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The simultaneous achievement of economic growth, social inclusion and environmental sustainability is the imperative of the 21st century. This imperative can be captured in two important words: sustainable development. The 17 Sustainable Development Goals (SDGs) agreed by 193 member states of the United Nations in September 2015 embody this, with quantitative and qualitative targets and timelines through to 2030.
The global financial sector will be at the centre of the UN’s attempt to achieve the SDGs. Recent estimates indicate that the SDGs will require an additional US$2.4 trillion1 of annual public and private investment into low-carbon infrastructure, energy, agriculture, health, education and other sustainability sectors, globally. The process of energy decarbonisation, alone, will likely cost an incremental US$1 trillion per annum in further investments in renewable energy and associated technologies. It is the task of the financial system – public and private - to mobilise this capital for the SDG agenda.
The financing of sustainable development, however, presents a paradox that needs to be solved.
On the one hand, the required increase in global investments is not overly daunting, given the size, scale and sophistication of the global financial system. The financial system has the requisite size, technological knowledge, dynamism and global reach to help achieve the SDGs.
Yet, perhaps because of the significant size and scale of the financial system, its re-orientation will be not an easy task. The system is comprised of tens of thousands of institutional participants – including regulators, banks, insurance companies, stock and bond exchanges, institutional investors and more – and billions of individual market participants. Changing the behaviour of this panoply of actors, each of whom operate in different geographies and regulatory environments, will require clear thinking, focused analysis and political will.
To solve the paradox, a system-level shift towards long-term, sustainable capitalism is required. Long-term capitalism means a financial system that supports long-term investments, from businesses and governments, for long-term outcomes. To move financial systems in this direction will require many changes in corporate incentives, the regulation of financial institutions, the diffusion of financial technology and more.
The BSDC was formed in 2016 to bring together leading corporate, non-profit and philanthropic leaders to think through how the global business community could accelerate progress towards sustainable development. The BSDC proposed five practical areas of action for the business, policy and investor community.
Infographic: Financial assets are growing 2% faster than GDP
- Economic policy and financial regulation must be aligned with sustainable development. New economic policy frameworks, including focused efforts on green infrastructure investments, are needed by government.
- Corporate reporting must be standardised and harmonised for sustainable development. The creation of an International Sustainability Standards Board and of corporate sustainability benchmarks would be useful initiatives.
- Sustainable infrastructure must be supported. There is an annual need of approximately US$6 trillion for green infrastructure investments, with a projected gap of US$2-3 trillion per annum. The creation and scaling-up of blended finance instruments can help solve this gap, as can a revisiting of the size and scope of global development finance institutions, a process that is already underway.
- It is necessary to create and expand long-term pools of capital for the required investments in sustainable development. There is not enough long-term, investor capital that can be mobilised for investments in infrastructure, energy and other real-economy investments.
- Financial innovation must be supported and used to accelerate progress towards sustainable development. Improvements in information and communication technology has enabled extraordinary development in financial inclusion.
By driving action in critical areas, including policy and regulation, corporate reporting, infrastructure, long-term financing and innovation, we believe that the great power and influence of the global financial system can support the world’s attempt to achieve a more sustainable future.
Hendrik du Toit and Therese Niklasson
Investec Asset Management recognises that it has an important part to play as a fiduciary and a manager of institutional assets.
We have, therefore, incrementally built our investment resources to better understand and internalise risks and opportunities related to sustainable development. This is the result of realising that the dynamics of economic growth and wealth creation over the past half-decade are incompatible with sustainable global development. Long-term business strategies need to become more inventive to maximise sustainable returns for stakeholders, instead of continuing the current zero-sum game of destructive value extraction.
So how can the world finance the SDGs? The answer is no less than ‘orientating the financial sector towards long-term and sustainable outcomes’. We would argue that a significant number of investors can specifically contribute to the first, second and fourth points of the BSDC recommendations (listed earlier).
Embedding SDGs into the investment process is effectively emphasising the importance of ESG integration, and this has been a key priority for Investec Asset Management over the past number of years. The integration has evolved on the back of key trends and signals for asset managers.
Firstly, and perhaps most importantly, there is an economic reason for considering material ESG issues in an investment case. Today, environmental management is a regulated space, and the effect on a company that falls foul of the regulations can be severe. The BP Macondo spill in the Gulf of Mexico in 2010 illustrates how a company, that had survived many difficulties and accidents in the past, was faced with a US$61.2 billion (pre-tax) bill for the disaster. This has had an impact on all its stakeholders and the value of the business.
Other issues of concern to global financial systems include bribery and corruption, labour slavery, trafficking and drugs industry. Bribery and corruption are estimated to be worth US$1.5 trillion which is about 2% of global GDP2. The investment industry has a significant role to play, alongside governments and regulators, to allocate capital responsibly. Investec Asset Management, therefore, looks closely at governance and business integrity before investing in any listed or alternative asset investment.
By integrating ESG issues into the investment process we are able to better understand where these types of risks reside, how exposed companies are to them, how well-positioned companies are to manage them, and how we can engage with company management.
In addition to the growing focus by asset owners, there has also been a growth in policies and initiatives supporting ESG. For example, a joint report by the UN PRI and the MSCI ESG Research team in 2016 identified almost 300 policy instruments which help investors to consider long-term value drivers in the 50 largest economies in the world.
We believe it is important to not only manage our clients’ assets in a responsible, long-term manner but to lead the conversation and encourage them on their journey towards more sustainable investing. Over the past year, we have engaged our clients through the Investec Investment Institute, client roadshows, and initiatives, such as our engagement with BSDC.
We also consider our own carbon footprint, manage our waste, train and develop our staff, and contribute to our communities and conservations across Africa.
The financing of the SDGs will encompass attitude and mentality changes, coupled with financial regulation changes, and on-the-field changes. Investec Asset Management is aware that overcoming these hurdles may well be a burdensome and slow process. But we are inspired and committed to contribute to sustainability across the world. We have the incentive, people, skills and tools to do so.