Executive summaryIntroductionA five-part framework for investors
Parts 1 - 5
Next stepsDownload PDF
Part 1: Identify outcomes
All actions of investors – investment decisions and use of tools of influence – shape positive and negative outcomes in the world. Some may be unintended – some might also be unknown. Part 1 is about investors identifying and understanding the outcomes of their investments and of their own operations (whether caused by, contributed to, or linked to – see Investor role in outcomes). It applies to outcomes related to investments in public and private markets and through internal or external management – both within the existing investment portfolio and stewardship activities, and from potential new investments and investment processes.
Building on investors’ most common current activities focused on the SDGs – mapping existing investments to the SDGs and determining the scale of investments in explicitly SDG-aligned activities – the next step involves identifying the positive and negative real-world outcomes related to investees’ operations, products and services. It involves seeking to understand the outcomes aligned to specific SDGs, and those that cut across multiple goals.
ESG incorporation efforts can be a good starting point – while they will need to be broadened to also shape realworld outcomes (see Example: Clean water and sanitation), they can provide metrics and data, as well as lessons on putting in place the necessary organisational processes for identifying and understanding positive and negative outcomes. For example, to identify negative outcomes, investors can use existing screening tools from ESG service providers, such as portfolio screening tools for biodiversity, and tools and data to screen for breaches of the UN Global Compact’s Principles.
In addition, there are a number of tools that may be useful for identifying (and in some cases measuring) outcomes, some of which are discussed further throughout this report, and which are listed in Appendix 1.
APG and PGGM have developed the Sustainable Development Investment (SDI) taxonomy, identifying investments which, based on their products and services, contribute to the achievement of the SDGs. The forthcoming SDI asset owner platform will provide company-specific data on how businesses relate their activities to the SDGs, using the SDI taxonomy, and in future will include metrics on the outcomes those companies have achieved, e.g. the number of people provided with access to financial services. By using artificial intelligence and big data, the platform can operate across a large number of investments.
The EU taxonomy for sustainable activities has created performance thresholds (referred to as “technical screening criteria”) to provide investors with a framework for identifying economic activities (and therefore companies) that are: a) making substantive positive contributions to climate change mitigation or adaptation, and b) avoiding significant harm to four other EU environmental objectives (pollution, waste and circular economy, water, biodiversity) – while also meeting minimum social safeguards (defined in reference to the UN Guiding Principles on Human Rights and the OECD guidelines). Financial products offered in the EU will be required to reference the taxonomy by December 2021 (with specific requirements depending on the type of fund).
Other existing climate tools include portfolio carbon footprints (for Scope 1, 2 and 3 emissions, consistent with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations) and forward-looking climate scenario analysis. In many parts of the world there are already data providers and commercial offerings to help investors report in line with the TCFD recommendations. Though some are process-driven or focused on the risks to the investment portfolio only, the tools can also be used to identify and understand outcomes. The climate scenario analysis can, alongside stress testing, also be used to plot and explore ways to increase positive outcomes.
Some stewardship service providers and investment managers have also started mapping their engagement activities to the SDGs, though in some cases this is still focused on tracking activities – such as number of meetings or discussions on a given SDG issue – rather than on shaping actual outcomes. Many tools and benchmarks are focused on investees’ processes, which can imply that such activities lead to positive outcomes, but this is not necessarily the case. Key stakeholders within and beyond the financial system will need to work together to further develop and standardise metrics and data to measure outcomes, to then be used in benchmarks. The PRI will support these efforts through its Driving meaningful data programme (see Next steps).
From the policy perspective, the EU’s Regulation on sustainability-related disclosures in the financial services sector requires financial institutions and financial advisors to publish a statement on how they consider investment decisions’ principal adverse impacts on sustainability factors.30 This is mandatory for firms with more than 500 staff, and operates on a comply-or-explain basis for others. For investors it includes disclosure on:
- policies on the identification and prioritisation of principal adverse sustainability impacts;
- a description of the principal adverse sustainability impacts, and of the actions taken;
- summaries of engagement policies;
- a summary of adherence to standards for due diligence and reporting, and where relevant, the degree of alignment with the Paris Climate Agreement.
Starting to identify and share information on outcomes of current portfolios and investment activities – negative and positive – will enable further learning and demonstrate the type of data (largely still lacking) and reporting tools needed from portfolio companies. Asset owners that use external managers should ask managers to report similarly, stimulating them to start identifying and understanding outcomes, and investing in the data and tools needed to do so.
