Since its introduction several years ago, environmental, social and governance (ESG) investing has evolved to measure risk, materiality and other exogeneous factors to help investors align portfolios with broader sustainability- and society-related objectives.
However, since the United Nations (UN) introduced its framework for sustainability and development, some of the business community has also looked to integrate an alternative approach. By aligning investments with the UN Sustainable Development Goals (SDGs), market participants can assess how their investments influence environmental sustainability, economic sustainability and inclusive societies.
Incorporating an approach within index-based strategies that aligns with the UN SDGs could dramatically expand the opportunities to deploy capital toward specific societal and sustainability-focused objectives.
This paper explains the role SDGs can play in building effective, transparent and consistent indices that align with society’s broader objectives, as measured by the SDGs. The paper also examines best practices for gathering and incorporating data that measure a company’s alignment with SDGs across its revenue sources and operations.
An Alternative to ESG Investing
ESG investing often involves a risk-based scoring system that starts with assessing the financial materiality of ESG factors for an industry or specific company. Factors include those that may have a present or future impact on a company’s value drivers, earnings capacity, competitive positioning or long-term value for its shareholders, and if those factors have a significant impact on society or the environment.
A different approach is to identify the measurable and specific impacts that a company’s activities make on society and the environment, regardless of the financial materiality implications.
One way to implement this type of investing is to employ a framework that aligns with the UN SDGs.
