The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (2024)

Organisation details

  • Name: Sustainable Development Investments Asset Owner Platform (SDI AOP):APG | Australian Super | British Columbia Investment | PGGM
  • Signatory type: Asset owners, investment managers
  • HQ location: Netherlands
  • Total combined AUM: €1 trillion

Covered in this case study

  • Asset classes: Equities, fixed income
  • Investment region: Global

As asset owners that aim to accelerate sustainable investment outcomes for our beneficiaries, we wanted to develop a solution that could translate the UN Sustainable Development Goals (SDGs) into an investable framework suitable for all asset classes.

In 2020, we collaborated to create the Sustainable Development Investments Asset Owner Platform (SDI AOP). Working with our users, we are developing a family of products – centred around a taxonomy – that focus on companies’ products and services, using revenues and other exposure metrics, to provide transparent, quantitative datapoints on SDG contributions[1].

Why we focus on SDG outcomes

We use the SDGs as a holistic lens to view how aligned our holdings are with the sustainability targets set by governments. As more resources are allocated towards achieving the SDGs, we expect that businesses that can deliver the solutions required to meet them will experience revenue growth.

We wanted to establish the SDI AOP Taxonomy to identify investment opportunities that can make a positive contribution to the SDGs. We deliberately focused on whether businesses are fundamentally aligned with the SDGs in terms of financial metrics and core outputs. Sustainability outcomes is an area that has typically received less attention than traditional ESG metrics on risks, controversies, compliance, and operational performance, but our clients and beneficiaries have increasingly shown their interest in supporting the SDGs.

How we focus on SDG outcomes

To create the SDI AOP Taxonomy, our investment teams systematically went through the SDG sub-targets and metrics to identify types of products or services that could be directly linked to the SDG outcomes, as shown in Figure 1.

Figure 1. Example of the taxonomy of products and services developed for SDG 3

The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (1)

We then worked with our data science partner, Entis, to classify companies providing these products or services, using data from their annual reports, financial reports, investor presentations, websites, and product pages.

We use artificial intelligence and machine learning to scale our process and continuously improve the SDI dataset. For each data release, we review any material changes and additions to the data, providing an extra layer of human validation.

Being involved in the methodology’s governance helps to ensure the taxonomy has a strict approach, independent of political or commercial interests, and sets a standard that can be applied across portfolios and products on the platform. We believe this can counter greenwashing concerns that are prevalent in the industry.

We determine the SDI classification of an entity based on how much of its business is aligned with one or more SDGs. As shown in Figure 2, we classify companies that have over 10% of their business contributing to an SDG as ‘decisive SDI’, while those with over 50% are classified as ‘majority SDI’.

Figure 2. How we determine the SDI classification of entities

The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (2)

One of the main challenges of developing the taxonomy dataset was to create something that worked at scale across our desired universe, which has grown to around 9,000 equity and bond issuers and continues to expand. For example, we are currently adding high yield and emerging markets fixed income coverage.

Our solution was to focus on financial datapoints that are widely available across each sector and not skewed by a company’s size or disclosure culture – factors that can impact many other ESG datapoints.

By default, we focus on company revenues, but where this does not work well, we identify more appropriate alternatives, such as capacity mix (utilities), market composition (telecommunications providers), or lending portfolio (development banks).

As investors looking across our portfolios, we require consistent data, which comes from using an auditable, rules-based approach rather than companies’ own determinations of SDG alignment.

Around a quarter of the companies we analyse are classified as having more than 10% SDI contribution, as shown in Figure 3.

SDI revenue data is now provided on a quarterly basis to reflect changes in the universe covered. Users can track how the proportion and level of revenues coming from companies’ SDI products and services change, which can feed into investment selection and stewardship processes to improve the SDG alignment of portfolios.

Figure 3. Proportion of SDI-aligned equity and fixed income issuers in the classification (as of December 2022)

The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (3)

Negative contributions to the SDGs

Based on early user feedback, and drawing on existing industry practice and resources, such as the UNEPFI Key Sectors Map, the taxonomy also highlights products and services that make a negative contribution towards achieving the SDGs. These include fossil fuels, due to their climate impact, landfill and single-use plastics, which are inconsistent with responsible consumption and production, and tobacco and gambling, due to their negative health impacts.

Figure 4. Entities with products and services classified as having material negative contributions (as of December 2022)

The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (4)

We do not include entities that derive more than 10% of their revenues from negative products in the SDI universe but provide users with the underlying data so they can apply their own thresholds for making an investment if desired.

For some products or services that are classified as SDIs, we include warning flags to indicate that users should consider the impact that their operations have on the SDGs, such as companies mining minerals that are critical to a low-carbon energy transition.

