Targeting real world impact aligned with the Sustainable Development Goals February 2018 For Investment Professionals only. The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.
2 Targeting real world impact aligned with the Sustainable Development Goals Richard Sherry Director of Alternative Credit Targeting real world impact aligned with the Sustainable Development Goals The United Nations (UN) put out a strong call to action for the private sector to play a fundamental role in achieving the Sustainable Development Goals (SDGs) over the next 15 years. It is still early days for the SDGs, but momentum is growing. Institutional investors not only recognise that the SDGs are a key part of their fiduciary duty, but achieving them offers opportunities for global economic growth that could lead to better investment outcomes for beneficiaries over the long term. Impact investors are uniquely positioned to take the SDGs forward by channelling private capital towards projects and investments with real world impact aligned with the SDGs. In this piece, we look at why the SDGs matter to institutional investors, the role of impact investing in helping to achieve the SDGs and what the global goals mean for the growth and development of the impact investing sector.
3 The UN Sustainable Development Goals The UN SDGs were adopted by 193 member states of the UN in September 2015 to end poverty, protect the planet, and ensure prosperity for all as part of the UN s 2030 Agenda for Sustainable Development. The 17 SDGs along with their 169 targets are broader in scope and are intended to go further than the Millennium Development Goals1 (MDGs), according to the UN. The SDGs, also known as the Global Goals, build on the successes of the MDGs and cover the three dimensions of sustainable development: economic growth, social inclusion and environmental protection. While not legally binding, countries have the primary responsibility for follow-up and review of the progress made in implementing the Goals. The UN Commission on Trade and Development (UNCTAD) has estimated that meeting these targets will require US$5 to 7 trillion in investment each year from 2015 to 2030. With the resources of governments, international agencies and civil society organisations constrained, there is an estimated funding gap of up to $6 trillion annually for private capital to fill. Figure 1. The global goals: A shared lexicon for responsible investment Source: UN The SDGs and their respective targets provide a way for all public and private stakeholders, including governments, regulators, civil society (or the third sector ) and the private sector, to work towards the same global goals over the subsequent 15 years and measure their real world impact. It is important to recognise that the SDGs have not been designed as a framework for investment in the first instance. However, we, like many others, believe there is a clear investment case for the SDGs and the fundamental ways that investors can contribute are rooted in existing practises. On one hand, the global goals can provide an opportunity for responsible investors to demonstrate how their efforts to incorporate issues, such as climate change, working conditions and board diversity into their investment approach are contributing to sustainable development for all. 1 The eight United Nations Millennium Development Goals are international development goals and targets established in 2000 that aim to decrease poverty and advance living standards by 2015.
4 Targeting real world impact aligned with the Sustainable Development Goals Increasing awareness among institutional asset owners, pension scheme members and individual savers is also shifting attitudes in favour of more sustainable approaches to investment. Institutional investors recognise that the SDGs not only play a key part of their fiduciary duty and in doing so take into account environmental, social and governance (ESG) factors but achieving them offers opportunities for global economic growth that could lead to structurally better investment outcomes for beneficiaries over the long term. Impact investors are uniquely positioned to take the SDGs forward Impact investing has a clear role in supporting the aims of the SDGs. Impact investing is generally accepted to describe a set of investments with the intention of generating measurable positive social and / or environmental benefit alongside a financial return. Impact investing has gained in popularity and importance over recent years as investors turn their attention from risk avoidance and exclusion towards actively achieving positive impact. The emergence of institutional-size private debt funds offering both attractive levels of return and strong positive impact have seen impact investing really come into its own in recent years. Private assets represent the biggest share of the impact investment universe. Private debt comprises 41% of global impact assets2 it is worth noting that most of these private debt impact assets are in emerging markets (approx. 75%), however, the focus of our private debt impact strategies is developed markets. One of the advantages of private debt for impact investment is the fact that these investments can potentially earn an illiquidity premium and deliver a measurable positive impact to help institutional investors, such as pension funds and insurance companies, meet their long-term objectives. The SDGs are catalysing interest in impact investing and channelling private capital towards solving the world s most pressing environmental and social problems, including climate change, and are helping to bring important scale to the industry. At the end of 2016, there were US$114 billion of impact investing assets under management, according to the GIIN3 Annual Investor Survey 2017 although the GIIN notes this figure serves as a best-available floor for the size of the impact investing market. Whether impact investors prioritise financial return or impact ( financial first or impact first ), what they define as impact and how their investments achieve this varies greatly according to their impact investment strategy. We believe the SDGs can act as a common framework for investors to help tie together the different approaches to impact investing and understand how these investments work towards achieving the same global development and sustainability priorities. 2 Source: GIIN Annual Impact Investor Survey 2017. Percentage calculated using total assets under management (AUM) by investment instrument excluding outliers, which totals $63.9 billion. Including outliers, this share is 34% (based on the full sample AUM of $113.7 billion). 3 The Global Impact Investing Network (GIIN) is a non-profit organisation dedicated to increasing the scale and effectiveness of impact investing around the world.
