New prospects around SDG finance

Only a decade ahead of the 2030 deadline to achieve the United Nations Sustainable Development Goals (UN SDGs), the Covid-19 pandemic is jeopardizing this endeavor and derailing progress trajectories in many countries. Capital outflows from emerging countries aggravates the existing investment gap to fulfill the 2030 Agenda. Investors and enterprises, by increasingly aligning their activities with the SDGs, can help bridging this gap.

With a combined US$89 trillion in assets under management, Principles for Responsible Investments (PRI) signatories can play a decisive role in helping to meet the SDGs – individually, and in collaboration. The PRI just reported a spike in the number of PRI signatories that have mentioned SDGs in their reporting to PRI, with 31% of signatories now mentioning the SDGs in 2020, up from 24% last year and 16% in 2018. Especially, investors seek to understand the real-world outcomes of their investments and to shape these in line with the SDGs. The PRI also announced it would make some reporting on SDGs mandatory a part of its signatories reporting requirement starting next year. To support investors in this SDG-specific reporting process, the PRI published a five-step framework in its report “Investing with SDG outcomes” comprising, for investors, SDGs’ selection, objective settings per SDG and specific report on their progress against these objectives.

The five steps include the identification of investments’ outcomes, the setting of policies and target, the outcomes shaping by investors and then by the financial system. The last step insists on global stakeholders’ collaboration to achieve the SDGs.

With a similar intent, and, as alternative investors integrate more and more ESG in their investment policies, the United Nations Development Program (UNDP) released the second draft of the SDG Impact Standards for Private Equity Funds. This standard aims to encourage the standardization of private debt and equity funds around the SDGs by requiring funds to define impact goals that inform capital allocation decisions. It also insists on the harmonization with standards that are already available such as the “UN Guiding Principles for Business and Human Rights” and the “Ten Principles of the UN Global Compact”. The SDG Impact Standards for Private Equity Funds consists of six standards in four parts:

• Defining SDG impact intentions and impact goals
• Embedding impact management into design and operations
• Transparent impact reporting and comparability for more informed decision-making
• Integrating effective governance oversight and operating context for impact management

Organizations wishing to receive the “SDG Impact Seal” will be required to apply. The Standards will be freely available and fund managers can have their practices certified by an independent UNDP accredited verifier. Those funds must be assessed in each of the 20 core Practice Indicators to achieve positive certification under these Impact Standards.

The UNDP, by also publishing the Practice Assurance Standards for SDG Bonds, encourages issuers to model future bond issues, identifying their contributions and future impacts with respect to SDGs. The SDG bond standards consist of six standards in four parts:

• Strategic Intent and Definition of Impact Objectives
• Impact measurement and management
• Transparency and comparability
• Context and governance

Increasingly, the link between sustainable development and business performance is being recognized by the private sector. The alignment of with sustainable development objectives aims to provide a broad reference framework enabling issuers, investors and bond market participants to assess the financing objectives of a given green, social or sustainability bond program in relation to SDGs. And in order to generalize the issuance of bonds using SDGs in their use of proceeds, as was the case for the Mexican government’s SDG Sovereign Bond Framework.  

These initiatives complete, and somehow compete with, the ever-increasing range of environmental and social reporting tools and represent an opportunity for both investors and bonds’ issuers who want to grasp SDGs. 

Innovation helps making SDG finance something else than only a branding exercise. Back in 2018, we have launched a geospatial data innovation stream. A novelty we are pushing is the use of geospatial data for 2030 Agenda related products. Our belief is that the 17 SDGs are time-framed, the deadline being 2030, but also “location-framed”. Almost 70% of the targets linked with the SDGs are directly related to local basis service provision, including water and sanitary, elementary education, energy consumption, and whose spatial and local dimensions are preponderant.

With this conviction “that location matters” for SDG achievement, we have designed tools and frameworks to accompany our clients. We propose them a two-fold use of geospatial data: for eligibility and impact purposes.

For instance, data on SDG gaps can be used:

• To determine constituents or reweight equity indices (by reconciling countries footprint in companies and countries’ situations visà-vis SDGs, giving preference to companies offering products or services that relate to SDG achievement and that operate or sell products where the SDG gaps are the highest)
• To prioritize investments domains and related projects, at national or international levels: data can help prioritizing some SDGs and subsequent related projects. The issuer can commit that a minimum share of proceeds will be allocated to the fulfillment of the most acute SDG gaps.
• To prioritize areas or projects located in these locations: for nationwide operating issuer such as a national development agency, targeting the most disadvantaged areas by making it an eligibility criterion can be meaningful. It could be either a binary criterion (in/out of the pool of proceeds), or with some reweighting (a minimum share of the proceeds will be allocated to areas above a certain threshold of unemployment or lack of access to essential services).
• To demonstrate impact in a given location: for instance, by comparing the  situation  prior the commissioning of a project and the situation once it is operational. Such demonstration is more credible for network infrastructures (water, electricity, public transportation) as the project can have a critical size with a high impact probability. An impact is defined by a change, which itself requires a baseline in the sense of an initial situation. Geospatial information and the identification of baselines are critical to demonstrating additionality. It is a determinant as to whether an investment has delivered benefits above what would have occurred in absence of the investment.

Contact us for more information on our geospatial data innovation stream (cedric.merle@natixis.com )