Introduced in September 2015, the UN Sustainable Development Goals (‘SDGs’) set 17 goals and sub targets (most with a 2030 deadline) for the eradication of poverty and hunger, the protection of the environment, the provision of clean water and sanitation, and prosperity for all.
While they originally received little attention in investment circles, in recent months many asset owners and investment managers have been considering whether the SDGs could be used for an entirely different purpose. Could investors use them as a benchmark for Impact Investing?
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
‘Impact Investing’ refers to investments made with the intention of generating a measurable, beneficial, social or environmental impact alongside a financial return. These beneficial impacts are however very often hard to measure. It is, for example, clear that a company that is improving food safety is generating a beneficial social impact – preventing death and illness – but how material is that impact relative to the size of an investment in that firm and/or to the size of the total investment portfolio? This is an issue that has been exercising investors’ minds for some time.
For companies operating in this field, the range of solutions being delivered – even within a single company – means that measuring impact at the portfolio level has been difficult. Companies’ own impact reporting has often been lacking, and where it has existed, it has been nigh impossible to compare with that of other firms. What is more, the data available is often oriented towards output rather than outcome or impact.
Data suppliers have recognised this gap and are beginning to provide investors (and asset owners) with reports on the extent to which investment portfolios are aligned with the SDGs. But to date, this has not been fully satisfactory. Data may not be available at the right level of granularity (particularly for smaller companies), and in our opinion this kind of work faces considerable challenges if not carried out by portfolio managers or analysts who know ‘their’ companies inside out.
Some months ago we took the plunge to do the kind of detailed work required for this exercise. Our portfolio managers began the project by analysing in great detail the percentage of each company’s revenues to come from specific business activities. This had to be done at a very detailed level to be meaningful. We discovered that for many companies it was necessary to allocate their revenues to as many as ten different business activities, though more commonly there were between three and five. In total we identified close to 200 different business activities.
Then for each business activity, we judged whether that activity has a positive, neutral or negative impact in achieving the SDGs – and we then calculate a total contribution for the portfolio. Taking our Water strategy as an example, the work has shown that:
- 68% of the portfolio’s business activities (measured by revenues) contribute directly to the achievement of the SDGs
- 7 of the 17 SDGs are directly benefiting from the portfolio’s investments
- Goals 2 (Zero Hunger), 6 (Clean Water and Sanitation), 7 (Clean Energy), 9 (Industry, Innovation and Infrastructure) and 11 (Sustainable Cities and Communities) are the most directly relevant SDGs
Source: KBI Global Investors. Calculations are based on KBIGI’s own methodology and are not independently verified.
We are still diving into the numbers and evolving our methodology, but our work may well provide a methodology for companies to report their own impact as well. We like the transparency the new approach brings and will use this approach to report to clients on the Impact that their investments are having.
Eoin Fahy is Head of Responsible Investing, KBI Global Investors
KBI Global Investors (North America) Ltd is a registered investment adviser with the SEC and regulated by the Central Bank of Ireland. KBI Global Investors (North America) Ltd is a wholly-owned subsidiary of KBI Global Investors Ltd. Form ADV Part 1 and Part 2 are available on request.
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