Investors lead the way on sustainable standards

Asset owners create SDI taxonomy for investment community

Asset owners and managers need to identify and assess sustainable development investments and measure their portfolios’ contributions to the United Nations’ sustainable development goals. Influential investors can drive a shift towards business models that better support sustainable development and create long term value. They also have a shared understanding of the data they need and how to apply it.

That’s why a group of leading funds last year introduced a classification designed to take the hard work out of translating the SDGs into investment measures for asset owners.

APG, AustralianSuper, British Columbia Investment Management Corporation and PGGM, who collectively manage more than $1tn in assets, have established the sustainable development investments asset owner platform. Initially launched with data on 8,000 listed equities, coverage will increase to 10,000 companies next year and include bonds. The platform is also working on applying its methodology to private assets.

It helps investors worldwide identify and assess companies on their contribution to the SDGs by using standardised, artificial intelligence driven data.

The initiative originated from Dutch pension providers APG and PGGM, who identified the need for a global SDI standard. Before one could be developed though, a common language was needed to ensure that investors had a shared understanding of their objectives.

The resulting SDI taxonomy focuses on products- and services-related contributions to the SDGs and is based on publicly available, audited financial metrics. This makes the data objective and measurable, removing any potential bias from the results. The SDI taxonomy is also publicly available, aiding transparency.

The taxonomy differs to existing systems in both scope and the metrics used. It focuses on company contributions to SDGs based on corporate revenues rather than economic activity, enabling investors to determine the contribution their investments are making to the 17 SDGs. These are a broader set of sustainability goals than the European Union’s taxonomy for sustainable activities’ six environmental objectives.

Having laid the foundations of common definitions and a taxonomy, the Dutch duo turned to providing a data source for investments. Powered by AI, data science company Entis generates SDI classifications for around 8,000 listed companies. These are then given to Qontigo, its global distribution partner, for release to subscribers.

AustralianSuper and BCI joined the SDI AOP design authority in 2020, adding the Americas and Asia Pacific regions to those already represented by earlier asset owners. The taxonomy continues to develop, drawing on insights from a focused and powerful group of asset owners, each offering a different perspective. Regional representation has deepened the platform’s research, integrating local expertise and insights.

It was important that the initiative was founded and led by asset owners. The intention is to set a global standard that the investment community embraces, leading to faster adoption of the SDGs as an investment framework.

As the taxonomy explains, environmental, social and governance considerations relate to the activities within a company; SDI relates to the products and services a company offers.

The taxonomy specifically maps investments to the SDGs and their subgoals, making it separate and distinct to ESG-indicator based standards. Including almost 170 goals on sustainable issues, such as climate change, hunger, water scarcity, healthcare access and social inequality, the SDG framework provides an extension to traditional ESG analytics and a broader view of sustainable investment impacts.

Data standardisation is one of the biggest challenges in the ESG landscape. While the SDI framework differs from traditional ESG measures, it supports investors’ existing integration practices. ESG warning flags were built into the taxonomy to support the integration of ESG in individual investors’ decision-making. Most importantly, the SDI AOP allows investors to assess how well placed companies are for a future SDG-aligned economy.

By developing an SDI standard, the consortium hopes to have created efficiencies for other asset owners so that they do not have to repeat work when they want to link their portfolio to the SDGs.

The next big step for the platform will be defining forward-looking metrics to enable reporting on the outlook of companies based on SDG-aligned products. As the industry moves towards greater transparency about how investment portfolios can contribute to solutions for global challenges, there is more to do.

Andrew Gray is Director of ESG and Stewardship at AustralianSuper.

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