PIMCO recently conducted a study on the quality of reporting on the UN Sustainable Development Goals (SDGs) for more than 240 corporate and financial issuers. The SDGs are a globally agreed sustainable development framework consisting of 17 goals and 169 targets to be achieved by 2030. The goals were adopted by all 193 members of the United Nations in 2015 as a global call to action for positive change.
The SDGs are important to investors as they can provide a framework for measuring impact in ESG (environmental, social, governance) investment strategies. But for this to work, investors need to be able to quantify and compare the contributions of each issuer to the achievement of the SDGs. To enable investors to make informed decisions and direct capital towards positive impact, companies need to publish relevant SDG performance data. Unfortunately, current corporate environmental and social disclosures make this difficult to do.
“The need for a common set of impact performance indicators has never been greater for investors.”
As part of PIMCO’s commitment to sustainable investing, we have mapped the current quality of SDG reporting among issuers with the goal of encouraging and supporting enhanced SDG disclosure.
- Companies have a high level of awareness of the SDGs, with 63% referencing them in their reporting, of which 39% map business activities to specific goals.
- Despite high awareness, only 19% of companies referencing the SDGs set quantitative targets for meeting the goals, indicating that many are finding it challenging to translate well-intentioned support into action.
- The need for a common set of impact performance indicators has never been greater for investors to compare the SDG contribution of companies. Encouragingly, there is existing guidance for issuers on how to align measurement with investor needs.
- Issuers can improve reporting practices by focusing on how the business can best apply its capabilities to the SDGs. It is better to identify the SDGs most relevant to the business, rather than generic disclosure across all goals.
- Finally, best practice reporting should include targets for meeting the goals over the timeline to 2030. Targets demonstrate that the company is serious about the SDGs and need not be overly taxing as existing sustainability data can be used as a starting point.
Importance of the SDGs
The SDGs were first adopted in 2015 and their appeal lies in the harmonization of three dimensions – social inclusion, environmental protection, and economic growth – to form a globally agreed sustainable development framework. The goals are ambitious, ranging from fighting poverty and hunger to combatting environmental degradation and promoting strong oversight of issues such as corruption.
The UN Commission on Trade and Development (UNCTAD) has estimated that meeting the goals will require $5 to $7 trillion in investment each year from 2015 to 2030, and with the resources of governments, international agencies and civil organizations constrained, private capital will be key to achieving these targets.
While momentum is building among corporate issuers to contribute to the SDGs, we believe overall private sector progress is insufficient to achieve the 2030 Agenda. Many investors would like to allocate more capital to companies best aligned with the SDGs, but existing levels of disclosure make this difficult to do.
A key challenge lies in the identification and development of fit-for-purpose, comparable metrics that allow investors to evaluate the impact of their capital decisions, as many SDG reporting frameworks aimed at filling the gap between ambition and attainment are at an early stage of maturity.
Assessing the current landscape
Our study examined the corporate disclosures of 246 issuers and mapped the extent to which these reports referenced the SDGs and what level of detail was provided. The issuers selected represent the largest holdings within PIMCO portfolios, and included a mix of geographies and sectors.
We found that almost 63% of issuers referenced the SDGs in some form in their reports, an encouraging signal that the SDGs are gaining a strong foothold in sustainability programs. However, it is also clear that most companies still lack the expertise to identify activity and targets that can add business value.
For example, among the issuers referencing the SDGs, 39% map their business activity to specific goals, but only 19% set quantitative targets and a mere 9% disclose progress against those targets.
Recommendations for sustainable reporting
Of the companies referencing the SDGs, most focused on reporting their positive contributions. While it is important to disclose existing efforts that are driving positive change, as investors we would also value articulation and quantification of:
- Business strategies linked to the SDGs: We encourage issuers to align social contribution to the SDGs with the long-term financial value for the company. The focus here is on how the business can best apply its skills and capabilities, including products and solutions, to advance the goals. There are existing sector-specific tools and resources that are helpful to this process.
- SDGs with the potential for greatest impact: Companies should prioritize the SDG goals in areas most relevant to their business and where the greatest societal impact can be made. The process needs to be informed by assessing risks to people and the environment across the company’s value chain to ensure that it does not offset the positive social and environmental impacts.