Part 2: Set policies and targets
Setting policies and targets moves the investor from identifying and understanding unintended outcomes towards taking intentional steps to shape outcomes.
The PRI proposes that investors set targets with the aim of:
- reducing important negative outcomes associated with all SDGs;
- increasing important positive outcomes associated with all SDGs.
As outlined above, targeted outcome objectives can be set (and assessed) against recognised global thresholds and timeframes for sustainability performance – including the SDG targets and indicators.
As many outcomes are connected – e.g. climate change and water scarcity, food security and poverty – investors will have to consider outcomes across all investments and all SDGs holistically. Positive progress on one SDG could even result in negative outcomes on another SDG. For targeting negative outcomes, existing frameworks such as the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD guide Responsible business conduct for institutional investors set expectations for investors to identify and manage adverse outcomes (see Example: Identifying and managing negative human rights outcomes).
The framework for setting outcome objectives can be embedded in an institution’s investment beliefs, or within its responsible investment policy (see Appendix 3: Investor examples – CDC). Identifying which SDG outcomes are most important could be informed by the insights learned from Part 1, or based on engagement with stakeholders – e.g. for a pension fund, with their beneficiaries (see Appendix 3: Investor examples – AP2).
While several investors already establish targets, these tend to be at the activity level (e.g. x% invested in green bonds), not at the outcome level (e.g. emission intensity per unit of energy generated (g/kWh)). Setting targets can include targets for existing and new investments, whether internally or externally managed, public or private market and beneficiary-, board- or client-led.
An example of investors collaborating in setting targets is the UN-convened Net-Zero Asset Owner Alliance – a group of asset owners that have committed to transition their entire portfolios to net-zero carbon emissions by 2050 to align with the Paris Agreement. The group has committed to regularly report on progress, including establishing intermediate targets every five years, in line with Paris Agreement Article 4.9.
Establishing policies and targets for outcomes can involve changes at different levels throughout the investment chain. In many cases, this would involve integrating SDG outcomes in the same way that ESG factors have been integrated within investment organisations (through guidance documents, tools, objectives, top-down commitment and training). For a pension fund, the starting point could be its strategic asset allocation; for a private equity manager it can be its internal portfolio management team, or asset class specific guidance sourced from third parties. For externally managed assets, assessment of the quality of policies and targets could be included in selection, appointment and monitoring processes.
Setting policies and targets for shaping outcomes can also change the metrics for successful engagement with portfolio companies – across their operations, supply chains and products and services. Although many investors have started mapping their stewardship activities to the SDGs, very few have set (and published) specific outcomesfocused targets for those engagements. One of the most well-known outcomes-focused collaborative engagements is Climate Action 100+ (also relevant to Part 4). It has two traditional process-based objectives: a) board accountability and oversight of climate change risk and opportunities, b) enhancing climate-related financial disclosures in line with TCFD recommendations – and one outcome-focused objective: reductions in greenhouse gas emissions across value chains.
Example: Identifying and managing negative human rights outcomes
The United Nations Guiding Principles on Business and Human Rights (UNGPs) set the expectations for businesses and investors on: respecting human rights, conducting proper due diligence to limit human rights risks and providing remedy for harm they cause or contribute to.
The UNGPs are referenced in the OECD guidance for multinational corporations, and the OECD has recently translated this into specific guidance for institutional investors. This OECD guidance explains that investors are responsible for seeking to prevent and address negative human rights outcomes that they are connected to, i.e. human rights outcomes that they are causing, contributing to or directly linked to (see Investor role in outcomes). It discusses the role that investors can take in various asset classes, and in the selection, and stewardship, of investments. It describes the importance of focusing on situations where the risk of adverse outcomes is most significant – measured in terms of scale, scope and irremediable character.
The guidance outlines several practical steps and supporting measures to ensure due diligence by institutional investors is effective, including a number that align to this framework:
- identifying actual and potential negative outcomes within investment portfolios and potential investments (aligns to Part 1);
- embedding human rights outcomes into relevant policies and management systems for investors (aligns to Part 2);
- as appropriate, using leverage to influence investee companies causing negative outcomes on people, society and the environment to prevent or mitigate that outcome (aligns to Part 3);
- accounting for how adverse outcomes are addressed, by a) tracking performance of the investor’s own performance in managing such risks and outcomes in its portfolio, and b) communicating results, as appropriate (aligns to Part 3);
- having processes in place to enable remediation in instances where an investor has caused or contributed to a negative outcome on people, society and the environment.
