Future Proofing Your Portfolios – How Relevant Really Are the Sustainable Development Goals?
Produced by Bloomberg Media Studios in partnership with Standard Chartered.
Sustainable Development Goals (SDGs), once exclusively a focus for global development, are now increasingly seen as a mainstay for investment. According to the Business and Sustainable Development Commission, pursuing SDGs could unlock $12 trillion in new market opportunities by 2030. [¹]
How can investors meaningfully capitalize on these opportunities in their portfolios? At Standard Chartered, our ESG experts guide our clients on three main areas:
- SDGs as a lens to identify opportunities and mitigate risk
- An approach to incorporate the SDGs into one’s core portfolio
- Thematic opportunities for your satellite portfolio
The SDGs as a Lens To Identify Opportunities and Mitigate Risk
The 17 SDGs were adopted by the United Nations General Assembly in September 2015 and have targets that look to 2030. Beyond a framework for investors to contribute towards social and environmental outcomes, it also identifies risks and opportunities.
To illustrate, SDG goal #7 focuses on clean and affordable energy and SDG goal #13 on climate action. Governments and companies globally are committing to transition plans towards a low-carbon economy and companies which are lagging on this transition risk being impacted by both regulation and evolving consumer demand. This has implications for investors as this can affect the medium to long-term profitability of companies. Singapore will stop new registrations of diesel cars and taxis from 2025, and all new car and taxi registrations from 2030 must be of cleaner-energy models. Taiwan will ban all sales of non-electric motorcycles by 2035 and four-wheel vehicles by 2040 while Hong Kong will phase out fossil fuel cars and go all electric over the next 20 years.
Beyond climate, responsible consumption and production (SDG #12) is another area that investors should consider. Evolving consumer demands are creating new opportunities for brands. Already in 2015, Nielsen reported that 66% of consumers were willing to pay more for sustainable brands. [²]
An Approach To Incorporating the SDGs Into One’s Core Portfolio
Incorporating the SDGs into one’s portfolio isn’t just about adding a theme or an alternative asset class. SDGs can also be looked at within core portfolios and as an investor, there are three simple questions you can ask as you look at the companies you invest in:
- What does the company produce?
- How does the company produce?
- Are there controversies surrounding the company and what are the risks?
- What does the company produce? – Some companies, for instance in healthcare, tech, clean energy and education, already offer products and services that make a clear contribution to the SDGs, especially if they are distributing into emerging markets and providing price accessibility. However, if we peel deeper, we can find varying company practices in terms of how they are responding to the risks and opportunities posed by the SDGs. A positive example would be oil and gas companies shifting the proportion of their energy mix and investing more in renewable energy projects.
- How does the company produce? –This is where investors can bring in the ESG (environmental, social and governance) lens to look at the internal practices of processes in place around carbon emissions, health and safety practices, labor rights, supply chain management and good governance. For example, clean energy companies which have poor labor policies and weak supply chain practices would still pose a risk to your portfolio.
- Are there controversies surrounding the company and what are the risks? – Finally, an important lens to include is that of controversy. This is typically any ‘black swan’ event that is unpredictable, but results in significant reputational, business and at times, regulatory impact. This includes accounting fraud scandals, anti-competitive practices and significant consumer safety breaches.
Thematic Ideas for Your Portfolio
Besides applying the SDG lens to an investors’ core portfolio, there are specific sustainability themes that investors can look into. Sustainable thematic strategies allocate capital to companies contributing towards achieving the targets set out in the SDGs.
Not all the SDGs are investible and identifying the ones that provide the most significant investment opportunities is important. For example, SDG #16 which is focused on peace, justice and strong institutions, and SDG #17 which is focused on partnerships. These are less investible themes compared to SDGs focused on climate action and water.
The following sustainable thematic strategies are ones with a growing number of investment opportunities, and we work with the top asset management partners globally to present relevant solutions for our clients.
Investing into the SDGs should be considered from a medium to long-term time horizon. While many of these pertain to long-term macro trends, they can experience short term dips such as the correction in clean energy. This momentum in energy transition is however one that is here to stay, driven by both policy support and technological innovation, and one that presents to investors a $90 trillion opportunity [³].
As ESG themes may become an increasingly important contributor to portfolio returns, considering how to incorporate SDG themes in an allocation can be useful in developing a holistic well-rounded portfolio that positions you for the future. Ensuring that solutions meaningfully contributes to SDG themes is important, and for Standard Chartered’s high conviction suite of sustainable funds, deep due diligence is conducted to help clients achieve the double outcome of doing good and doing well.
[¹] Business Commission [²] Nielsen [³] IRENA