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?
‘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.
IMPORTANT RISK DISCLOSURE STATEMENT
Under MiFID II this is deemed marketing material and should not be regarded as investment research. This material is provided for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security, product or service including any group trust or fund managed by KBI Global Investors (North America) Ltd, or any of its affiliates (collectively, “KBI Global Investors”). The information contained herein does not set forth all of the risks associated with this strategy, and is qualified in its entirety by, and subject to, the information contained in other applicable disclosure documents relating to such a strategy. KBI Global Investors (North America) Ltd’s investment products, like all investments, involve the risk of loss and may not be suitable for all investors, especially those who are unable to sustain a loss of their investment.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
This introductory material may not be reproduced or distributed, in whole or in part, without the express prior written consent of KBI Global Investors (North America) Ltd. The information contained in this introductory material has not been filed with, reviewed by or approved by any United States regulatory authority or self-regulatory authority and recipients are advised to consult with their own independent advisors, including tax advisors, regarding the products and services described therein. The views expressed are those of KBI Global Investors (North America) Ltd. and should not be construed as investment advice. We do not represent that this information is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change without notice. The products mentioned in this Document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors. In some tables and charts, due to rounding, the sum of the individual components may not appear to be equal to the stated total(s). Additional information will be provided upon request.
Our firm claims GIPS compliance and is annually verified by an independent verification firm to be so. The verification report from our verifier and our GIPS composite presentation are available upon request.
Gross results shown do not show the deduction of Adviser's fees. A client’s actual return will be reduced by the advisory fees and any other expenses which may be incurred in the management of an investment advisory account. See Part 2 of Adviser's Form ADV for a complete description of the investment advisory fees customarily charged by Adviser. For example, a $1,000,000 investment with an assumed annual return of 5% with an advisory fee of 0.85% would accumulate $8,925 in fees during the first year, $48,444 in fees over five years and $107,690 in fees over ten years. Performance returns for individual investors may differ due to the timing of investments, subsequent subscriptions/redemptions, share classes, fees and expenses. Performance for periods of more than 1 year is annualized. Investments denominated in foreign currencies are subject to changes in exchange rates that may have an adverse effect on the value, price and income of the product. Income generated from an investment may fluctuate in accordance with market conditions and taxation arrangement. PAST PERFORMANCE IS NOT A RELIABLE GUIDE TO FUTURE PERFORMANCE AND THE VALUE OF INVESTMENTS MAY GO DOWN AS WELL AS UP. Stocks mentioned in this document may or may not be held in this strategy at this time. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the strategy. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. Discussions of market conditions, market high/lows, objectives, strategies, styles, positions, and similar information set forth herein is specifically subject to change if market conditions change, or if KBIGI (North America) believes, in its discretion, that investors returns can better be achieved by such changes and/or modification. Style descriptions, market movements over time and similar items are meant to be illustrative, and may not represent all market information over the period discussed.