight it uses the goals ‘to guide and inspire us in developing our sustainability agenda’. But IKEA believes the ambition level is lacking when it comes to many of the SDGs, such as climate and energy. ‘Businesses need a long-term and stable policy framework to contribute to the SDGs.’

Research also underlines the gap between ambition and action. According to a PwC report in 2017, 62 per cent of 470 global companies surveyed felt the SDGs were important enough to refer to in their reporting. However, PwC noted, ‘many companies are still at the start of their SDG journey’ and haven’t set any priorities for working towards them. In total, almost two-thirds of the companies polled weren’t engaging meaningfully with the goals, said the report. ‘Making the strategic decisions necessary to tackle the 17 goals and 169 targets and decide how to report on them is no small task,’ it said.

Beyond business as usual

The challenge for business in understanding how their activities contribute to or have a negative impact on the SDGs might also be hindering investment into sustainable development.

‘I think companies are focusing on the SDGs that may fit the best with the strategies they already have,’ says Martijn Willem Scheltema, former Co-Chair of the IBA Business Human Rights Committee and a partner at Dutch law firm Pels Rijcken & Droogleever Fortuijn.

‘Sometimes you might have to change policies within your company, and your corporate behaviour and culture, to really address the targets,’ says Scheltema. ‘But often companies pick the SDGs they find easy to address – they say “look, we’re doing some additional things”, but these things fit nicely with their strategies anyway.’

This isn’t what the goals are trying to achieve, he says, ‘because we want to see some real change in the world’ rather than business-as-usual behaviours.

Companies often pick the SDGs they find easy to address – they say ‘look, we’re doing some additional things’, but these things fit nicely with their strategies anyway

Martijn Willem Scheltema
Former Co-Chair, IBA Business Human Rights Committee; partner, Pels Rijcken & Droogleever Fortuijn

Scheltema points to the likes of consumer goods giant Unilever and paint and coatings company AkzoNobel as corporates at the forefront that are ‘really trying to move things’. He highlights an initiative in the Netherlands, led by financial institutions, including ASN Bank and Triodos, to promote a living wage in the textile industry as a good example of a concrete corporate action that contributes to a number of the SDGs. ‘There are meaningful attempts by some to change things, but also many other companies not going down the same route,’ he says.

Elise Groulx Diggs, Vice-Chair of the IBA Business Human Rights Committee and an associate tenant at Doughty Street Chambers in London, agrees. ‘I’m both happy about the SDGs and worried about them,’ she says. ‘It’s good to have a framework setting out ambitious goals that inspire business leaders, as well as guiding government policymakers. But I’m concerned that, in the business world, this approach can bring us back towards “corporate social responsibility” and even philanthropy in some cases, instead of really looking at the specific impacts of business operations, such as the harm that corporations can do to people and the environment.’

The UN Guiding Principles on Business and Human Rights can be a useful framework to enable businesses to develop strategies to engage positively with the SDGs, says Rae Lindsay, Co-Chair of the IBA Business Human Rights Committee and a partner at Clifford Chance. ‘Lawyers can help businesses implement those strategies where, for example, they seek to use their leverage through their value chains to prevent and mitigate human rights impacts,’ she says. ‘Beyond that, there are tools available to help business develop strategies to contribute to government efforts to meet the SDGs, but there are limitations on the extent to which lawyers would have a particular role in applying those. I’ve not yet seen a legal framework that directly supports private sector involvement in the SDGs.’

The legal profession can start to be the moral compass, particularly in global compliance of businesses

Kevin Hyland
Chief Executive Officer, ChildFund Ireland; former UK Independent Anti-Slavery Commissioner

Ending modern slavery – an SDG challenge, despite legal momentum

Many of the SDGs are seen as aspirational, and only a few are underpinned by regulatory frameworks that lawyers can use to help their clients align with the targets. Eradicating modern slavery is one of the exceptions. The UK’s Modern Slavery Act, for example, is ‘really helping to address and actually achieve the eradication of modern slavery, consistent with the SDGs,’ says Rae Lindsay, Co-Chair of the IBA Business Human Rights Committee and a partner at Clifford Chance.