5 Articulating the relationship between investments, impact themes and the SDGs The primary way we approach impact investing is through private debt and we target investment opportunities that aim to make a competitive return as well as a measurable positive social or environmental impact. At M&G we assess impact investments against a criteria developed in conjunction with a leading sustainability adviser. This criteria classifies our impact investments according to one or more of our 12 thematic environmental or social impact areas (refer to Figure 2 for an overview of these impact areas). Within each thematic area, we identify specific sub-themes with their own eligibility criteria and metrics to measure outputs that are tailored to the specific impact theme. We believe it is vital to have a clear framework to analyse and measure the impact of an investment. For example, metrics could include megawatt hours of electricity generated by a solar park, or how many people are housed through an affordable housebuilding programme. Impact investments made in areas such as renewable energy, affordable and social housing, and health and social services are clearly aligned with the SDGs, however, this is not always as clear cut. In our view, not all of the goals will inherently fit investment activities or neatly align with impact themes after all, the scope of the SDGs is to involve many other players besides the investment industry to address the goals. We have focused on making clear, tangible links, and by doing so, we have found that each of our own impact themes align to one or more global goals. It is important to note that Goal 16 peace, justice and strong institutions and Goal 17 partnership for the goals are not easily investable, and therefore require a different approach.
6 Targeting real world impact aligned with the Sustainable Development Goals Figure 2. Mapping our impact themes to the UN Sustainable Development Goals Green buildings Sustainable food, agriculture & forestry Economic inclusion Health & social services Waste management Green transportation Mapping our impact themes to the UN SDGs Social Education Social housing Environmental Water Renewable energy generation Pollution control Energy efficiency
7 Impact investing and the global goals in action Example 1. Mapping environmental impact theme: Renewable energy generation Investment sub-themes: Electricity generation, biofuels, heat production, transmission systems and renewable energy technologies. Why invest? We believe the development of renewable energy resources is a crucial and central ingredient of a broad strategy to address climate change and to shift economies toward greater sustainability. Renewable energy generation impact investments can align with the following UN SDGs: US residential solar enabling affordable and clean energy for US households M&G participated in the financing of a pool of US residential solar loans Expected return premium: 0.5% to 1% p.a. over equivalent-rated public corporate bonds1 Key M&G impact theme and expected metrics2: - Renewable energy generation: 1. 50,000 tco2e emissions avoided per year 2. Approximately 101,000 MWh of clean energy generated per year This investment aligns with the following UN SDGs: Goal 7: Affordable and clean energy Ensure access to affordable, reliable, sustainable and modern energy for all This deal finances a pool of solar panel loans to residential customers in the US who use the loans to purchase rooftop solar panels, benefiting from long-term savings on energy bills from the clean electricity produced by the solar panels. It is estimated that approximately 101,000 MWh of clean energy (electricity) will be generated per year from this transaction. Goal 13: Climate change Take urgent action to combat climate change and its impacts The US produces around 20% more CO2 per megawatt hour (MWh) of electricity generated than the OECD average and 50% more than European OECD countries3. The relative impact on greenhouse gas (GHG) emissions and the importance of clean energy for the protection of the environment is therefore higher for the US than many other countries. The amount of emissions avoided by using the clean electricity produced by all the rooftop panels financed in the pool of loans is estimated at over 50,000 tonnes of CO2 which is equivalent to 10,700 cars off the road per year in the US4. 1 Source: M&G, as at October 2017. Private or illiquid debt investments will often pay a premium over liquid public bonds to compensate for their lack of secondary trading opportunities and lesser liquidity. This is often referred to as an illiquidity premium or in this case Expected return premium. 2 Impact metrics are intended to provide an indication of expected outcome. tco2e = tonnes of carbon dioxide equivalent. 3 Source: European Investment Bank, Methodologies for the Assessment of Project GHG Emissions and Emission Variations, April 2014. 4 Passenger vehicles driven for one year figure calculated according the United States Environmental Protection Agency (EPA) Greenhouse Gas Equivalencies Calculator.
