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SDI AOP adds SDG impact to sustainable investment classification

© Shutterstock / FuntapSDGs - sustainable development goals.

The collective SDI Asset Owner Platform (SDI AOP) has updated its classification of sustainable development investments (SDIs) to reflect negative impact on the UN Sustainable Development Goals (SDGs).

The SDI AOP now includes negative impact of its sustainable development investments (SDIs).

This action reflects the growing importance of understanding the negative impact of investment and will affect over 8,800 companies globally.

It aims to enable better comparison between SDG-aligned investments and improve transparency. This supports the growth of impact analysis and double materiality approaches.

In response to feedback from SDI-AOP users, August 2022 saw an update in its classification to include data on the negative contributions of potential investments to the UN SDGs. This is being calculated on the basis of revenues derived from products and services with a negative SDG impact.

The platform, powered by Entis’ AI algorithms is intended to classify SDIs in real-time, and is used by asset managers and pension funds such as APG, PGGM, Australian Super and British Columbia Investment Management Corporation (BCI), to invest their assets in companies aligned with progress towards the 2030 goals.

How has the SDI AOP introduced negative contributions data?

SDI AOP had previously focused on highlighting opportunities for positive SDG contributions only, but has recreated its monitoring methodology to also assess negative contributions in response to user feedback.  The fact that the update has been driven by asset owners requests provides credibility to the growing maturity of the platform.

Its methodology categorises SDIs based on how their products and services contribute to the SDGs, predominantly focusing on financial metrics such as revenues. This revenue-based approach overcomes the challenges associated with companies self-reporting negative impacts.

At the same time, it provides a further point of analysis for the identification of both positive and negative contributions. Keeping these as separate metrics will help to improve understanding of the complex interactions between various SDGs, according to SDI AOP research director James Leaton.

Transparency

“It was critical for us that we maintained our core principle of transparency to enable users to understand the underlying revenue streams”, Leaton added.

The underlying data is distributed by SDI AOP partner analytics specialist Qontigo, which enables interested parties to integrate the classification and analysis into any investment approach.

The current classification universe includes 8,864 companies, covering both equity and fixed income offerings. The platform’s classification has revealed that six hundred companies have been identified as having a material level – over 10% – of income from products and services with a negative impact. A further 150 of the companies covered had less than 10% of their income coming from products and services with negative SDG impacts, which enables users to track all exposure if they desire.

While the SDI-AOP has strict criteria around its definitions of  SDIs in terms of revenues, it remains the fact that out of nearly 9,000 entities, only 2000 have been identified as having deliberately SDG-aligned products and services, leaving well over 6000 which don’t even qualify as sustainable development investments.

What is the case for SDG-aligned investment?

Growing understanding of the importance of the UN SDGs has been one of the drivers of the continuously growing market for impact investment opportunities by providing objective targets against which companies could monitor their impact on sustainable development.

Asset management firm Robeco has recently suggested that strategies for investing in sustainability should be redirected from a focus on environmental, social and governance (ESG) metrics, which have recently been subject to backlash, to prioritise verified positive impact through frameworks based on the SDGs.

Doing so could provide a more relevant means of creating positive impact, while mitigating some of the complexity surrounding the understanding of the various standards and disclosure methodologies associated with ESG.

It is, however, often difficult to assess whether investment opportunities contribute positively to SDG outcomes overall. Indeed, research by machine-learning backed analytics provider Util suggests that few funds are determinedly making either a positive or negative contribution.

Nevertheless, as UN secretary general António Guterres wrote in his foreword to the Sustainable Development Goals Report 2022, “data infrastructure is needed to efficiently target investments now, anticipate future demands, avoid crises from descending into full-blown conflict and plan the urgent steps needed to achieve the 2030 Agenda”.

The SDI AOP’s latest data release demonstrates an attempt to align with this goal, with future plans including a target of increasing the universe to cover 10,000 entities.  The group has also said it plans to develop long-term metrics for SDG impact for a range of existing business concerns including capex, patents and research and development expenditure to give users a clearer vision of what their investment could achieve.

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