PE vs SDGs
As climate change becomes a more pressing threat to our community, in January 2016 the UN introduced Sustainable development goals (SDGs), which have been adopted to achieve a better and more sustainable future for everyone. The SDGs focus on the biggest issues such as poverty, inequality, climate, environmental degradation, prosperity and peace and justice. All 17 goals interconnect which makes it important to achieve each goal and target by the time limit which is 2030. But to fulfill them, everyone must work for it, which includes the civil society and the private- and public sector.
The Private Equity (PE) investors have a big opportunity to influence businesses and invest in companies that have a positive impact on the goals. There is already a big range of both PE firms and PE investors that have discovered the opportunities that the SDGs contribute for new investments that now has the chance to provide a significant sustainable impact.
However, as per released on the 4th of April UN’s “Financing for Sustainable Development Report “the goals will not be fulfilled by 2030 if there is not an improvement by the member states and their work towards the goals. According to the authors, as the private sector is the biggest part of the economy in most countries, it is promising that there is a growing number of investors that have expressed interest in taking social and environmental issues into account in their investment decisions. On the other hand, it’s still unclear what impact this growing interest has. This can be due to the confusion of what sustainable investment means and a lack of consensus on how to measure its impact.
The report gives further recommendations for the private sector to work on with regards to achieving the SDGs. As such:
- The Inter-agency Task Force could help create greater global consensus on the definition of sustainable investment and the measurement of investment impacts
- Governments should aim to build inclusive financial systems, for instance by supporting diversified types of financial institutions and making greater use of financial technologies (fin-tech).
- Governments should also “promote incentives along the investment chain that are aligned with long term performance and sustainability indicators, and that reduce excess volatility” and require more meaningful disclosure by corporations on social and environmental issues
- Member states should strive to create an enabling environment that encourages entrepreneurship and a vibrant domestic business sector, where financing is available
As highlighted in the report, there is not yet a standardized way to report on SDGs contribution. To report on the SDGs there must be a methodology in place to specify how to assess one’s contribution. The main challenge is that, unlike financial reporting, which uses a common unit (money), many factors included in sustainability reporting (i.e tons of CO2, recycled waste, gender, etc.) are difficult to express in monetary terms.
For the PE sector, which primarily focuses on financial returns, there are still no agreed-on principles or guidelines on how to link their portfolios to SDGs, but there are examples to follow. One of them can be Actis (an investor in private equity, energy, infrastructure, and real estate). The company has developed a methodology that enables them to report on several goals. For example, they have provided two million students with access to quality education via six investments and have avoided 1.6 million tonnes of CO2 in 2016 by providing affordable and clean energy.
In Sweden, Norrsken Foundation is one of the PE investors that focus on the SDGs. Norrsken Foundation states that they support and invest in both for-profit businesses and non-profit organizations, whichever they believe is most likely to have a positive impact on society. This is based on their will to create a world that is optimized for both people and planet and according to Norrsken Foundation, the best way to solve some of the problems facing our world is to have entrepreneurs building rapidly scalable businesses. To help these entrepreneurs Norrsken Foundation use their experience from founding and leading startups to support and help them succeed with this. Norrsken Foundation also reports on several goals, such as tonnes of food rescued, tonnes of CO2 saved and number of workers trained in right and responsibilities, etc.
PE investors are increasingly dedicating time and effort to engage with the SDGs but face common challenges when engaging with the goals given their width, underlying targets and KPIs. Delivering on SDGs requires funds to think differently about their role as well as collaborate with each other to define the most appropriate KPIs, as well as common and agreed-upon approaches to impact investing and reporting.
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Stockholm, 23 July 2019
Andreas Askenbäck, email@example.com