8 Targeting real world impact aligned with the Sustainable Development Goals Example 2. Mapping social impact theme: Social housing Investment sub-themes: Housing projects, housing improvements. Why invest? Access to affordable housing plays a significant role in determining physical security, and increasing economic inclusion for people. Social housing impact investments can align with the following UN SDGs: Social housing finance funding the development of social housing in the UK 65 million, 30-year private placement provided by M&G Expected return premium: 0.5% to 1% p.a. over equivalent-rated public bonds1 Key M&G impact theme and expected metrics2: - Social housing: 1. 900 new social homes for development 2. 50 applicants for each available property This investment aligns with the following UN SDGs: 1 Source: M&G, as at December 2017. Private debt investments will often pay a premium over public bonds to compensate for their lack of secondary trading opportunities and lesser liquidity. This is often referred to as an illiquidity premium or in this case Expected return premium. 2 Impact metrics are intended to provide an indication of expected outcome.
9 Goal 1: No poverty End poverty in all its forms everywhere The housing association manages over 5,000 homes and the new funding will help finance the development of a further 900 social homes. The issuer operates in a commuter town outside of London where the average house price is much higher compared to the national UK average, and there are 50 applicants for each available property. A reported 14 million people in the UK currently live in poverty more than one in five of the population according to a recent study by the Joseph Rowntree Foundation, a UK social policy research and development charity. The report also shows that people on low incomes are increasingly struggling to afford a home, with around half of those on the lowest incomes spending more than a third of their income on housing. A key Goal 1 2030 target aims to reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions. The provision of social housing in the UK helps to reduce poverty levels by housing people that have been priced out of the rental market. Goal 11: Sustainable cities and communities Make cities and human settlements inclusive, safe, resilient and sustainable A key Goal 11 2030 target set by the UN aims to ensure access for all to adequate, safe and affordable housing and basic services and upgrade slums. All homes managed by the issuer meet the decent homes standard set by the UK government. Over 8 million has been set aside by the housing association for home improvements over the next few years, to ensure that the standard continues to be met or exceeded. The issuer is also planning to make their properties more energy efficient, by fitting wall insulation in a portion of their properties with the aim of reducing heating bills and CO2 emissions. So the investment will help to achieve another Goal 11 target to enhance inclusive and sustainable urbanization and capacity for participatory, integrated and sustainable human settlement planning and management in all countries.
