The simultaneous achievement of economic growth, social inclusion and environmental sustainability is the imperative of the 21st century. This imperative can be captured in two important words: sustainable development. The 17 Sustainable Development Goals agreed to by 193 member states of the United Nations in September 2015 embody these principles, with quantitative and qualitative targets and timelines through to 2030.
The goals provide an opportunity for the financial industry to recalibrate its efforts to support sustainable development. This is an important responsibility of the SDGs given the size and importance of the global financial sector. Recent estimates indicate the SDGs will require an additional $2.4 trillion of annual public and private investment into low-carbon infrastructure, energy, agriculture, health, education and other sustainability sectors globally. The financial sector — the task of which is to link the supply and demand of capital for productive investments — will be central to the world's efforts to position itself on a more sustainable path.
The asset management industry will play a particularly important role within the financial sector, given the growing size of investible assets globally and increasing interest on sustainable investing and environmental, social and governance issues. The total pool of capital within non-bank institutional investors has more than tripled from 2001, to well over $100 trillion today. As of 2016, more than $23 trillion of managed assets had some level of ESG integration.
The SDGs can play a powerful role in furthering the investment industry's engagement on sustainable investing. For that to happen, however, it is important for the spirit of the SDGs to not be lost as the goals get translated into action for the financial sector. The spirit that underlies the SDGs is about the transformation of the global economy into a system that simultaneously pursues economic growth, inclusion and environmental safety. The SDGs are therefore not about simply mapping current practices and revenue streams of issuers to the 17 goals and subsequently being named an SDG-aligned product. That is a superficial treatment of a much deeper transition that is needed and sought after by the SDGs. Keeping with that concept, I believe the SDGs can be a helpful guidepost to the financial sector in four ways.
First, the SDGs should initiate a structured conversation and governance process within both asset owners and asset managers to understand how they are contributing or detracting from global efforts around sustainability as outlined by the goals. This is simply a first step of the custodians and stewards of capital to more clearly understand how both their international functioning as an organization as well as the external impact of their investments is contributing to the momentum around sustainability. There are no set standards — nor should there be — around how this internal assessment should happen within the boards of asset owners and asset managers, but these discussions are an important start.
Second, the SDGs should support the creation of investment products that are additional and intentional to solving the challenges of sustainable development. Additionality and intentionality are, I believe, the two central aspects of SDG products and investment programs. For an investment product to be aligned to the SDGs, it must be clearly demonstrated how the product lends itself to a non-business-as-usual outcome for whichever sector in which the fund is investing. This additionality can be understood in many different ways, perhaps shareholder activism and engagement that would likely otherwise not have occurred. It can also mean the deploying of capital to regions and businesses that otherwise might not have had access to private capital. Similarly, in keeping with the spirit of the SDGs, the investment product must have a stated intention to be addressing a sustainable development challenge.
Third, the SDGs should support the creation of multistakeholder partnerships among investment firms, issuers, academia, the non-profit sector and other sets of actors that must more collaboratively work together for the SDGs to be achieved. One of the biggest challenges for sustainable development to be achieved is the lack of cooperation and coordination among different actors in the global economy. One of the SDGs explicitly targets this as an issue that must be addressed. The SDGs should drive the creation of platforms that bring together these various actors in an intentional way. Investment firms should be central nodes in these platforms given the significant influence of capital in the global economy.
Fourth, the SDGs should be the central framework used by corporations and governments to create a standard, uniform and globally accepted sustainability accounting framework that mandates disclosure of material non-financial information from issuers to investors. The lack of uniform sustainability accounting standards remains one of the most important challenges and bottlenecks for global efforts around sustainability. The reason the SDGs can be helpful in this regard is they have been agreed to by all 193 countries of the United Nations, which gives them an initial legitimacy from which a broader set of efforts can be developed.
The SDGs can be a powerful tool for transformation of the global financial sector, which can then play an even more productive and efficient role in connecting capital with investment opportunities for a more sustainable future. For that goal to be realized, the spirit of the SDGs cannot and should not be lost, but rather built upon.
Aniket Shah is the head of sustainable investing for OppenheimerFunds Inc., New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.