INTERVIEW with Shelagh Whitley, Director of ESG and SDGs with the Principles for Responsible Investment (PRI). For further expert opinions please use the question-level hyperlink.
The urgency to deliver on the SDGs has only been increased by the COVID-19 pandemic, with several governments recognising that the SDGs can act as a guide to the global response, ‘to make sure that nobody is left behind’.
In July this year, PRI published a report on Sustainable and inclusive: Covid-19 recovery and reform. It highlighted that there is opportunity to accelerate policy and investor commitments, particularly those focussed on tackling climate change, and to ensure they are inclusive. The COVID-19 pandemic has put many aspects of our economy and lives on hold, but it has not stopped the climate emergency and will not prevent the risks from extreme weather events and other climate-related shocks that threaten us now and in future. Policy makers need to seize the opportunities created by shifts in markets and behaviour to accelerate change, focusing on areas in which the COVID-19 recovery and decarbonisation priorities are best aligned. In order to create a decisive green transition, targeted government stimulus spending must be backed up by accelerated measures to build markets that can deliver for people and the planet.
Climate-related priorities should include:
〉Establishing standards, benchmarks and tools for measuring and managing climate-related commitments, risks and outcomes.
〉Policy action and stimulus spending targeted at priority sector transformations to reach net-zero emissions by 2050; focusing in the short term on areas with the highest job creation and economic multipliers.
In terms of social issues, the COVID-19 pandemic has meant that both investors and companies are likely to be subject to a heightened degree of scrutiny. The pandemic has brought the multiple dimensions of poverty and vulnerability experienced by millions of people into sharp focus. For these people, decades of economic growth and development have not delivered prosperity and security. COVID-19 has exacerbated those vulnerabilities, created new ones and reduced people’s ability to cope with shocks. To maintain public support and deliver a sustainable, equitable, inclusive and resilient recovery, governments, investors and companies should contribute in ways that are (and are seen to be) both effective and fair.
Priorities for purpose, fairness and human rights should include:
〉Safeguard human rights of workers, suppliers, partners and associates, through implementation (by investors and companies) of the UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises.
〉Disclosure by companies on living wages, freedom of association and collective bargaining, job security and benefits.
〉Tax transparency to end secrecy and opacity related to tax transactions, and strong investor commitments to responsible tax behaviour, and disaggregated corporate reporting to demonstrate that taxes paid are reflective of the commercial reality in which a company operates.
〉Remuneration alignment with company strategy and business model to ensure long-term value (including consideration of CEO / worker pay ratios, and integration of ESG metrics to guide performance-related pay)
All actions of investors – investment decisions and use of tools of influence – shape positive and negative outcomes in the world. Some may be unintended – some might also be unknown. Investors must seek to identify and understand the outcomes of their investments and of their own operations. This applies to outcomes related to investments in public and private markets and through internal or external management – both within the existing investment portfolio and stewardship activities, and from potential new investments and investment processes.
Building on investors’ most common current activities focused on the SDGs – mapping existing investments to the SDGs and determining the scale of investments in explicitly SDG-aligned activities – the next step involves identifying the positive and negative real-world outcomes related to investors’ and investees’ operations, products and services. It involves seeking to understand the outcomes aligned to specific SDGs, and those that cut across multiple goals.
ESG incorporation efforts can be a good starting point – while they will need to be broadened to also shape real world outcomes, they can provide metrics and data, as well as lessons on putting in place the necessary organisational processes for identifying and understanding positive and negative outcomes. For example, to identify negative outcomes, investors can use existing screening tools from ESG service providers, such as portfolio screening tools for biodiversity, and tools and data to screen for breaches of the UN Global Compact’s Principles.
Targeted outcome objectives can be set (and assessed) against recognised global thresholds and timeframes for sustainability performance – including those established at the level of specific SDG targets and indicators.
There are a number of tools that may be useful for identifying (and in some cases assessing progress on) sustainability outcomes, some of which are listed on our website here.
| Investors focus on SDG investing for various reasons using it as an ESG investment guidance, a framework for measuring impact, as a risk identification tool for global portfolios etc. What benefits, opportunities and risks does the Five-Part Framework point to when it comes to the transition to an SDG-aligned world?
Focusing on SDG-aligned outcomes, including through collective action, can also feed back into portfolio performance, and into the resilience of the financial system itself.