Part 3: Investors shape outcomes
In Part 3, investors seek to shape outcomes in line with the policies and targets set in Part 2, and report and communicate on progress against those objectives. Below we outline examples of how this can be done through each of the investor actions identified – investment decisions; stewardship of investees; engagement with policy makers and key stakeholders – and communicated through disclosure and reporting. Investors should prioritise which actions to use based on which can have the most leverage on their most important outcomes.
What role an investor plays in shaping SDG outcomes will be a function of the asset class(es) it invests in, the market(s) in which it operates (e.g. public vs private), its ownership share, its time horizon for investment and its size and resource capacity (see also Investor role in outcomes). For example, the ownership share and medium- and long-term horizon of private markets such as infrastructure and private equity can give them considerable scope to shape outcomes.
The PRI’s discussion paper on strategic asset allocation proposes that asset owners could incorporate consideration of the SDGs into portfolio construction, with limited impact on risk/return expectations. Investors might also use tools such as the EU taxonomy for sustainable activities to design and implement investment products and strategies that focus on environmentally sustainable economic activities (see more in Part 1). The target allocations chosen should be accompanied by an approach to monitor the changes in specified outcomes against goals.
Investors with internal investment portfolios will have to develop (or source) frameworks, tools and data to enable investment staff to deliver in line with the policies and targets established in Part 2 (see Appendix 3: Investor examples – Actis and Aviva). This may also require new incentive structures, internal communications and training. This change management element can largely build upon existing programmes to mainstream the integration of ESG risks and opportunities within the organisation.
Enabling investors to consider outcomes across different asset classes, investment strategies (both passive and active) and financial products (e.g. ETFs) will require a range of different approaches, supported by guidance documents.
One of the most well-established examples of an approach that seeks to increase positive outcomes is impact investing. Impact investing can be undertaken from an impact-first or financial-first perspective, so long as the impact is achieved.
A range of impact investing products or strategies are available to investors, such as green bonds, listed equity impact strategies, micro-finance, green real estate, renewable energy infrastructure and impact venture capital funds.
For investors that use external managers or funds, Part 3 is about using the policies and targets developed in Part 2 in their selection, appointment and monitoring process – directly or in discussion with their investment consultants. This will include adding assessment criteria on changes in outcomes into request for proposals, and requiring external managers and investment funds to report on their progress. External managers and funds will need to develop approaches for translating changes in outcomes at individual investee companies or projects to a total portfolio, mandate or fund level, for ease of communicating to investors.
It is important to note that individual investors reallocating capital does not always shape outcomes in the real world – in some cases only changing which outcomes that particular investor is exposed to. For example, the screening out of certain portfolio companies because of their involvement with negative human rights issues changes the shareholders in that company rather than the outcomes from its activities. This is true unless it happens at a scale that can significantly influence the capital costs of the company (see Part 4 for more on collective action).
Stewardship of investees
Once stewardship targets have been set for specific outcomes – e.g. a living wage for workers in the supply chain of a clothing retailer, or adequate clean water and sanitation in a specific region – outcomes can be shaped through the current tools of active ownership: voting and engagement, including participating in collaborative strategies (see Part 4). Measuring performance against those targets is also similar to traditional measurement of stewardship activities, although outcomes-related data needs further development. Such engagement is not just confined to listed equity investments – it is equally relevant to fixed income and private equity, and to other asset classes such as real estate and infrastructure (see Appendix 3: Investor examples – ACTIAM).
The difference between stewardship objectives focused on outcomes and those focused on portfolio ESG risks and opportunities – or limited to processes for achieving outcomes – is described in more detail in the PRI’s Active ownership 2.0. This proposed approach prioritises the pursuit and achievement of positive real-world goals, and highlights that while resources, activity metrics and intermediate goals (e.g. corporate disclosure) are among the levers available to investors, these are not sufficient to deliver outcomes.
Engagement with policy makers and key stakeholders
Public policy critically affects the stability and sustainability of financial markets, and of social, environmental and economic systems. Public policy engagement by investors is therefore a natural and necessary extension of an investor’s responsibilities and duties. In recent years, there has been a dramatic increase in the attention paid by policy makers to sustainability issues. Since the 2008 financial crisis there has been a surge in policy interventions, based on a growing realisation among regulators that the financial system can play an important role in meeting the global challenges they are working to address. This is also reflected in the activities of PRI signatories, whose engagements with policy makers, regulators and standard setters increased from 44% of signatories in 2016 (1,073) to 61% in 2019 (1,710).
