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From ESG to SDGs:
An Investor’s Perspective on Sustainability Reporting

Investors are stepping up their appeals for robust corporate sustainability reporting, with increased focus on climate impact and long-term performance in a carbon-constrained world. These reports have been standard for some time, though the metrics and definitions for success have transformed within this framework over time.

Many stakeholders have pressed companies to go beyond the standard ESG approach — which measures performance by limiting corporate impact — and explore ways actually improve the world around them. To that end, some see the UN Sustainable Development Goals (SDGs) as an opportunity to guide companies toward areas of positive, measurable impacts.

Steve Schueth, President and Chief Marketing Officer at First Affirmative Financial Network, has watched the corporate-investor sustainability dialogue evolve throughout his career as a leader in socially responsible investing. I sat down with him to explore this latest shift, and what he sees for the future of sustainability reporting.

In what ways do you feel like the way that companies tend to approach sustainability efforts in tracking and reporting come up short, and how do you think the SDGs can help us address some of those challenges?

Steve Schueth: 27-28 years ago, all we really had to go on was the idea of “avoiding the bad guys.” What we used to call “social screens” were all about identifying companies that were doing things that were unhealthy. They were in businesses which were producing products which, when used as directed, killed or hurt people, caused damage. And frankly, that's pretty much all we could do, and it was kind of an act of faith that creating an investment portfolio that was not exposed to those bad actors would ultimately deliver better performance.

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Fast-forward 20 years and we're now in the middle of ESG, [which] of course is language that was promulgated by the UN PRI (Principles for Responsible Investing) in 2006. Since 2006, the nomenclature has shifted — but more importantly, there's so much more data available to us now. And today, the process of ESG factor analysis — which is at the core of every investment strategy that calls itself “Sustainable” or “Responsible” or “Impact” — is now a big data-driven process. So, I want you to think about the original Socially Responsible Investing (SRI) — avoiding the bad guys — as SRI 1.0. I think about ESG as SRI 2.0, heavily data-driven. Lots of information definitely has helped us identify the better companies and has helped us design portfolios where we don't have to really be very concerned about them underperforming relative to their conventional competitors. I think the SDGs are becoming commonly held goals that companies can embrace, that investors can embrace; and that investment professionals, asset managers, can embrace.

I've looked at sustainability reports that have been published by large global companies for, let's say, the past six or seven months. What's become apparent is that the SDGs are very much front and center for these large companies***.*** Not that everybody is spending their entire report on this, sometimes it's a couple paragraphs or a couple pages. In most cases, you've got a big public company saying, “These [few] SDGs really fit who we are — they’re accurate reflections of our mission, our purpose in the world and our core business, and we're going to track our progress against these three or four or five SDGs.” Nobody's trying to bite off all 17 of them, which is a good thing, but everybody's trying to take a few. Now, from a company perspective, I think you take the ones that are the right fit and it's a lot more comfortable. And frankly, it makes a lot more sense for the company to be reporting on its sustainability initiatives and progress around those SDGs than it is to report around Environment, Social and Governance factors.

In other words, I can relatively easily see that putting my money with this company, with what it's doing to improve the world in these five areas that's helping to create a better world. Therefore, I can understand the positive impact story of that particular situation. So, it’s beginning to feel to me like this is a win-win-win proposition. The SDGs didn't even hit the scene until 2015 — here we are two years later and we're seeing an embracing of SDGs from companies, from investment professionals and from investors, quicker than I've ever seen anything else. So, I just think it's an exciting time I think the SDGs are going to be SRI 3.0. It might take a while, but I think it's going there fairly quickly. We're going to have several sessions at the conference in November (#AllInForImpact Conference for Sustainable, Responsible and Impact Investing) where it isn't just going to be my voice speaking to this, but a whole bunch of other experts on this topic — including people from the UN — will be talking to the vibrancy. It all started out as possibility; now, I think it’s a vibrant reality that the SDGs represent.

I know that the goal has been that national governments will use the SDG rankings or guidelines to guide tax and regulations policies, but that doesn't seem like that's going to be the case, at least in the near term, in the US. What's case do you make for them to build this into the reporting framework?

SS: Two things that come to mind are, number one — building off of what you said, about other countries using these as a regulatory framework, I think we can aim for that. Moving in that direction, I think it is very positive that so many of these companies do business in other countries where it's likely that the SDGs will become part of the regulatory framework — I think that bodes well for their business operations all over the world. But I think in the US, investors and investment professionals who are looking for the better managed companies — the ones that today are embracing ESG factor analysis — as they begin to embrace and ESG/SDG analysis process that we are going to become more of a catalyst than the government will be.

Now, I suppose once we get out from under the yoke of this current Administration, anything is possible. But our history here in the US is that the government has not been a supporter — at least not in any kind of meaningful, direct way — of a more responsible approach to investing. But I'm just ready to write that off and say we have to do this ourselves. It's the trillions of dollars that are being managed on behalf of people who care — and those asset managers, those analysts, are going to be encouraging companies to become more responsible corporate citizens as defined by the SDGs. I think that's the way it should go and I think it will.

I don't want to say that we will ever be done, but do you think once everyone adopts the SDG framework we’ve reached the final evolution, or do you see something beyond that?

SS: I highly doubt it. Global capitalism is all built on out-competing, doing better than your competitor. I’ve always believed that the more responsible corporate citizens [that] in turn build their brand identity around that — at least to some degree — tend to do better, attract better talent and have better stock prices, and all of that. On the other hand, at the investor level you've got all kinds of investment strategies and strategists that are trying to find a way to beat their competitors — in other words, for my fund to do better than the next guy's fund from a performance perspective.

That's certainly that's where ESG came from. It wasn't just another way of organizing analysts under three column headings: Environmental, Social and Government; it was also a way to broaden and deepen the analysis of companies and generate more data upon which investment decisions could be made. I challenge you, just take five or six, pick them randomly if you want to, mutual funds or ETFs or asset managers that are in the SRI or ESG space, depending on how they position themselves and compare their strategies — they all have something that they think is different from the others. Now is it, really? Maybe not. But they're all looking for something different. And that search for something different, the drive to be better than our competitors, is going to continue to propel this whole thing forward in my opinion.


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