There is a continuous feedback cycle between (ESG) risks and opportunities and (SDG-aligned) outcomes: ESG issues create risks and opportunities for investors, whose actions shape outcomes on the world, which feed back into portfolios in the form of ESG risks and opportunities, and so on.
A focus on shaping SDG outcomes involves broadening the analysis of individual investees’ financially material ESG issues, to also include a parallel analysis of the most important outcomes to society and the environment at a systemic level. These material issues and real-world outcomes overlap to some extent, but not fully, and this is part of the gap that needs to close to achieve the SDGs by 2030.
A focus on outcomes allows investors to understand the risks and opportunities that are likely to exist in the transition to an SDG-aligned world.
〉identify opportunities in business models, supply chains and products/services;
〉prepare for legal and regulatory developments;
〉protect their reputation and licence-to-operate;
〉meet commitments to clients and beneficiaries – and communicate progress;
〉consider materiality over longer time horizons, to include transition risks, tail risks, financial system risks etc.;
〉minimise the negative outcomes and increase the positive outcomes of investments.
| What challenges does the Report ‘Investing with SDG outcomes: a five-part framework’ help tackling and what are its key findings?
The report outlines a five-part framework for investors that are seeking to understand the real-world outcomes of their investments, and to shape those outcomes in line with the SDGs.
〉Part 1 is about investors identifying and understanding the unintended outcomes of their investments and their own operations. This assessment involves identifying positive and negative real-world outcomes related to investees’ operations, products and services. It can build on activities such as mapping existing investments to the SDGs and determining the scale of investments in explicitly SDG aligned activities.
〉Part 2 sees investors setting policies and targets, moving the investor from identifying and understanding unintended outcomes towards taking intentional steps to shape outcomes. As many outcomes are connected – e.g. climate change and water scarcity, food security and poverty – investors will have to look across all investments and all SDGs holistically when considering their most important outcomes.
〉In Part 3, investors seek to shape outcomes in line with the policies and targets set in Part 2, and report on progress against those objectives. We outline examples of how this takes place through investor actions including: investment decisions, stewardship of investees and engagement with policy makers and key stakeholders – and how it can be communicated through disclosure and reporting.
〉Part 4 considers the contribution of the financial system. Shaping outcomes in line with the SDGs at the financial system level takes place both through aggregating the actions of individual investors, and from investors acting collectively – including alongside other financial system participants such as credit rating agencies, index providers, proxy advisors, banks, insurers and multilateral financial institutions.
〉Part 5 recognises that no one set of actors will achieve the SDGs in isolation. The finance sector, businesses, governments, academia, civil society, the media, individuals and their communities must act collectively to ultimately achieve the SDGs. Necessary elements include programmes to connect supply and demand of investments at scale, and collaboration on tools to contextualise outcomes data in the global thresholds and timelines required to achieve the SDGs.
| How does PRI support asset owners interested in contributing to attaining particular SDGs?
The PRI will assist signatories seeking to shape outcomes in line with the SDGs – across the proposed framework, for each of the investor actions (capital allocation, stewardship and engagement with key stakeholders) – as well as supporting disclosure and reporting. Subsequent guidance on each action could focus on improving transparency and involvement in collaboration, all with the objective of shaping real-world outcomes.
We have also produced a resource looking specifically at infrastructure investors can contribute to SDG outcomes, and we are rolling out a series of case studies of current practice in investing with SDG outcomes.
Shelagh Whitley is Director of ESG and SDGs with the Principles for Responsible Investment (PRI), leading PRI’s teams on Environmental, Social and Governance issues, and on sustainability outcomes.
Prior to joining PRI, Shelagh was Head of the Climate and Energy Programme at the Overseas Development Institute (ODI) where she led ODI’s research on fossil fuel subsidies, green fiscal policy and private climate finance. Shelagh has also worked in the private sector and within civil society on carbon market development and climate finance, this has included working with Camco, a carbon project developer, on the origination, execution and financing of carbon projects, and with The Climate Group, a non-profit organisation dedicated to advancing business and government leadership on climate change. Shelagh has a Master’s Degree in International Environmental Policy and Finance from the Fletcher School at Tufts University in the United States, and a Combined Honours BSc in Biology and International Development Studies from Dalhousie University in Canada.