Example: Evaluating the impact of a plastic packaging company

Below we show how we analysed a packaging company’s products and services for inclusion in the SDI AOP Taxonomy.

Rationale: The company has a range of packaging products. It derives 57.4% of its revenues from products/services that qualify as SDI – recycled paper packaging, closed-loop packaging services, and specialist medical packaging. The company also derives 14.9% of its revenues from single-use plastic packaging, which has a negative contribution, and therefore does not qualify as SDI.

Product category

Revenues (US$m)

Percentage

Classification

Single-use plastic packaging (e.g. drinks containers)

304.5

14.9%

Negative – SDG 12

Other packaging (e.g. disposable wooden cutlery)

565.3

27.7%

Non-SDI

Circular recycled packaging partnerships (closed loop)

126.2

6.2%

SDI – SDG 12

Recycled paper packaging (certified FSC sourced)

444.1

21.7%

SDI – SDG 15

Specialist medical containers (for pharmaceuticals)

602.8

29.5%

SDI – SDG 3

Total

2,042.9

100%

Example: Using the SDI AOP

The SDI AOP has created a community for ourselves and other users (asset owners and investment managers) to share challenges and learnings about the taxonomy and its uses.

PGGM

We use the taxonomy to:

  • review our overall portfolio SDG exposure for public and private assets;
  • identify potential impact investments for our actively managed long-term equity strategy;
  • explore how we can tilt the SDI weighting of our passive indexed portfolios; and
  • quantify our ‘Pensions with purpose’ objectives to communicating to members.

BCI

We use the taxonomy to:

  • assess (and report on to clients) the SDI exposure of various passive and active equity and fixed income funds;
  • monitor the progress of companies in aligning with the SDGs in an internal dashboard; and
  • highlight SDG-related opportunities to our investment teams.

Australian Super

We use the taxonomy to:

  • understand and track the progress companies are making towards the SDGs;
  • identify potential investment opportunities in SDG-aligned industries and businesses;
  • inform our engagements with companies as part of our stewardship programme; and
  • measure and report on the SDG contribution of our portfolios to stakeholders.

APG

We use the taxonomy to:

  • identify suitable investments across asset classes;
  • report on our commitment to have 20% of our AUM in SDG-aligned investments by 2025 for our largest client; and
  • create index solutions around priority SDGs.

I bring to you a comprehensive understanding of sustainable development investments, particularly in the context of the Sustainable Development Investments Asset Owner Platform (SDI AOP). My expertise is rooted in a deep knowledge of the intricacies involved in translating the UN Sustainable Development Goals (SDGs) into an investable framework across various asset classes.

The SDI AOP, comprising major asset owners such as APG, Australian Super, British Columbia Investment, and PGGM, operates with a total combined AUM of €1 trillion from its headquarters in the Netherlands. The platform focuses on equities and fixed income in a global investment region.

The core objective of SDI AOP is to accelerate sustainable investment outcomes for beneficiaries by developing a taxonomy that translates SDGs into a framework suitable for all asset classes. This involves a meticulous process of systematically aligning companies' products and services with SDGs, using transparent and quantitative datapoints derived from revenues and exposure metrics.

To achieve this, the platform utilizes artificial intelligence and machine learning, collaborating with data science partners like Entis. The resulting SDI dataset undergoes continuous improvement, ensuring accuracy and reliability. The SDI classification of entities is determined based on the percentage of their business contributing to SDGs, with categories such as 'decisive SDI' and 'majority SDI.'

One notable challenge addressed is the scalability of the taxonomy across a universe of around 9,000 equity and bond issuers, including high yield and emerging markets fixed income coverage. The platform focuses on financial datapoints that are widely available, ensuring consistency and minimizing biases related to company size or disclosure culture.

The SDI AOP not only highlights positive contributions but also addresses negative contributions to SDGs, including fossil fuels, single-use plastics, tobacco, and gambling. Entities deriving more than 10% of their revenues from negative products are excluded from the SDI universe, and users are provided with underlying data for their own investment thresholds.

The SDI AOP's impact is reflected in its quarterly SDI revenue data, allowing users to track changes in the proportion and level of revenues from companies' SDI products and services. The platform's community, comprising asset owners and investment managers like PGGM, BCI, Australian Super, and APG, collaboratively uses the taxonomy to review portfolios, identify impact investments, explore SDI-weighted portfolios, and measure and report on SDG contributions.

In summary, the Sustainable Development Investments Asset Owner Platform is a pioneering initiative that not only focuses on positive SDG outcomes but also actively addresses negative contributions, providing a robust framework for sustainable investments across various asset classes.

The Sustainable Development Investments Asset Owner Platform: Aligning portfolios with the SDGs (2024)
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