ESG and SDGs – a new way for investors to map progress

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BMO Global Asset Management, which has long been an active ESG-orientated manager, has shown in its latest annual ‘Responsible Investment Review’ how the growing acceptance of ‘sustainable development goals’ (SDGs) can be mapped to allow greater understanding of a portfolio’s impact on the world.

Richard Wilson, BMO GAM’s chief executive and CIO, says in the report that the growing body of evidence about the “materiality” of ESG factors has been responsible for the UN PRI having more than 1,750 signatories with assets of about US$70 trillion. PRI is run by Australian Fiona Reynolds in London. Australian super funds and managers are well represented among the signatories.

In his report Wilson says: “The trend also reflects the reality that the financial sector cannot be a passive bystander to the sustainability challenges the world faces. Asset managers have a privileged and trusted position as stewards of capital, which gives us both influence and responsibility. “Through using these effectively, I believe the industry can – and should – make its own contribution towards achieving the world’s sustainability needs, as set out in the United Nations Sustainable Development Goals.

The review is BMO GAM’s sixteenth and details the firms activities in voting and other stewardship engagement with companies and policy makers around the world.

“Our clients, rightly, have high expectations when entrusting their money to us. In my view, fulfilling those expectations is not just about the quarterly financial returns we deliver to them. It is also, I believe, about being a responsible member of the investor community, and supporting the development of a sustainable global economy – which, ultimately, will underpin our own and our clients’ long-term prosperity and security,” Wilson says.

The United Nations’ SDG program has become widely adopted by companies. Many fund managers, such as BMP GAM, are now looking to map their progress in that regard as another benchmark for their own integrated ESG processes.

The report presents several case studies of engagement and also the results of its various activities, including 199 instances of change “milestones” where businesses have improved their practices in terms of ESG and SDG. The most significant changes, the report says, were to do with climate change.

Five major themes are emerging for ESG in 2018. They are:

  • #metoo – a watershed for working culture?
Popularised after the allegations against Harvey Weinstein, the #metoo hashtag quickly went viral and became a global movement empowering individuals to speak up against sexual harassment.

Whilst the allegations continue to emerge, the morphing of #metoo to its successor movement
Time’s Up reflects how the initial outrage and anger is now being mobilised towards action to tackle the root causes. This is where #metoo converges with existing investor action on issues including board diversity and gender wage inequality.

In 201, we believe there will be heightened focus on workplace culture – particularly in male-dominated industries, the technology sector being one example – and on women’s representation not just on boards, but in senior management.

  • Challenging the throwaway society – ocean plastics highlight wasteful consumption habits. After years of campaigning by NGOs, it took a seminal wildlife documentary – Blue Planet II – to get politicians to pay attention to the devastation being wrought by the disposal of plastics. More than eight million tonnes of plastic are discarded into the oceans every year, equivalent to 16 full shopping bags for every metre of the world’s coastline.

Policy experiments have proven remarkably effective. The UK’s plastic bag charge cut usage by 85 per cent. We expect to see similar policy initiatives developed in 2018. Single-use plastic bottles are a likely target, given that a million plastic bottles are sold every minute, but only a small percentage of which are made from recycled materials. There is a potential cost here for companies which have to change their production processes – but it also opens up opportunities for those developing innovative new packaging solutions.

  • E-commerce and privacy – as technology enables our buying decisions to become ever more automated, what about privacy?

E-commerce may be surpassing bricks and mortar, but it is no longer at the cutting edge of retail technology. Automated commerce – a-commerce – holds the promise of making purchasing decisions simpler, with algorithms replacing time-intensive browsing and research.

Despite the undoubted convenience advantages, we see new risks arising from this increased reliance
on consumer data within retail business models. Regulations on data use, such as the EU’s General Data Protection Regulation (GDPR), are becoming far more stringent, with high penalties for misuse. Where retailers are obliged to ask their customers if they really want their personal data used to predict their future purchases, they may get a less than enthusiastic response.

  • Candy crushed – regulatory and consumer pressure on sugar use rises as health evidence mounts up. Sugar is cheap, but its public health impacts are considerable. Obesity, formerly seen as a rich-world problem, is increasingly rife in many emerging markets, with rates of diabetes in countries like Mexico at epidemic levels. As waistlines grow, so do the public health costs to the taxpayer. Growing frustrated that their healthy eating messages are not getting through, governments are getting tougher, looking at measures including labelling schemes and taxation. Food and beverage companies are going back to the drawing board to re-formulate much-loved recipes where brand loyalty is a key differentiator. Those who mismanage the process may lose customers – but those slow to act are vulnerable to longer-term risks of diminished sales and reputation.
  • Entering the impact zone – investors reconsider their purpose. The 17 Sustainable Development Goals are a blueprint for a better world. Covering issues from poverty, inequality, the environment, to education and public health, the SDGs identify 169 targets to track progress towards the 2030 target date.

Responsibility for achieving progress was once seen very clearly as the duty of governments, perhaps with the help of charities and NGOs to fill the gaps. But times have changed. We are shifting to a new paradigm where both companies, and investors in them, are expected to recognise that their actions have wider consequences on the economy and society, and to think deeply about how they can square their duties to deliver risk- adjusted returns with the imperative to manage these consequences.

What does that mean in practice for investors? As well as further growth in the rapidly-expanding impact investing industry, we also anticipate further momentum behind efforts to measure portfolio-wide sustainability impacts, as investors seek to demonstrate their understanding of their alignment with the SDGs.

– G.B.

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