10 Targeting real world impact aligned with the Sustainable Development Goals What do the SDGs mean for the future of impact investing? It is still early days for the SDGs, but momentum is growing. We believe the SDGs can be utilised by investors in the following ways: to create taxonomies for investments, to guide impact measurement and reporting, and to encourage better behaviours and disclosure from borrowers. This ambition could not only help to promote common understanding of definition and segmentation of the market, but also encourage the growth and development of the impact investing sector. Taxonomies for investments: The SDGs can provide useful context for impact investors to examine how their objectives and investment activities fit into global sustainable development efforts. Further, using the SDG framework to develop and enhance their own taxonomies (aimed at grouping investments according to relevant activities of a company or project) can also help articulate and clarify how impact investments align to the goals. Measurability and transparent reporting: A robust process to measure and report the social and environmental outcomes of each investment is essential for any impact strategy, in addition to typical financial performance metrics. While there are both opportunities and challenges aligning with the SDGs on a broader level, they can help to guide impact measurement practice and contribute to transparent reporting. About 26% of survey respondents track their investment performance to the SDGs and another 34% plan to do so in the near future, according to the GIIN s Annual Investor Survey 2017. Among the 55 respondents that track the performance of their investments with respect to the SDGs, a large majority target Goal 8: Decent work and economic growth (82%). Other commonly-tracked SDGs include Goal 7: Renewable energy (62%), Goal 1: No poverty (58%), and Goal 5: Gender equality (55%). Engagement element orientated around the SDGs: Engagement with management is necessary for impact analysis and meaningful impact reporting, and to encourage better behaviours and ESG disclosures. While this can help to ensure the investment delivers strong environmental or social benefits and the required financial return, there is also an engagement opportunity orientated around the SDGs. In 2015, researchers from ShareAction interviewed 52 institutional investors, based in every region of the world, on their attitudes and intentions in relation to the SDGs and they found that 95% of respondents plan to engage with investee companies about issues covered by the SDGs.
11 The PRI s SDG agenda: Ongoing support from policymakers and international organisations is also crucial to the long-term growth of the impact investing industry. In particular, the UN Environmental Finance Initiative (UNEP FI) launched the Principles for Positive Impact Finance (PIF) in January 2017, which is a common framework designed to help meet the UN SDGs. The Principles for Responsible Investment (PRI) is also helping to reinforce the SDGs as a framework for sustainable and impact investment through its activities. The PRI have included the SDGs and impact as part of their aim over the next 10 years to bring responsible investors together to work towards sustainable markets that contribute to a more prosperous world for all. This includes setting out steps and developing tools for investors to align their investment activities with the SDGs and introducing the SDGs into the PRI Reporting Framework. Exactly how investors should interpret investment risks and opportunities relating to the SDGs may still be unclear to many, but efforts are evidently underway to help investors understand how they can utilise the SDGs as a way to frame their investment activities to achieve environmental and / or social goals and the required risk-adjusted returns. The world stands a fighting chance of achieving the sustainable development goals if greater amounts of private capital are allocated to solving the most pressing environmental and social problems. We believe impact investing has a pivotal role to play in filling the SDG funding gap by targeting real world impact aligned to the SDGs.
Contact United Kingdom Andrew Swan +44 (0)20 7548 2375 andrew.swan@mandg.co.uk John Atkin +44 (0)20 7548 3466 john.atkin@mandg.co.uk Henry Barstow +44 (0)20 7548 3469 henry.barstow@mandg.co.uk Sunita Dey +44 (0)20 7548 3393 sunita.dey@mandg.co.uk www.mandg.co.uk/institutions institutional.clients@mandg.co.uk For Investment Professionals only. This paper reflects M&G s present opinions reflecting current market conditions. They are subject to change without notice and involve many assumptions which may not prove valid. Past performance is not a guide to future performance The distribution of this guide does not constitute an offer or solicitation. It has been written for informational and educational purposes only and should not be considered as investment advice or as a recommendation of any particular security, strategy or investment product. Reference in this document to individual companies is included solely for the purpose of illustration and should not be construed as a recommendation to buy or sell the same. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. The services and products provided by M&G Investment Management Limited are available only to investors who come within the category of the Professional Client as defined in the Financial Conduct Authority s Handbook. M&G Investments is a business name of M&G Investment Management Limited and is used by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and Wales under number 936683 with its registered office at Laurence Pountney Hill, London EC4R 0HH. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. FEB 2018 / IM1440 / UK