Investors should engage with regulators and policy makers – in their home market and in any jurisdiction that’s a significant part of their portfolios – on the wide range of regulatory or legislative developments that would improve outcomes. As outlined in Next steps, the PRI will support investors to focus on ESG issues that have systemic implications for market beta or the real economy. Examples include investor engagement with new government strategies such as the European Green Deal, and – in currently hard-to-reach countries, where the most progress is needed in achieving the SDGs – working with policy makers to establish the conditions necessary for investors to direct capital there.
Disclosure and reporting
There are several emerging tools, frameworks, metrics and data sets to support investors in tracking progress against the policies and targets set in Part 2, including against global thresholds and timelines. Some are outlined in Appendix 1, and for climate goals specifically, in Appendix 2. These efforts will need to scale up significantly for investors to be able to measure negative and positive outcomes comprehensively – for each separate SDG, and holistically across all SDGs.
Existing initiatives to develop such tools and metrics have emerged from the impact investing community, and are often focused on specific positive impact sectors, such as healthcare and social housing. There are also tools that address themes that cut across sectors, the two most developed themes being climate change mitigation and human rights. The tools and metrics provide guidance and concepts that can be a starting point for tracking progress at a portfolio level across a wide range of sectors.
The PRI’s new Reporting Framework, launching in January 2021, will include questions on if and how signatories are seeking to shape outcomes, individually and collectively, and how progress is being measured against outcome objectives (see also Next steps).
Part 4: Financial system shapes collective outcomes
Shaping outcomes in line with the SDGs at the financial system level takes place both through aggregating the actions of individual investors (i.e. aggregation of Part 3 activities), and from investors acting collectively – including alongside other financial system participants such as credit rating agencies, index providers, proxy advisors, banks, insurers and multilateral financial institutions.
Ultimately, lasting change in economic sectors or industries relies on changes in technology, regulation or consumer preferences that affect demand for products or services, but all of these can be influenced by the collective actions of investors working with others across the financial system – through their investment decisions and use of tools of influence.
The need for collective action on shaping outcomes is clear – as outlined in Part 3, although investment allocation strategies can shape what outcomes an investor is connected to, the real-world outcomes themselves are not always changed. This is particularly clear in screening strategies, where one investor not selecting a company or sector for its portfolio simply means that another one does, with limited impact on the world.
This can change however, if the shift in allocation decisions (and active ownership strategies) happens at scale, meaning companies are influenced to stop or diminish the activities or products with negative outcomes (and/or start/increase ones with positive outcomes). One such example, if implemented across the financial system, could be the UNconvened Net Zero Asset Owner Alliance (described in Part 2).
Other strategies include joint investments by actors across the financial system, such as blended finance vehicles where, for example: banks provide debt, pension funds provide equity and governments or supranational development banks provide first-loss guarantees. One outcomes-focused blended finance initiative is the Blended Finance Breakthrough Taskforce (BFBT) – established by the Business and Sustainable Development Commission (BSDC) – which has published a report that aims to expand the evidence base around the potential for blended finance to narrow the SDG funding gap.
Stewardship of investees
Universal ownership engagement (or beta engagement) – collective investor engagement with a large cohort of companies, enacted on sufficient scale to affect the overall market – will be crucial to shape systems-level outcomes. Climate Action 100+ is a key existing example (described in Part 2). More thinking on large-scale engagement can be found in the PRI’s Active ownership 2.0. (Also see Appendix 3: Investor examples – Nomura).
Engagement with policy makers and key stakeholders Engagement with policy makers and regulators will need to be implemented collaboratively in order to be effective in lowering barriers to outcomes-focused policies and targets, and in enabling regulatory environments (in the financial system and beyond) that support SDG-aligned outcomes at scale. This will include requiring investors to work closely with participants from across the financial system.
Investors are already engaging with regulators and policy makers to create voluntary frameworks for shaping outcomes. Important developments under the EU Action Plan include the EU Green Bond Standard and voluntary low-carbon benchmarks. The EU Green Bond Standard aims to improve the disclosure of climate-related information and to facilitate the development of low-carbon indices, which can be used as benchmarks for low-carbon strategies. Another example is the ASEAN Green Bond Standards.
On environmental SDGs, investors have engaged in the development of sustainable finance regulations including: in the EU (through the EU taxonomy for sustainable activities (described in Part 1), and the Regulation on sustainabilityrelated disclosures in the financial services sector (see below)), France’s Article 173 and emerging sustainable finance policy developments in Australia and Canada. On the SDGs more broadly, investors could engage with countries on their voluntary national reviews, and call for country roadmaps for the SDGs or national infrastructure planning related to the SDGs.
