How Asset Managers use SDGs to assess the sustainability profile of their products

Asset Managers are increasingly expected to integrate sustainability in their investment process in some way, shape, or form. The metrics and processes that asset managers decide to adopt depend on how sustainability-driven their financial products are. 

One of the most common frameworks used by Asset Managers is the United Nations Sustainable Development Goals (UN SDGs). The SDGs are certainly one of the simplest ways to start integrating sustainability into investment processes because of the nature of the information. From the financial industry lens, it is a binary data point: either a company commits to a certain goal or it does not. 

This article will dive into the benefits and limitations of using SDGs in the investment process. As well as how, exactly, an asset manager can use SDGs in their decision-making process.

Why are SDGs being adopted by Asset Managers? 

The 17 SDGs are a comprehensive framework created by the United Nations in 2015 to be a shared blueprint to address global challenges by 2030. 

In the past years, SDGs started being widely adopted by companies in their sustainability reports and also by end investors to create a vision of how their capital can contribute to bigger causes. It is only natural that asset managers would follow the trend. And here are three reasons: 

1. A common language: Between companies and investors are the asset managers with the role of selecting companies to create portfolios that meet investors’ demands. Asset managers are, therefore, bound to utilize SDGs as a common language to address the topic of sustainable impact made by a portfolio. 
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2. ‍Attracting responsible investors: Investors are increasingly interested in contributing to a more sustainable world. Asset managers who incorporate the SDGs in their strategies are more likely to attract socially conscious clients who want their investments to align with their values.
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3. ‍Impact creation and measurement: Some asset managers also truly wish to align their investments with one or many of the 17 global priorities. The SDGs are accompanied by 169 specific targets and 232 measurable indicators. These targets and indicators help countries and companies plan, measure progress, find gaps, and report the results to the international community. These targets and indicators are what actually make the SDGs measurable and reportable. Therefore, the SDGs facilitate transparency and accountability in the industry.

Common ways to integrate SDGs in financial products

We notice three common ways of using SDGs in the investment process and disclosure documents:  

1. Financial products that follow SFDR’s Article 8 or Article 9 guidelines need to establish a methodology to assess what percentage of their portfolio is considered sustainable investments. While creating this methodology, many asset managers include SDGs as the framework by which they assess the positive contribution of their financial products. For example: an asset manager might say that, to be considered a sustainable investment, a company must contribute to at least 10 SDGs.
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2. “Mainstream” financial products not following SFDR’s Article 8 or Article 9 guidelines - those calling themselves “Article 6”, can also benefit from SDGs to make a simple assessment of the sustainability impact of their investments and publish it in an annual sustainability report. We came across, for example, the following analysis: the asset management company selected a handful of goals to focus on and defined a target percentage of AUM that should contribute to such goals. In the yearly sustainability report, they mentioned the actual percentage of AUM contributed to the selected goals.
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3. Thematic financial products dedicated to a specific trend or theme might use SDGs to ensure and report the alignment of the product to the UN's global goals. Similar to example 2, a fund manager managing a portfolio dedicated to investing in assets that contribute to objectives such as renewable energy or public health could work to align their screening and investment process with SDGs such as 7 (affordable and clean energy) or 3 (good health and well-being).

The path to acquiring information about SDGs contributions

To effectively measure and report their contributions to the SDGs, asset managers employ a variety of methods and tools:

1. Company reporting: Mentioning SDGs contribution is voluntary and not enforced by any regulation in Europe. Instead, it is a decision by each company. And many companies now disclose information about their contributions to the SDGs in their yearly sustainability reports. Take the example of the French pharmaceutical company Sanofi. Their latest Corporate Sustainability Report (reference year: 2022) contains 98 pages of in-depth information, but in one table, they describe how exactly the company is contributing to 8 of the 17 SDGs (see an extract below).
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2. ‍Research: Sometimes, asset managers looking for information about SDGs might need to jump through some more hoops to actually identify the SDGs’ contributions. Take the example of Cisco Systems, Inc. The American tech company does not explain the contributions to SDGs in their annual sustainability report. Instead, it has a page on its website with deeper links to detailed explanations for each SDG. For examples like this, asset managers simply need to dig for the information.
   
   
3. Third-Party Data Providers: Asset managers may count on the support of data providers, including Datia, that aggregate and analyze data on how companies align with the SDGs. Using a third-party service can help asset managers save time. They no longer need to collect the data points from each investee company. Instead, they can focus on analyzing the impact of their entire portfolio. 

Challenges with the usage of SDGs in the investment process

While the use of SDGs in asset managers' sustainability strategies is on the rise, challenges persist. These include the lack of standardized metrics for measuring SDG impact, the potential for SDG-washing, and the need for consistent global reporting standards. 

Given these limitations, Datia’s team summarizes the use of SDGs as a good start for mainstream financial products looking to kick-start more sustainable strategies. “But as the sustainability vision of the team matures, other metrics can be more assertive in determining if a company is contributing to a sustainability objective, for example, the most recently established Principal Adverse Impact indicators created by the Sustainable Finance Disclosure Regulation, explains Nora Sandahl, Datia’s Head of Sustainability. 

How Datia can help

Datia collects information about the SDGs contribution of 36,000+ companies and calculates what percentage of assets under management is contributing at least to one SDG and what percentage is contributing to each of the 17 SDGs. This evaluation works even for fund-of-funds thanks to Datia’s fund look-through technology which analyzes the constituents of over 210,000 funds.