Investing with SDG outcomes: a five-part framework

Following on from the PRI’s The SDG investment case – which laid out why the SDGs are relevant to investors, why there is an expectation that investors will contribute and why investors should want to – this report takes the next steps by outlining a prospective framework for action. It is meant as a useful reference for all PRI signatories, providing sufficient scope for asset owners, investment managers and service providers to differ in the specific actions they undertake to shape outcomes in line with the SDGs.

This framework is the starting point for a deeper and ongoing body of work on the subject, and will be the basis for future guidance and support.

Executive summary

All investor actions shape positive and negative outcomes in the world

Issues such as human rights abuses, climate change and inequitable social structures seriously threaten the longterm performance of economies, investors’ portfolios and the world in which beneficiaries live. Expectations from beneficiaries, clients, governments and regulators over how investors should respond have changed – driven by increased visibility and urgency around many of the SDGs.

The urgency to deliver on the SDGs has only been increased by the COVID-19 pandemic, with several governments recognising that the SDGs can act as a guide to the global response, “to make sure that nobody is left behind”.

To support meeting the SDGs, investors must understand how they can increase the positive outcomes and decrease the negative outcomes arising from their actions.

There is significant potential for investors to shape outcomes in line with the SDGs

With a combined US$89 trillion in assets under management, PRI signatories can play a unique role in helping the world to meet the SDGs – individually, and in collaboration with fellow investors and broader stakeholders.

A focus on shaping SDG outcomes involves broadening the analysis of individual investees’ financially material ESG issues, to also include a parallel analysis of the most important outcomes to society and the environment at a systemic level. These material issues and real-world outcomes overlap to some extent, but not fully, and this is part of the gap that needs to close to achieve the SDGs by 2030.

A focus on outcomes allows investors to understand the risks and opportunities that are likely to exist in the transition to an SDG-aligned world. Investors can:

identify opportunities in business models, supply chains and products/services;
prepare for legal and regulatory developments;
protect their reputation and licence-to-operate;
meet commitments to clients and beneficiaries – and communicate progress;
consider materiality over longer time horizons, to include transition risks, tail risks, financial system risks etc.;
minimise the negative outcomes and increase the positive outcomes of investments.

A five-part framework for investors

The PRI proposes a five-part framework for investors that are seeking to understand the real-world outcomes of their investments, and to shape those outcomes in line with the SDGs.

Figure 4_Five-part SDG outcomes framework for investors

1. Identify outcomes

Part 1 is about investors identifying and understanding the unintended outcomes of their investments and their own operations. This assessment involves identifying positive and negative real-world outcomes related to investees’ operations, products and services. It can build on activities such as mapping existing investments to the SDGs and determining the scale of investments in explicitly SDGaligned activities.

2. Set policies and targets

Part 2 sees investors setting policies and targets, moving the investor from identifying and understanding unintended outcomes towards taking intentional steps to shape outcomes. As many outcomes are connected – e.g. climate change and water scarcity, food security and poverty – investors will have to look across all investments and all SDGs holistically when considering their most important outcomes.

3. Investors shape outcomes

In Part 3, investors seek to shape outcomes in line with the policies and targets set in Part 2, and report on progress against those objectives. We outline examples of how this takes place through investor actions including: investment decisions, stewardship of investees and engagement with policy makers and key stakeholders – and how it can be communicated through disclosure and reporting.

4. Financial system shapes collective outcomes

Part 4 considers the contribution of the financial system. Shaping outcomes in line with the SDGs at the financial system level takes place both through aggregating the actions of individual investors, and from investors acting collectively – including alongside other financial system participants such as credit rating agencies, index providers, proxy advisors, banks, insurers and multilateral financial institutions.

5. Global stakeholders collaborate to achieve outcomes in line with the SDGs

Part 5 recognises that no one set of actors will achieve the SDGs in isolation. The finance sector, businesses, governments, academia, civil society, the media, individuals and their communities must act collectively to ultimately achieve the SDGs. Necessary elements include programmes to connect supply and demand of investments at scale, and collaboration on tools to contextualise outcomes data in the global thresholds and timelines required to achieve the SDGs.

Although more support for investors needs to be developed, there are already several relevant tools, metrics and data sets that can be useful for investors to take action across the framework. Given the urgency with which the SDGs must be achieved, investors must work with others to further develop the tools and incentives needed.

Next steps: PRI support for signatories

The PRI will assist signatories seeking to shape outcomes in line with the SDGs, including supporting investors to focus on key issues that have systemic implications for market beta or the real economy, such as climate change and human rights issues. We will aim to do so for each part of the framework, across each of the investor actions. Subsequent guidance on each action could focus on improving transparency and collaboration, all with the objective of shaping real-world outcomes.

Following consultation with signatories on revising the PRI Reporting Framework, we will also include an initial set of outcomes questions in the pilot year of the new Reporting Framework in 2021. A small number will be in the ‘core’ section (questions that are mandatory to answer, and are assessed), with the majority in the ‘plus’ section (voluntary to answer, and not assessed).

This report is only the beginning in bringing together thinking on ESG risks and opportunities with thinking on the potential to shape SDG outcomes. The scale of the challenge will require working with others across the finance sector, as well as with other key stakeholders.