The Act – which aims to put an end to modern slavery in the UK and in the supply chains of imported goods – became law in March 2015, just months before the SDGs were agreed. Implementation of the Act was spearheaded by the UK’s first Independent Anti-Slavery Commissioner, Kevin Hyland. Now CEO of ChildFund Ireland, Hyland tells Global Insight he took on the job to ensure a reference to ending modern slavery was included in the SDGs. ‘I had very high-level support right up to the Pope to include the target,’ he says.

Highlighting modern slavery in the SDGs and having regulation at a national level is ‘a real driver’ to address the problem, says Hyland. But he regrets that the UK’s legislation ‘came without any teeth in terms of reporting’. For example, the Act doesn’t cover government procurement. For companies, this sets the standard that reporting on modern slavery ‘is for you not for us,’ he says.

A report on the UK’s progress on the SDGs recommends strengthening the Modern Slavery Act by extending it to the public sector. Produced by the cross-sector network UK Stakeholders for Sustainable Development, the report called for companies and organisations that do not report on modern slavery to be penalised.

The legislation is not as effective as it should be in changing the approach of business, with some companies seeing it as a box-ticking exercise, says Hyland. An assessment of modern slavery disclosures by FTSE 100 companies, published by the Business & Human Rights Resource Centre in November 2018, showed almost all companies now meet the minimum requirements under the UK Act. But the assessment found there’s still a lack of detail in reporting, and a number of companies provided weak disclosure statements.

It might be difficult to agree the right solution for many of the other SDGs, says Hyland, but ‘no UN member state, no government and no business will say that having human trafficking or slavery in their footprint is acceptable. It shouldn’t be too much to ask [to have effective regulation in place]’.

Hyland is encouraged by efforts to roll out or strengthen legislation around modern slavery in Australia, Canada and the European Union, among others. ‘We do see progress around the world, but it’s the urgency that doesn’t seem to be there.’

Lindsay adds that any legislation supporting SDG aims – such as addressing a living wage, the gender pay gap or modern slavery – provides an incentive for business to take steps beyond compliance and use those requirements as a platform for broader engagement with the SDGs. ‘In that context, lawyers can certainly make a positive contribution to their efforts,’ she says.

The UN Guiding Principles can be combined in powerful ways with the SDGs but, says Groulx Diggs, a ‘delicate balance’ needs to be struck between doing good and preventing harm. The SDGs are feeding into an initiative called the Trust Fund Project, chaired by Groulx Diggs, to develop best practice and tools around the third pillar of the UN Guiding Principles: access to remedy. Currently in its funding phase, the project is designed to implement the Principles but, at the same time, is framed to incorporate the SDGs because the goals ‘really inspire businesses,’ she says.

A moral compass for business

Another challenge is developing SDG regulation and frameworks. Regulations covering all the goals will not emerge in the near term. Climate change has so far taken the front seat, says Paterson-Jones. ‘Governments are playing a big role in working towards climate goals – we’ve got renewables targets, subsidies and multilateral banks investing in clean energy. This has changed the energy generation landscape massively.’

But, for many of the other goals, what regulations need to entail is more complex. ‘Bringing people out of poverty is broader and more difficult – it revolves around political and economic issues we’ve struggled with for hundreds of years,’ says Paterson-Jones. Governments should explore ‘putting a price on detrimental economic activity’, by either banning such activities or making companies pay for the negative impact of their activities. Crucially, governments should make investments that leverage private sector capital, he adds. This is starting to happen, particularly in climate finance.

Lawyers can also use existing instruments, such as due diligence and compliance, to speed up implementation of the SDGs. But these are ‘probably not adhered to as much as they could be,’ says Hyland. ‘The legal profession can start to be the moral compass, particularly in global compliance of businesses,’ he says. Compliance could be used more effectively by lawyers to help companies ‘stick their necks out and be human rights champions’, he adds. ‘So many law firms have influence – they’re involved on company boards, charities, trustees. Lawyers should think, “I can influence the board, I can empower the board and actually help achieve the SDGs”.’

