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What is SDG Investing?

Julian Stempher

Sustainable Development Goal Investing (SDGI) is one of the hot topics within the financial sector. In this article, we want to help establish a common understanding. We talk about how SDGI can be defined, what it entails, and the implications of introducing yet another new term.

What is SDG Investing?

First off: there is no consensus yet - meaning there is no one definition that has been agreed upon by a larger community or that has been adopted by the investment industry as whole. This is because the SDGs are only starting to take foot in the financial sector. So far, the predominant term for sustainability-related practices among investors has been ‘ESG’, which stands for ‘Environmental, Social, and Governance’.

However, there are a few organizations that have already dared to make that connection between investing on the one hand and the SDGs on the other hand, and that have coined the term SDGI along the way. Most noticeably, perhaps, in 2017 the United Nations Department of Economic and Social affairs has commissioned the consultancy C-Change to write a discussion paper on that very topic. In this paper, C-Change defines SDG Investing as ‘all investment strategies whereby sustainability and/or the SDG’s form a ‘material’ factor – i.e., are actively considered – in investment decisions.’ And further: ‘With this term, the authors offer an umbrella term that recognizes an existing, broadly accepted spectrum of sustainable, responsible, and impact investing’. The figure below presents in greater detail how the authors differentiate SDGI from other types of (traditional) investing.

Source: own illustration based on C-Change (2017).

Importantly, this definition of SDGI unites all those investment strategies that consider/integrate/work with sustainability or ESG, no matter at what level of maturity, quality, depth, and at what stage in the investment process. Integration can range from the bare minimum of exclusion criteria to a dedicated impact investing approach. Thus, SDGI is to be seen as yet another umbrella term, much like other frequently used terms such as ‘ESG Investing’ or  ‘Responsible Investment’, or ‘Sustainable Investing’.

One might wonder: why yet another umbrella term? Don’t we have enough terms and aren’t we quite confused with those already? If at all, aren’t we in need of more narrow terms and definitions that don’t allow for interpretation (and perhaps greenwashing) as much?

To that end, the authors state that introducing the term ‘SDG Investing’ is intended to support two important developments:

(1) more money being invested in SDG Investments
(2) the money being invested in SDG Investments having a larger (positive) societal impact

Especially with regards to point (1), I would agree: outside of finance, when it comes to sustainability, everyone is talking of the SDGs now. Until 2030, they are THE framework - for public, private and third sector alike - for implementing sustainable strategies and business models and measuring and communicating progress. Introducing the term ‘SDG Investing’ feeds into this development: not only does it further shape a common language, it also helps the investment community join the conversation and makes it easier for them to connect with like-minded actors. I could see how this helps increase the total volume of SDG investments.

Also with point (2), the authors might be right: introducing the SDGI concept will help investors realize that there are many different ways (‘strategies’; e.g. responsible, sustainable, finance-first, impact-first, etc.)) to integrate sustainability, depending on what an investor’s ambition might be. Many investment firms will then decide to look into sustainability issues more deeply and spend more time devising an approach that fits their strategy and their beneficiaries’ interests. Naturally, over time, investment firms will get better at SDGI (and perhaps even move to more progressive SDGI strategies) , therefore being able to generate a higher societal impact with every dollar invested. 

Please refer to following link to read C-Change's entire paper and reach a better understanding of SDG Investing:
www.c-change.io 

What are the SDGs?

To learn more about the Sustainable Development Goals and their application visit this article:

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Julian Stempher
T: +49 15 20 93 95 67 9
E:julian.stempher@tauw.com
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