Machine learning analytics startup Util has released a report revealing which are the top-ten positive- and negative- contributing investment funds relative to each of the 17 UN Sustainable Development Goals (SDGs) — and why.
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The report itself identified the leaders and laggards against outcomes for all 17 of the Sustainable Development Goals (SDGs). What comes through most clearly however is that there is rarely a simple answer to the question of whether or not a fund, or its underlying portfolio, is driving positive SDG outcomes across the board.
The report reviewed over 6,000 US-domiciled funds, for which it measured positive and negative performance, respectively. Funds were aggregated as an aggregation of holdings, weighted by allocation; companies, an aggregation of products, weighted by revenue. Relationships between products and SDGs derive from Util’s canon of 120 million peer-reviewed texts.
The result of the analysis was to say that there are few funds that could be said to be unequivocally contributing to the world’s issues, either positively or negatively – each industry makes different contributions both in terms of its operational impacts and its overall positive contribution to wider outcomes.
Mining and resource extraction, for example, usually have negative environmental and often social impacts but can contribute to economic growth which can in turn have positive impacts – so how should that be assessed?
How much is good enough – gauging links to the SDGs
According to the FT, private bank Berenberg has suggested that if 45% or more of a company’s revenue is tied to one of the SDGs then it should be deemed to have a positive response. But there is an extension of the approach which is to argue that transition stocks – or those moving in the right direction – will have more upside as their ESG improvement continues.
The difficulty with such an approach is that it muddies the water even further. What is the point of having an ESG approach, which should help to mitigate the downside risk of exposure to environmental, social and governance risk, if minimal alignment is to be considered good. And it certainly undercuts the belief that many investors share, that to invest in ESG is to invest in ‘good’ companies.
Is it time to unbundle E, S and G?
Util has suggested that the market might benefit from an unbundling of environmental, social and governance (ESG) factors, a suggestion that has been made recently within the wider ESG marketplace. The difficulty is that by unbundling such complex and interconnected factors, it could deemphasise the importance of factors such as social – an area which is already underrepresented within ESG investment.
There is no question that some issues seem to have more immediacy than others. Inaction on climate change for example, has been estimated by Deloitte could cost the global economy $178 trillion by 2070. But ignoring the implications of social action ignores how climate change affects the most vulnerable, how education can raise societies out of poverty, how gender parity affects healthcare, violence and of course, education.
McKinsey research identified how high scores on social indicators correspond with high scores on economic indicators – that action on such indicators could add $28 trillion, or 26%, to global GDP within a decade.
Single metrics are not enough to address the complexity of the challenge
Util doesn’t go as far as the recent Economist article, which argued that the only metric that should count in ESG is emissions. Rather it suggests that what matters is a greater understanding of the tradeoffs that are made within different industries. Patrick Wood Uribe, chief executive of Util said: “Only with comprehensive company, industry, and fund data can tradeoffs be understood and managed, and positive impact optimised.”
One thing that is vitally important however when we are discussing the challenges around ESG, sustainability and the SDGs is to be consistent in the terms we use. In ESG for example, the elements are environment, social and governance. When talking about the SDGs, Util’s assessment is clearly focusing on the importance of the role of economics in terms of development.
While sustainability in terms of environmental and social outcomes should carry across both ESG and SDGs, its important to remember that they are not necessarily directly comparable approaches. Long term economic development, as with the SDGs, is not necessarily going to look the same as improving current economic models – at least not during transition, and confusing the two is only going to muddy the waters further. If we’re going to be assessing environmental, social and governance factors, economic performance needs to be taken out of the equation.
It’s not that companies shouldn’t strive for growth. But the point about sustainability is to look to your own processes and operations, to find new business models, new processes, even new products in a journey to a new financial and economic model. Minor tweaks to existing models are not going to achieve either the Paris Agreement or the SDGs.
Investment in understanding metrics is going to accelerate
Given the confusion around, and interest in, data analysis around sustainability, ESGs and performance against the SDGs continues to attract market interest. In April 2022 Util closed a multi-million dollar seed round led by Eldridge, with participation from Oxford Sciences Enterprises, Cris Conde (former CEO, Sungard Bank), Andy Brown (former CTO, UBS), and Roseann Palmieri (former Head of Enterprise Data Management, Bloomberg LP).
The debate about the best way to either improve ESG metrics and ratings, find a new way to understand the correlation between operations and impact is likely to run and run. Yet the very fact that these questions are being asked supports a growing trend that will continue to shape the market.
