The research shows that where Environmental, Social and Governance (ESG) ratings and information predominantly focus on the business conduct of companies, the SDGs focus attention on the current challenges in the world, and possible solutions. When focused on the actual impact of a company, the SDGs can support the assessment of a company’s contribution to challenges and its preparedness for the world of tomorrow.
SDG investing in practice
Investing on the basis of the SDGs frequently produces one of two kinds of reaction: one person might fear ‘SDG-washing’, but another emphasises the strength of a common language for the societal and environmental challenges that the world faces. Several asset managers have already developed investment products that integrate the SDGs into investment decisions. In a working paper SDG Investing in practice recently published by the Erasmus Platform for Sustainable Value Creation, two SDG investment strategies were researched.
Annebeth Roor, who graduated from RSM’s MSc in Global Business & Sustainability in 2019, examines the SDG investment strategies of an equity fund and a credits fund. Her research shows that given the limited attention that investors have in making decisions, the SDGs can influence the focus and language in the fundamental analysis of a firm. The set-up of a SDG investment strategy in structures and processes plays a large role in this. In both methods the asset managers focus on their own proprietary assessment of the SDG impact – and not of that of the companies themselves. Where ESG ratings and information predominantly focus on the business conduct of companies, the SDGs focus attention on current challenges in the world and potential solutions. This other perspective helps investors to focus attention on the societal and environmental impact of the company. This leads to an increased effort to indicate and measure the impact of a company, either via a proprietary assessment or via engagement with the firm.
Saudi Aramco’s contribution to the SDGs
Take a look at the long-expected Initial Public Offering (IPO) of Saudi Aramco, a Saudi Arabian national petroleum and natural gas company. At first it was expected to become the world’s largest listed company, but soon several environmental, social and governance concerns began to have a large effect on the firm’s valuation. Several Dutch institutional investors declared they would not invest in Aramco, but for investors with a passive strategy, the decision whether or not to buy from the IPO of Saudi Aramco is still a dilemma. Saudi Aramco itself states on its website:
‘Quite simply, sustainability makes good business sense. From continuously improving operational efficiency and the environmental performance of our facilities, to pursuing low carbon energy solutions, and strategically investing for growth, we view sustainable practices as the best way to ensure our business remains viable for the long-term.’
When statements like these are accompanied by a thoroughly worked-out policy for Corporate Social Responsibility, they can result in a good ESG score, adding extra eligibility to the company’s prospects of attracting investors. And simply for disclosing this information, Saudi Aramco might even also claim that it is making a contribution to SDG 8 Decent Work and Economic Growth, and SDG 9 Industrial Innovation and Infrastructure, based on energy efficiency and innovative production methods.
But does this actually tell us anything about the value creating potential of Saudi Aramco and its ability to contribute to certain challenges? The organised perspective of the SDGs helps investors to find an answer to these questions. When potential investors use the framework of the SDGs to focus on the real impact of a company, they can indeed support the assessment of a company’s contribution to challenges and the preparedness for the world of tomorrow.