Disclosure and reporting
Investors can form coalitions to drive demand for the improved and expanded data sets that will be needed to monitor, measure and report on changes in systemslevel outcomes. One example is the Global Real Estate Sustainability Benchmark (GRESB), initiated by a group of European pension funds, which has become the benchmark for ESG performance data for real estate investments. Another is TCFD, which has been an important initiative in the development of climate change metrics and targets.
Part 5: Global stakeholders collaborate to achieve outcomes in line with the SDGs
No one set of actors will achieve the SDGs in isolation. All stakeholders across the finance sector, businesses, governments, academia, civil society, the media, individuals and their communities must act collectively to ultimately achieve the SDGs.
Necessary elements include programmes to connect supply and demand of investments at scale, and collaboration on tools to contextualise outcomes data in the global science- and norms-based thresholds required to achieve the SDGs.
This is not an area in which investors are used to engaging. It will involve creating collaborations and coalitions with stakeholders not typically thought of as partners.
One example of such a collaboration is the Financial Sector Commission on Modern Slavery and Human Trafficking, a public-private partnership between: the governments of Liechtenstein, Australia and the Netherlands; the United Nations University; private sector institutions (including asset owners and investment managers), civil society organisations and foundations. The resulting Finance Against Slavery and Trafficking (FAST) initiative provides a collective action framework for the whole financial sector (including its service providers) to accelerate action to end modern slavery and human trafficking.
Another example is the “Deep Track” in the Dutch pension funds agreement on responsible investment, which has been developed by pension funds, NGOs, labour unions and the Dutch government. The parties will work together in engaging selected portfolio companies to mitigate and/or remediate adverse human rights and labour rights outcomes. Engagement targets are selected on human rights and labour rights issues that “pension funds encounter in their investment practice and which they cannot resolve themselves and that could potentially be resolved through cooperation between the parties”.
The investment community will need to receive insights, data and tools that match the global societal and planetary thresholds. These can be used to work top-down to the needed outcomes at the level of the asset owner, investment manager and investee entity – and vice versa, bottom-up.
For monitoring performance against the global goals, topdown tools that are already being or have been developed by other stakeholders are a good starting point and can be supplemented or amended with data from tools listed in Appendix 1. Tools developed by policy makers can be such a starting point, including the SDG Tracker, UN Environment’s Emissions Gap report and the global stocktake process within the Paris Agreement.
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I have extensive expertise in sustainable investing and the integration of environmental, social, and governance (ESG) factors into investment strategies. My knowledge encompasses various frameworks, tools, and initiatives aimed at aligning investments with positive social and environmental outcomes. I will break down the concepts discussed in the provided article.
Part 1: Identify outcomes This section emphasizes the importance of investors understanding the outcomes of their investments. It suggests mapping investments to Sustainable Development Goals (SDGs) and using ESG incorporation efforts. Tools like the Sustainable Development Investment (SDI) taxonomy and the EU taxonomy for sustainable activities are highlighted. The article stresses the need for metrics and data to measure outcomes, including climate tools and stewardship activities mapping to SDGs.
Part 2: Set policies and targets Investors are encouraged to set targets to reduce negative outcomes and increase positive outcomes associated with all SDGs. The UN-convened Net-Zero Asset Owner Alliance is cited as an example of investors collaborating to set targets. The importance of integrating outcome objectives into investment beliefs and responsible investment policies is emphasized.
Part 3: Investors shape outcomes This section discusses how investors can shape outcomes through investment decisions, stewardship of investees, engagement with policy makers, and disclosure/reporting. Impact investing is highlighted as a way to achieve positive outcomes, and the role of engagement in influencing companies is discussed. The need for public policy engagement and effective disclosure and reporting is stressed.
Part 4: Financial system shapes collective outcomes The article underlines the need for collective action in shaping outcomes at the financial system level. It mentions the importance of large-scale engagement, such as Climate Action 100+, and collaboration with policy makers to create frameworks for outcomes-focused policies. It also discusses the role of disclosure and reporting in driving demand for improved data sets.
Part 5: Global stakeholders collaborate to achieve outcomes in line with the SDGs The final part emphasizes the collaboration needed across various stakeholders, including the finance sector, businesses, governments, academia, civil society, media, and individuals. Examples like the Financial Sector Commission on Modern Slavery and Human Trafficking and the Dutch pension funds agreement on responsible investment showcase collaborative efforts.
The overarching theme is the integration of SDGs into investment strategies, the importance of setting measurable targets, and the need for collective action and collaboration across the financial system and global stakeholders to achieve positive outcomes aligned with the SDGs.