Scheltema believes that ‘many lawyers are not up to speed’ with the goals. ‘We need education for lawyers in all practices – it’s important to emphasise to clients that SDGs are designed to bring about meaningful and substantial change.’

Legal practitioners can help drive progress in the private sector – for example, by including requirements to meet the SDGs in legal documentation for businesses and investors. ‘If you embed legal consequences for not meeting sustainability targets, that’s a very powerful tool,’ says Paterson-Jones.

Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin, says lawyers should include a reference to sustainability goals in corporate bond covenants. ‘Legal practitioners are the ones drafting covenants – they should recommend clients involved in long-term refinancing exercises to incorporate and accurately report on the SDGs. Investors will appreciate it.’

Increasing investor backing

Since the launch of the SDGs in 2015, institutional investors and asset managers have been vocal in their support. ‘Many investors are really aligned with the SDGs – this is somewhere where I do see a push,’ says Hyland.

But, according to a survey by French bank Natixis, published in September 2018, investor expectations on companies’ SDG contributions are ‘far from being met’. The survey involved 42 investors with combined assets under management of $14tn – including BlackRock, Legal & General Investment Management and UBS Asset Management. It found investors are committed to further integrating the SDGs into their own portfolio management. Many also offer specific products linked to the goals, such as SDG-focused funds.

In response to investor dissatisfaction, Natixis launched a methodology to address SDG contributions and ensure they are backed by sufficient evidence. In addition, in September 2017, UK insurer Aviva joined forces with Dutch non-profit, the Index Initiative, and the US-based UN Foundation to develop benchmarks that rank companies on their contribution to the SDGs. The launch of the World Benchmarking Alliance (WBA) noted that while many companies are aligning their business models with the SDGs, information on their performance is often hard to access and compare. The WBA benchmark aims to bring more transparency and aid investment decisions or policy efforts.

I have yet to see the SDGs having a particular influence on the funds, investment managers or investors for whom I have been acting

Brian McDermott
Co-Chair, IBA Investment Funds Committee; partner, A&L Goodbody

If institutional investors begin backing the SDGs at scale, it could significantly boost progress towards meeting the goals. The UN estimates that $85tn is parked in long-term investment vehicles, and some argue this should be invested in projects and companies supporting the SDGs.

But, despite efforts by some asset managers and institutional investors, sustainable development is not yet a core part of risk management and investment strategies for most investors. ‘I have yet to see the SDGs having a particular influence on the funds, investment managers or investors for whom I have been acting,’ says Brian McDermott, Co-Chair of the IBA Investment Funds Committee and a partner at A&L Goodbody in Dublin.

Hyland believes not enough has been done to promote the SDGs to the wider investment community ‘in a way that actually resonates with an investment firm in London, for example’. Some investors think the SDGs are a ‘UN-based ambition, only referred to when humanitarian response is required’ and don’t realise the day-to-day duties investors and businesses need to undertake to help meet them, he says.

Jakob Thomä, Managing Director at climate and finance-focused think tank 2° Investing Initiative, agrees that some of the SDGs are not understood by or accessible to investors. They might ask ‘what can a European pension fund really do about child mortality, for example?’ he says.

In Natixis’ survey, some respondents said corporates and investors can only make greater strides on the SDGs if they see more action at state level. ‘SDGs have been signed by countries, not by companies,’ said one unidentified investor who took part. ‘Although it’s clear that companies have their share in contributing in the achievement, it’s much more countries and states that should be [at] the forefront.’ If anything, governments have to help ensure SDG-related investments are de-risked so that institutional investors can back the goals, while also getting a long-term return. ‘There’s no lack of finance – but pension funds have a fiduciary responsibility to get market returns,’ says Paterson-Jones.

McDermott says environmental, social and governance issues are ‘much discussed’ in the funds and investment space, which will increase investor focus on the SDGs. ‘It’s only a matter of time before we see it having a significant impact on our clients, whether as a result of investor, legislative or regulatory pressures – or a combination of some or all of them.’ Elza Holmstedt Pell is a freelance journalist and can be contacted at elza@holmstedtpell.com