Why and how to manage your portfolio with revenue alignment to the UN SDGs
Global progress on the 17 Sustainable Development Goals (SDGs) and 169 targets set by the United Nations member states in 2015 is markedly off track from 2030 targets. Only 15% of SDGs targets are on track, according to the 2023 special edition of the Sustainable Developments Goal Report. The remaining 85% are making limited progress, no progress or even reversing progress. The reasons for these results are broad and diverse, ranging from differing government priorities and commitments to outdated mandates of development finance institutions.
What might be more straightforward is how investors can contribute to sustainable development by assessing the alignment of the revenues of their investment companies with the UN SDGs. By doing so, investors can keep pace with the macro trends driving society and respond to growing customer demand.
“The SDGs are a global framework. They are clear and comparable, pointing to the needs and solutions that society must address and fund to operate in a sustainable future,” says Lorenzo Saa, Chief Sustainability Officer at Clarity AI.
Beyond a social good, aligning revenues to the SDGs can also support compliance with regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and the sustainability requirements under MIFID II. The Goals can be used by market participants to identify companies that contribute to environmental or social objectives in line with the regulators’ expectations outlined in Article 2(17) of the SFDR.
“When the assessment of revenues is grounded in granular and reliable data, it can help investors in two ways: first, identify new opportunities, and second, avoid greenwashing,” explains Clarity AI’s CSO.
How SDGs Revenue Alignment Can Capture New Opportunities
Oftentimes, fund managers have only access to high-level data, which might result in an inaccurate assessment of a firm’s contribution to the SDGs. As an example, let’s take a large electric utility company. By using high-level, standard data, a fund manager will see that the company’s revenue comes from selling mixed power, which would imply that there is no SDG alignment. However, by utilizing more granular data, the picture changes, clearly showing that renewable energy drives 37% of this company’s revenue, hence demonstrating its contribution to the SDGs.
At Clarity AI, granularity is achieved by combining the data reported by companies at a more nuanced level with additional datasets, to provide investors with investment opportunities they might overlook otherwise, and a detailed view of what specific issue a given company is addressing within each SDG.
With these data-driven insights, investors can make more informed thematic allocation decisions. According to Lorenzo Saa, such knowledge may improve progress in the SDGs as it empowers a “shift in society in terms of moving from just looking at risk return to actual contribution.”
Avoiding Greenwashing
Leveraging this level of granularity can also prevent overstating sustainability contributions. To illustrate this point, here’s a second example of a global online education company. Because SDG 4 promotes “Quality Education,” it would appear that the company is 100% aligned with the SDGs because its revenue comes from education services. But, with a granular view, it becomes clear that the perceived alignment is inaccurate.
As previous Clarity AI research found, “on average, companies in SDG funds sell only 1% of their products and services in countries that need them the most.” To accurately say that progress is being made towards SDG 4, investors need to understand how much impact is being made in countries that need those resources the most. When applying geographic filtering to the data, we see that only 15% of the revenue of the online education company was earned in a region that qualified as needing educational resources and thus was aligned with SDG 4.
Accurately identifying these nuances can help reduce reputational risk, positively contribute to sustainable development, and ultimately deliver on client mandates, values, and beliefs.
The UN SDGs: A Common Framework Accessible to All
What’s particularly helpful about aligning revenues to SDGs is that the data facilitates a more transparent and straightforward conversation among investors and subsequently among their clients.
The UN SDGs are already well understood by many people, making them easier to communicate. “You want to be simple in your communication. The SDGs already lean towards that,” said Lorenzo.
