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Industry Voices

Commentary: Finance and society – forging a new pact

A decade after the global financial crisis, we have an opportunity to reshape the relationship between finance and society in ways that aspire to deliver long-lasting benefits to economies and people everywhere. In 2015, the United Nations and its 193 member states unanimously adopted the Sustainable Development Goals. These 17 goals cover global priorities as diverse as climate action, gender equality, and peace and security.

The SDGs present a framework for individual and collective action more universal than the Millennium Development Goals they replaced. And within the SDGs is a powerful message: Healthy societies and healthy markets go hand-in-hand.

At a time when the legitimacy of globalization and economic integration is being tested, with international arrangements under great strain, the SDGs present a historic opportunity for governments, business and investors to forge a new pact. The U.N. secretary-general plans to convene a high-level event during the General Assembly in September to focus on this agenda.

Mobilizing finance will be essential; the U.N. estimates achieving significant progress on the SDGs will cost $3 trillion to $5 trillion annually, mainly for basic infrastructure. This is within ambition, but not without activating private finance and investment as a complement to public sector funding. The U.N. and its member states believe priorities within emerging markets and developing countries should focus on roads, rail systems and ports, power stations, water and sanitation. Investment can take many forms and include many asset classes, including sovereign and corporate debt aligned to SDG initiatives, or equity stakes, via direct acquisition of real assets or through investment in companies operating in SDG sectors. Relatedly, the Business and Sustainable Development Commission — a self-initiated group of leaders from business, finance and international organizations — estimates adopting the SDGs could help companies unlock business opportunities worth $12 trillion globally by 2030.

The private sector already is gearing up. According to a recent U.N. survey, about 75% of nearly 2,000 participating companies report they are adopting core strategies to take action on the SDGs. Relatedly, policymakers and finance leaders need to pursue new pathways even as they stay true to their core responsibilities — citizens and investors.

We suggest the following areas for focus and action:

1. The SDGs present an opportunity for global finance to adopt a new, principles-based approach that places finance within society — rather than something perceived as operating outside, or in conflict with, the interests of the broader community. Through initiatives such as the United Nations Global Compact and Principles for Responsible Investment, private-sector organizations increasingly are prioritizing environmental, social and governance criteria. Such strategies need to accelerate and evolve, merging with the SDGs in the next phase.

2. We must work harder to break the tyranny of short-termism that continues to plague so much of business and investment decision-making. Short-term thinking is not in the long-term interest of the private sector or the planet. Investment strategies that place an emphasis on capital preservation and long-range value creation — broadly understood to also include societal outcomes — should be emphasized.

3. To finance the SDGs, we must engage critical financial participants — including public and corporate pension funds, institutional asset managers, banks and insurers. Establishing a common approach with clear milestones can help bring together these key constituents and unlock needed capital. In so doing, we could potentially evolve the promising shoots of "impact investing" into a larger movement of "SDG investing" that fully encompasses mainstream finance.

4. We must innovate, uniting public and private investors around new concepts, solutions and investible instruments that go beyond the important arena of green finance to address SDG needs. Enlightened economic self-interest is guiding many businesses to solve long-standing social and economic problems in new ways, in addition to mitigating medium- and long-term risks.

The investment community has an important role here. Fixed-income investors, for instance, can leverage existing technology to direct capital toward solving issues of health, food, water, sanitation, education, equality and, of course, infrastructure, a priority in emerging economies in particular.

Such innovation must remain mindful of the fiduciary and risk-adjusted return requirements of investors. Firms like Pacific Investment Management Co. have been working with issuers to create securities that target a range of impact outcomes based on the SDGs without compromising on investment return potential, and potentially enhancing it.

5. We need governments and other public authorities to create regulatory and policy environments that fully unlock the potential of private finance and investment. These efforts can and should be undertaken in tandem with current global governance discussions on the reordering of the financial system toward greater stability, sustainability and inclusion.

6. In all of this, we must also consider how digital trends affect finance, positively and negatively, and how technology can drive sustainability outcomes.

This new global agenda demands our attention and creativity. Working together, we can usher in a new era in which finance — public and private, and preferably together — propels us toward the achievement of our common goals.

Lise Kingo is CEO and executive director of the United Nations Global Compact, New York; Scott Mather is managing director and chief investment officer U.S. core strategies of Pacific Investment Management Co., Newport Beach, Calif. This article represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.