On the hierarchy of products, we can’t live without, a coffee-delivery drone using a mechanism to dole out caffeine to tired office workers falls pretty near the bottom of anyone’s list, especially compared to products helping to meet true human needs for food and clean water and air. While drone delivery is once again making headlines in the tech sector with a surge of interest in drone delivery during the Covid19 pandemic, a recent trend of business growth and investment around the broad themes of climate change, general resource efficiency, public health and social equity may go where traditional lending institutions have feared to tread. A strategy focused on building on this momentum would go some of the way towards helping the global community reach its nation-by-nation targets by 2030, a program also known as the United Nations Sustainable Development Goals.
In 2015, the United Nations hosted summits to forge plans for an ambitious and transformative global development agenda, including the 2030 Agenda for Sustainable Development, 17 sustainable development goals aimed at abolishing poverty and hunger, and scaling up provisioning systems of clean water and sanitation. This agenda is a roadmap for how to support the planet’s human population, projected to be 9.7 billion people by 2050.
The 2030 SDGs point to the crucial role of financial partnerships, both in the public and private sector, especially in the poorest and most vulnerable countries.
This massive transformation of society requires massive funding in sustainable infrastructure. Thus the 2030 SDGs point to the crucial role of financial partnerships, both in the public and private sector, especially in the poorest and most vulnerable countries. According to OECD (Organization for Economic Co-operation and Development) estimates reported in 2017, USD $3.3 to $4.5 trillion in annual investment would be required to implement the SDGs in developing countries by 2030. These days, Official Development Assistance cash totals just US $1.3 trillion annually, well short of its goal. But to match institutional capital with the need for loan financing is a colossal undertaking that has yet to be achieved at scale.
Achieving the SDGs may in fact call for shifting to a different economic model, one that acknowledges a deeper understanding of equity. According to Oxford academic Kate Raworth, author of Doughnut Economics, a good way to think of sustainability is in terms of a doughnut shaped space – one where resource use is high enough to meet people’s basic needs but not so high as to transgress planetary needs. As we consider the benefits of a doughnut-shaped economy, the knowledge forum on the SDG agenda points to the efficacy of partnerships with loan financing, institutional capital and private sector commerce support. As a result, many have turned to impact investing, a new investment mechanism geared towards delivering on the SDGs. Going above and beyond the frameworks of socially responsible investing and sustainable investing, which involve investing according to ethical guidelines, impact investing seeks to further business and product development focused on sustainability or other social equity goals.
In many ways, the same traditional investment incentives apply to the current version of sustainable investing. The drive to see positive financial returns and for strong business models to scale up are as strong as ever. The difference now is that impact investors aim to produce both financial returns and positive social or environmental outcomes. A misconception lingers, however, that the biggest risk with impact investing is sacrificing returns, the argument being that these initiatives lack the traditional incentives of profit and scale.
One problem for anyone using United Nation SDGs as a guide for investment efficacy is the question of metrics. Financial returns are easy to measure but determining positive social impacts can be less straightforward. To tackle the difficulty of measuring positive social change, the Global Impact Investing Network developed the Impact Reporting and Investment Standards (IRIS) with metrics for investors to compare social impact returns with financial gains.
IRIS is a catalog of generally- accepted performance metrics that impact investors use to measure the social, environmental, and financial performance of their investments. IRIS metrics align with a number of assessments, standards, and reporting frameworks from a range of industries. These reporting frameworks provide guidance on what social and environmental performance areas to measure and report to stakeholders, based on sector, business model, organization type, and/or target beneficiaries.
In “Somebody’s Gotta Get Rich”, an opinion piece in Stanford Innovation Review in August 2018, Kevin Starr, director of the Mulago Foundation and the Rainer Arnhold Fellows Foundation, writes that for businesses designed to address social need to have any measurable impact, they must be able to scale. “Impact at big scale requires that lots of businesses deliver a similar product or service over broad geography ... and barely profitable businesses won’t scale.” He adds, “The main thing social businesses need to do is to make sure they’re not stuck in a niche where scale can’t happen,” he says.
According to The Ellen Macarthur Foundation, we need “a systemic shift that builds long-term resilience and provides environmental and societal benefits” to construct a “circular economy.” Research suggests such a transition can be aided by more capital flowing into businesses that meet one or more of the UN SDGs.
Fundamentally, an investment firm’s role is to manage risk and to find the optimal point on the risk-reward continuum. The think tank Preventable Surprises says the time has come that market analysts, fund managers and investment consultants should all raise the ante by encouraging more “forceful stewardship.”
Forceful stewardship, according to Preventable Surprises, focuses on the rights that investors have as owners. Investors now face unavoidable climate- related systemic risks to a diversified investment portfolio, and stock picking or hedging provides no way out. Investors must use their influence to urge the companies in their portfolios to take action and set responsible targets, and the UN SDGs can provide a framework for investors to use when demanding concrete action be taken.
