Investment in the 17 SDGs is growing, but SDG 16, and its call to promote peaceful and inclusive societies for sustainable development, gets the least investor attention. Yet the idea that investors can mobilise their capital to nurture peace is wholly possible, argued Scott Weber, president, Interpeace, the Swiss-based UN-backed organisation set up in 1994 that strives to build peace in conflict-riven countries. Speaking at the Fiduciary Investors’ Symposium at Harvard University, he outlined ambitions for investors to rally behind a fledgling project to invest in SDG peace bonds to foster home-grown solutions to conflict.
An inaugural bond could allow investors to finance mental health in Rwanda, where generations remain plagued by the aftermath of the genocide. Other bonds could finance infrastructure and energy in former conflict zones in a new area of finance that he compared to green bonds 25 years ago.
“Governments will pay out bonds at the end of the term with a coupon that is better than a treasury bond,” he said.
At its core investors will buy into the belief that people in conflict zones need ownership of their own peace process. During the height of the piracy crisis off the coast of Somalia, the world spent $6.1 billion on re-routing and arming ships, insurance and other strategies to counter the risk, said Weber. Yet all the time the root of the problem was onshore in Somali villages where people had turned to piracy following the loss of their fishing industry to foreign trawlers.
“Governments spend on the symptoms and not the core issues,” he said, explaining that Interpeace’s ensuing initiative in Somali villages has profoundly reduced piracy. “If people don’t own the solutions to problems, they don’t stick,” he said. “90 per cent of countries in conflict today have previously experienced conflict. It is about getting people to build peace themselves.”
Moreover, investing in peace is the most important SDG of all. How can any of the other development goals ever be achieved if war shatters their benefit, he asked delegates.
“Lots of people live in conflict, and most have no access to the type of capital you are raising. All SDGs in a conflict country depend on peace.” He added that few conflict-riven countries achieved the UN’s Millennium Development Goals.
For investors, the novel idea raised questions of where the revenue would come to pay for the bonds. Others commented that under existing SDG investment, investors already invest in emerging market infrastructure.
For some it sounded far-fetched.
Kate Murtagh, managing director for sustainable investing and chief compliance officer at $37.1 billion Harvard Management Company noted that that SDGs offered an “additional prism” through which to monitor ESG integration adding that the SDGs were crafted as “development goals for countries to strive for” rather than “an investable framework.”
She said, however, that such conversations are important to take investors out of their comfort zone and that a “willingness to have these conversations” is how novel ideas take root.
Sustainable investment comes with hundreds of different definitions and ratings, but the SDGs offer signposts and classification. For example, ratings from MSCI and Sustainalytics differ from each other.
“The SDGs bring a framework that is uniform and more tangible,” says Erik van Leeunwen, co-head of fixed income, Robeco. He explained that one of the challenges integrating SDGs is applying them to public markets – important because this will take them mainstream. van Leeunwen listed public food companies need to ensure healthy food (SDG 3) and the car industry to go electric to combat climate change (SDG 13) as examples of the types of public companies that need to change.
“We need these public companies to make the transition and realise the SDGs,” he said.
In 2016 Robeco began shaping a framework to gage which of its holdings contribute to the SDGs via a range of KPIs. These include looking at the products investee companies make, to whether they are active in emerging markets or the extent to which they have integrated diversity.
“If you want to build a diversified portfolio it is possible,” he said. “You can target high impact companies. Our framework is a good way to link investment to the SDGs and engage with clients to build more positively impactful portfolios.”
At €473 billion ($575 billion) APG, Europe’s largest investor managing the pension fund of one in five Dutch citizens, SDGs are increasingly integrated alongside the manager’s primary goal of ensuring returns.
“Our client funds are very clear that they want us to invest for returns, manage costs and contribute to sustainable development,” said Anna Pot, manager, responsible investments, APG. Most recently this has involved developing an inclusion policy. The strategy demands that portfolio managers should defend the rationale for investing in a company from a risk, return, cost and ESG perspective. “We can invest in a laggard, but if we do, we know it involves a risk,” she says.
Much of APG’s SDG strategy is driven by its beneficiaries.
“Our clients have set specific targets to invest more in companies that contribute to the SDGs,” she said.
This has led the manager to develop sustainable development investments that meet the SDGs. It recently created an SDI (sustainable development investment) Asset Owner Platform together with sister fund PGGM.
The AI-driven technology sifts through reams of structured and unstructured data to gauge the extent to which companies’ products and activities meet the UN’s Sustainable Development Goals. Collaboration has been a key element of developing the platform to try and ensure shared definitions, she explains.
“SDIs are companies that contribute to the SDGs,” she says. “If it is only us who applies this definition there is a risk of all having different definitions. We invite others to join us on our journey.”
Robeco’s van Leeunwen noted that because the SDGs have only been around since 2015, it is still too early to assess their impact.
“We don’t know if it is definitely a better way of investing, but if you look at the results the risk is higher in companies that don’t contribute to SDGs.” Those companies that contribute negatively have a higher default rate, he concluded.