Integrating the UN Sustainable Development Goals into an investment philosophy
April 22, 2021 by Mari Brossard
At NBI, we have been using SDGs in our sustainable ETFs suite for over a year now, with some of our external managers having used them for over a decade (their predecessor being Millennium Development Goals). This discussion focuses on why these goals have been so enthusiastically adopted by investors.
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Mari Brossard (MB) and Sarah Tunnel (ST)
Hi everyone. Welcome to NBI podcasts. I’m Mari Brossard, Senior Manager, Sustainable Investments at NBI. I’m very happy to have Sarah Tunnel with us today. Sarah’s a Product Specialist for Alliance Bernstein, Sustainable Thematic Equities portfolio.
The focus of today’s discussion will be investing in line with the United Nations Sustainable Development Goals. Welcome, Sarah!
Thank you so much for having me.
At National Bank Investments, we’ve been using the SDGs in our Sustainable ETFs suite for over a year now, and some of our external managers have been using them, or their predecessors, the Millennium Development Goals, for over a decade.
Can you please discuss a bit about why they have so much attention from investors now?
Yes, the UN Sustainable Development Goals – or the SDGs – outline a massive social and environmental gap. They were agreed upon my 193 nations, which signals broad political consensus. Actually, the UN’s economist estimated the cost to achieving these goals at roughly U.S. $90 trillion.
Now, that cannot come from governments and non-profits alone. For reference, U.S. GDP is only about $21 trillion, and so when you compare that to the cost of achieving this agenda of $90 trillion, you can see that there is a far gap. With investors, we want to be forward-looking, and the SDGs are a tool for doing that. We know that the SDGs require private sector involvement. And so, it is natural for investors to look to this agenda when building their forward-looking investments.
So, Sarah: how can investors practically use the SDGs in a portfolio?
There are a lot of ways that managers can use the SDGs. It really depends on what that manager’s objective is, what their expertise is, what asset class they work in. There is no one way to incorporate the SDGs. Actually, the SDGs were not even written for investors, although they have been becoming increasingly popular for investor use. And so, for that reason, we need to be careful about how we use them.
One way an investor could look to use the SDGs is to build an investment universe that is forward-looking, environmentally and socially positive. We do see investors choosing to do this because they understand where the world is going, they see the gaps, and they want to align their investments with doing just that. So, by picking companies that sell products and services that contribute to the achievement of the SDGs, an investor can start to build this forward-looking universe and these forward-looking portfolios that try to solve the world’s biggest challenges.
That’s super interesting, Sarah. Would you please also highlight some of the benefits of investing through the lens of the SDGs?
I think there are two primary benefits for investors in using the SDGs. The first is that there is no single definition of what sustainability is, and so by using the SDGs, investors can effectively outsource their definition to a very credible third party. I think this is very important in investor accountability.
In today’s world where you hear about greenwashing in the headlines, really using the SDGs as a framework for a portfolio, again, can help to clarify what it is that sustainability means to that manager.
The other thing that I’ll mention is that starting with the SDGs rather than starting with something like a benchmark to build a portfolio helps us to be forward-looking as investors. I think sometimes portfolio managers build portfolios by starting with benchmarks. But benchmarks are inherently backwards-looking. They show us what yesterday’s winners were. The SDGs point us towards tomorrow’s winners, and again, for investors looking to align their investments with where the world is going, the SDGs do provide a nice framework for that.
So, with that credible framework and forward-looking mindsight, can you please give us examples of companies that you’ve identified by using this approach?
Sure! Now, the nice thing about using the SDGs as a framework to build a portfolio is that the opportunities represented really cross geographies, they cross sectors, and so investors can use them to build quite a diverse set of portfolios. Some of the companies that I’ll focus on today in my examples address the world’s biggest problems in areas such as healthcare and infrastructure.
We can look at a company called Danaher for example. Danaher supplies many instruments and other products that enable research and new drug discovery. For example, Danaher manufactures an innovative liquid handling robot that uses soundwaves to move tiny drops of samples for researchers to run large-scale experiments. Danaher also sells a wide range of specialized equipment for manufacturing biotech drugs. There are only a small number of companies in the world that offer this type of equipment, but it’s becoming increasingly important to the world.
Danaher is a key enabler of medical innovation. I mean, think back to the last year, we’ve all started to experience on a first-hand basis why medical innovation is such an important sustainability issue. And this is directly in alignment with UN Sustainability Development Goal 3, called “Good health and wellbeing.”
Separately, there’s a company called Tetra Tech. Tetra Tech is a leading provider of consulting and engineering services focused on things like water, environmental management, and sustainable infrastructure projects. The company can help their clients to address clean water supply issues around treatment and testing, flood management, disaster relief and even things like building design.
But approximately 85% of Tetra Tech’s business is related to water and environmental management. Tetra Tech is aligned to SDG 6, and so we can see that, just from these two very simple examples, that SDGs can provide us a diverse set of opportunities. Investors really can use them to build that core portfolio.
So, Sarah, when the SDGs were launched, 2030 looked so far away. It is now right around the corner. Some of our investors have a very long investment horizon – beyond 2030. How do you assess sustainability beyond the SDG framework?
When the SDGs originally came out, 2030 did feel quite far away but as we rapidly move through 2021, it’s coming much closer. The interesting thing though is that, while the SDGs are a framework until 2030, these sustainability issues that they outline – no poverty, zero hunger, quality education, things of that nature – those issues are going to be relevant far passed 2030. So, while 2030 may be the end date of the SDGs as an agenda, we are confident that another agenda will follow.
In the same way that the UN Sustainable Development Goals followed the Millennium Development Goals, we expect to see another framework come out after this that again seeks to address the world’s biggest challenges.
Thanks, Sarah. I really enjoyed our discussion. NBI is glad to have Alliance Bernstein as partners. Some of the key messages to remember are that SDGs are a critical tool and they compliment an investor’s approach. They help to build a forward-looking portfolio and enable us to benefit from sustainable growth opportunities within our investment portfolio. Thanks, Sarah, for your time. We were very happy to have you on the line and I enjoyed the discussion.
Thanks for having me.
Mari Brossard is Senior Director, Sustainable Investment at NBI. She conducts various research projects in sustainable finance, participates in industry panels and supports the National Bank in various initiatives. She holds a bachelor's degree and a master's degree in law, and is a member of the Quebec Bar.
Sarah Tunnell is the Product Specialist for AB's Sustainable Thematic Equities Portfolios. Her primary responsibilities include monitoring and communicating portfolio positioning, and analysis, client servicing and operations. Tunnell joined AB in 2017 as an associate, focusing on servicing ultrahigh-net-worth individuals, family offices and institutions. She holds a BS in business administration with concentrations in finance and information systems from the University of Pittsburgh, and is a CFA Level III candidate.