For some time now, ESG index Funds provide exposure to companies with outstanding Environmental, Social and Governance (ESG) ratings. In the 1990s, Socially Responsible investments (SRI) made up about 1% of the investment market, compared with 18–50% today. Nowadays, nearly every investment house offers socially responsible investments, which have grown to make up 30% of the investment market in the last 5 years.
Jake Raden, co-lead at US-based impact investing firm Swell Investing says “We find that our investors don’t want to sacrifice their values in order to get a return. They’re hoping that their ROI includes a world that the next generation can enjoy peacefully and comfortably.” Market incentives in this type of investment align with both wealth creation and risk mitigation, a net positive risk-reward continuum.
Swell’s portfolios also work towards positive impact through stocks, making it possible for the start-up to offer impact investing to a broader audience of investors with a low account minimum, or anyone hesitant to take on the risks posed by investing in a single sector. “A company’s value no longer lies in raw assets--equipment, buildings, inventory,” Dave Fanger, Swell Impact’s founder, says. “Instead, a company’s brand reputation and public goodwill dictate stock price in today’s interconnected world.” This is borne out by performance data, verifying that a type of “index of goodwill” is at play.
For the investor looking to support companies with positive environmental, social and governance (“ESG”) characteristics, a classic, if somewhat outdated, option MSCI KLD 400 Social Index. This is a free-floating adjusted market capitalization index designed to target U.S. companies that have outstanding ESG characteristics. To be eligible for inclusion, companies must generate at least 50 percent of their annual sales from one or more of the sustainable impact categories and maintain minimum environmental, social and governance (ESG) standards.
This index excludes companies whose products have negative social or environmental impacts, that is companies involved in Nuclear Power, Tobacco, Alcohol, Gambling, Military Weapons, Civilian Firearms, GMOs, and Adult Entertainment are excluded. Out of the top 10 constituents in this index, six of these are from the info/tech sector; and include Google’s parent company Alphabet, Facebook, and Microsoft. Another investment option is electronically traded iShares MSCI Global Impact. Started in 2016, this fund tracks an index composed of companies that derive a majority of their revenue from products and services that address SDGs.
A high ESG score doesn’t mean the corporation supports the UN SDGs. Not by a long shot.
A high ESG rating can be falsely reassuring, however. The index fund, MSCI KD 400 Social Index, is a case in point; Microsoft, Alphabet, and Facebook comprise the majority of its holdings. With criticisms of its content policies, misinformation and lack of fact-checking growing since the 2016 American elections, Facebook isn’t receiving high marks for its social responsibility. A high ESG score doesn’t mean the corporation supports the UN SDGs. Not by a long shot.
Consider a better option for supporting 2030 goals — the SPDR S&P 500 Fossil Fuel Reserves Free ETF Index Fund (SPYX). This fund is designed to measure the performance of companies in the S&P 500 Index that do not own any fossil fuel investments. For what it’s worth, SPYX closed out the week at 67 and shows a YTD return of 17.96%. Between 2010 and 2016, the average cost of solar power for residential, commercial and utility-scale projects declined 73 percent, and cost reductions are expected to continue through 2020, according to a new cost analysis from the International Renewable Energy Agency (IRENA). Still, today solar represents less than 1% of the roughly $4 trillion global energy market.
An industry leader in rooftop solar and energy storage is Sun Run, headquartered in San Francisco and traded on NASDAQ. Technologies to manufacture panels are now considerably more affordable, which elevates the demand, which, in turn, motivates developers to innovate technologies that meet demand at a lower cost. As prices continue to decline, and as these technologies reach scale, we can expect an acceleration of renewable power and generation.
The economics that drove down the price of renewables are also driving the development of cheaper batteries and energy storage. Better energy storage will help store power generated through solar so that it can be used during off- peak hours or sold to those who don’t have access. We can also expect to see an increase in the availability and range of electric cars and aviation. Zunum Aero is a company backed by Boeing and JetBlue that has been working since 2013 on a family of 10 to 50-seat hybrid electric regional aircraft. Pro Terra based in the States is developing a fleet of electric buses. Another leader in this area is Canadian-traded Clear Blue Technologies, which aims to provide reliable, low-cost off grid power.
The Covid19 pandemic threatens much of the progress that has been made over the past few years on the UN SDGs. UN leaders such as Secretary General Antonio Guterres and UN Environment Chief Inger Anderson have emphasized the need to lean into this moment of crisis and “take bold steps to steer the world back on track towards the SDGs”. With the bulk of responsibility for achieving these ambitious goals resting on the back of only NGOs and governments, the challenge appears immense. But now that both private industry and finance are waking up and getting in the game, the odds are looking more promising. The possibility of meeting these goals is more than just a moonshot.
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