BNP AM

The sustainable investor for a changing world

As sustainable finance evolves from ESG[1] ratings and risk management, investors are increasingly asking for tools to help align their investments with actual sustainable outcomes. Now, Danish fintech Matter and BNP Paribas Asset Management have developed a dataset that provides a detailed, conservative analysis of how the revenues of more than 53 000 companies align with the UN Sustainable Development Goals (SDGs).[2] The new offering is called SDG Fundamentals.  

To mark the launch of SDG Fundamentals, Lise Pretorius from Matter and Berenice Lasfargues from BNPP AM examine why it is essential that we improve data on the contribution of investments to the 17 United Nations Sustainable Development Goals and what can be done to bridge the ‘SDG data gap’.  

The SDGs are the closest thing humanity has to a roadmap for achieving a sustainable future for all. They outline an ambitious set of objectives to tackle inequality, end poverty and hunger and address climate change, while simultaneously encouraging inclusive and just economic outcomes.

When the SDGs were announced in 2015, they came with a target to achieve them by 2030: at an estimated cost of USD 5-7 trillion annually. Yet, the SDGs have been underfinanced by USD 2.5-3.5 trillion annually since 2015.

The private sector is expected to contribute substantially through conventional market mechanisms. To do so, large amounts of institutional cash will need to be reallocated from activities that are misaligned with the SDGs and be used to back those companies that produce goods and services that bring us closer to the 2030 target.

At the same time, there have been considerable inflows into ESG and sustainable investment strategies: According to the Global Sustainable Investment Review, USD 35.3 trillion was managed in sustainable investments as of 2020.

However, as the recent IPCC reports have painfully demonstrated, not all stakeholders – public and private – are taking the necessary steps on climate adaptation and mitigation. Furthermore, Covid-19 has starkly exposed global inequalities, with the global poverty rate having increased from 7.8% to 9.1% as a result of the pandemic.

According to some estimates, the USD 2.5 trillion gap is widening, not contracting. As Marcos Athias Neto, Director of the UNDP Sustainable Finance Hub, neatly summarised: 

“If ESG could save the world, then arguably the SDG financing gap should be contracting rather than expanding and we should have solved the SDGs several times over by now.” 

Why isn’t finance driving achievement of the UN SDGs?  

There are several reasons including misaligned incentives and a lack of clear and comparable standards. Crucially, however, there is a lack of adequate data helping investors understand how the companies they finance contribute to, or take us further away from, achievement of the SDGs.

This is in large part due to the nature of the SDGs themselves. They were not developed to be an investable framework, and the underlying targets are often qualitative and intangible, and therefore difficult to measure and compare.

The upshot is that SDG methodologies can vary widely in what constitutes supportive investments. More rigour and conservatism is required to understand how investments align with the goals if they are to be met by 2030.

Bridging the SDG data gap unlocks opportunities

There is a clear ethical imperative in achieving the SDGs: failure threatens the long-term prosperity of the planet, as well as that of current and future generations inhabiting it.

There are also business and regulatory opportunities to be unlocked. Prioritising investment in the SDGs could create opportunities worth about USD 12 trillion and 380 million jobs a year by 2030, the UN has said.

In addition, regulators are putting greater emphasis on what is considered sustainable investment – a definition and disclosure is now required under the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the second Markets In Financial Instruments Directive (MiFID II).

How can the gap be bridged? Introducing SDG Fundamentals

SDG Fundamentals is a data solution for analysing how the different revenue streams generated by companies are aligned or misaligned to the SDGs.

Exhibit 1: SDG Fundamentals assesses whether a company’s different revenue streams are aligned with the UN Sustainable Development Goals (SDGs) – image shows a sample overview (each coloured dot represents an SDG)

Source: Matter, BNP Paribas Asset Management; June 2022

By looking at revenue, SDG Fundamentals disregards the spin and looks to the core of a company’s impact: the products and services it sells.

Updated monthly and covering over 53 000 companies, the tool provides investors with a clear picture of how investments interact with the SDGs at the individual SDG, SDG target and aggregate SDG level.

SDG Fundamentals differentiates itself from other SDG alignment datasets in three core ways: 

  1. Each of a company’s different revenue streams are mapped against the SDGs – Impact data can oversimplify an economic activity by e.g. assuming that healthcare companies always contribute to ‘good health and wellbeing’ – SDG 3. The reality is often more nuanced.
  2. Economic activities can be either aligned or misaligned to the SDGs – For example, a company that produces fruit can align with SDG 2, Zero Hunger, while also potentially having a negative impact on SDG 15, Life on Land.
  3. It assesses all 17 SDGs – It treats every SDG as potentially investable, although not every underlying target. It provides output for alignment/misalignment across all SDGs.
  4. Conservative and realistic – It determines alignment/misalignment according to the underlying SDG targets and indicators rather than relying on investable ‘themes’. When there is a lack of information, the activity is classed as ‘potentially aligned’ (‘potentially misaligned’). 

Here is an example: under an existing SDG revenue alignment dataset, a US healthcare company was scored as 100% aligned to the SDGs. We ran it through SDG Fundamentals to test that score and found that, for instance, 10% of its revenue related to cleaning products with a potentially harmful impact on life on land and under water.

SDG Fundamentals recognises that there are activities for which it is not clear whether they are aligned with the SDGs. Still, we believe this is just the start of the journey to understand the relationship between businesses, investment and the SDGs. Revenue is one way of looking at SDG alignment. Other ways include news coverage on a company in relation to the SDGs or company conduct.

Tools such as SDG Fundamentals can help close the SDG data gap, so that more investments can be channelled to companies making meaningful contributions towards achieving the UN SDGs by 2030.


You can sign up for a demo via Matter’s website if you want to know more about SDG Fundamentals and understand how we are integrating these insights into investment decisions.


References

[1] Using environmental, social and governance criteria  

[2] Sustainable Development Goals; more at https://sdgs.un.org/goals 

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

To reach net zero, overhaul the built environment
US climate spending – How does it reduce inflation?
BNPPAM

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.