The average annual investment needed to meet the United Nations Sustainable Development Goals (UN SDGs) by their 2030 deadline is $5-7 trillion, according to the Brookings Institute. Yet in 2014, the UN said funding for the SDGs totaled just $1.5 trillion.
From an investor’s perspective, among the many reasons for this, there are two simple ones that stand out.
First, for decades some players in the financial world have pilloried sustainable investment, arguing that its focus on social and environmental factors narrows the path to superior returns. This issue might loosely be termed ‘greenbashing.’
Second, certain other players in the sustainability community have arguably engaged in ‘greenwashing,’ or overstated their investments’ social or environmental credentials. The resulting arguments have spilled over into the international investment arena and produced a counterproductive funding environment for the world’s sustainability challenges.
Money managers have a chance to put the accusations of greenbashing and greenwashing behind them by taking three simple steps.
First, sustainable and impact investments should not sacrifice competitive financial returns for positive societal impact. For sustainable and impact investments to become part of a private client’s asset allocation, they need to support positive societal impact or outcomes alongside (and not in place of) market rates of return.
One route is by helping to set up companies in SDG-related fields that offer undersupplied products and services and can deliver above-average profitability over time, in addition to a measurable SDG-related impact. Within healthcare, for instance, one key example is oncology, given growing incidences of cancer globally and the undersupply and profitability of treatments.
Another way is by adopting investments with a more dedicated sustainability focus such as World Bank or multilateral development bank bonds in place of other highly rated debt with similar expected risks and returns.
The confusion among private clients about the difference between these kinds of approaches and philanthropy (giving or investing expected to deliver sub-market rates of return) and conventional investing (where returns are prioritized over social and environmental considerations) has hindered private investors from funding the SDGs to their fullest potential, in our view.
A growing body of academic research shows investments in public markets can do well for society without relinquishing competitive returns. For example, a 2015 study by Friede, Busch, and Bassen found a non-negative relationship between investing according to environmental, social, and governance factors and corporate financial performance in around 90% of more than 2000 empirical studies conducted between 1970 and 2014.
To reduce confusion, we believe that financial firms could standardize classifications for sustainable giving and investing.
Projects that offer sub-market returns should be labeled philanthropy. They should be distinguished from impact investing, which intentionally targets market rates of return and positive social or environmental impact. Our experience suggests requiring impact investments to deliver positive social impact alongside (and not in place of) market rates of return has a significant effect on private clients’ interest.
Second, financial firms need to standardize impact conventions. Investors disagree on how to define impact investing and even common sustainable financial instruments like green bonds. We believe an impact investment should satisfy three criteria:
- there must be intent to generate positive returns and social / environmental impact (by the investor and the provider of the investment solution);
- it must be possible to measure the returns and social / environmental impact of the investment according to clearly established metrics for expected performance and evaluation before investment;
- it must be possible to verify the returns and social / environmental impact empirically, with proof that the invested capital has generated the intended impact.
Lastly, to counteract ‘greenbashing’ in all areas of investment, financial firms need to fashion innovative solutions to fill funding gaps for sustainable development. There are still significant limitations in the range of sustainable investments available today.
Greater product development is needed for sustainable solutions in areas like US corporate debt, high yield bonds, emerging market debt, syndicated loans, thematic impact, renewable infrastructure, and sustainable real assets.
Other financial services firms could expand their range of private market impact investments that aim to deliver non-greenwashed societal impact as well as a compelling financial return.
Let’s hope investors put this war of words behind them and focus on profitable opportunities to the world’s most urgent sustainability challenges.