- Targets in place to 2030: Targets demonstrate that the company is serious about optimizing the strategy for financial, environmental, and social value creation. A common starting point is using existing data that is already being collected and expanding from there.
We provide further detail on what we deem to be best reporting practices and highlight examples in the final section of this report.
The way forward
Overall we are encouraged to see that the majority of businesses within our study referenced SDGs in their reporting. However, to address the current challenges in providing meaningful reporting, we think issuers and investors should focus on the following:
- Develop agreed performance metrics for the SDGs: If investors are to be able to compare SDG performance, we will need convergence towards a common set of impact indicators that showcase a company’s targets and progress. Encouragingly, several initiatives are seeking to align measurement and reporting with sustainability goals and investment practices, including:
- Investor-led efforts, such as the University of Cambridge Investor Leaders Group (ILG), which is an organization PIMCO actively participates in. The goal of the group is to develop metrics and methodologies for six impact themes encompassing the SDGs. Going forward, we are committed to applying such frameworks to measure and report on the real-world impact of capital allocation within PIMCO’s ESG strategies.
- Issuer reporting efforts such as the UN Global Compact (UNGC) – Global Reporting Initiative, which in August 2018 published Integrating the SDGs into Corporate Reporting: A Practical Guide to enable companies to better align SDG measurement and reporting to investor needs.
- Don’t let perfection be the enemy of progress: SDG reporting is at a nascent stage, with some degree of trial and error, but we encourage issuers to apply the steps outlined here, and further detailed in the UNGC guidance.
- Engage with investors on the SDGs: Even high quality SDG reporting is an imprecise tool for fully capturing the impact of companies. Through engagement with investors, issuers can create a positive feedback loop that strengthens and sustains the changes that are being created.
- Consider issuing SDG bonds: Fixed-income capital is an important financing mechanism in the realization of the SDGs, and investors like PIMCO stand ready to provide financing and support (assuming it makes sound financial sense ). Bond issuers have an opportunity to align debt issuance to support this global sustainability vision in the form of SDG bonds 1.
Our hope is that with better disclosure on the SDGs, and the development of an active SDG bond market, investors such as PIMCO will be able to better allocate capital to directly support the goals. In turn, this should provide more impactful solutions for clients seeking to make positive change through their investment decisions.
Case study: what good reporting looks like
The UNGC guidance for companies recommends a step-by-step process to engage with the goals, identify their priorities, set outcome-oriented targets, and measure progress over time. To provide the most decision-useful information for investors, it recommends that SDG reporting should:
Identify specific SDGs most relevant to the business and with the potential for greatest impact
In the initial labelling and mapping stage, companies go through a high-level scan of the SDGs, including the underlying targets, to develop a better understanding of how they relate to their business activities and sustainability strategy, taking into account the interrelatedness of the goals and the entire value chain of the business. Often companies are reframing current sustainability activity to align their reporting with the SDGs. Many issuers already act and report on topics covered by the SDGs, such as climate change, water management and working conditions.
It is helpful for investors to understand which SDGs are most relevant to the business rather than see boilerplate disclosure across all 17 goals. This step drives any subsequent target-setting and re-alignment of the company’s sustainability strategy. For example, Rabobank, a Dutch lender, has a special focus on the SDG themes of Climate Smart Agriculture and Reducing Food Waste, which leverages impact effectively as its core business lending is to Food & Agriculture businesses in 40 countries. Other issuers in our review undertook stakeholder engagement in order to ensure a comprehensive consideration of the targets and from there developed a shortlist of priority goals.
Disclosing details of the stages in an issuers’ prioritization process ensures that investors have confidence that the company’s SDG activity is well planned and relevant to its business strategy. Spanish telecommunications provider Telefonica’s process recognized how deeply inter-related the goals and targets are. While it ultimately selected SDG 9 (Industry, Innovation & Infrastructure) as its core priority, the company identified eleven secondary and tertiary goals that it believes it can impact and which may affect its business. The final output is an SDG network that illustrates the different priority levels and demonstrates an understanding of the risks and opportunities associated with its business activities 2.
Prioritization also helps investors to identify critical links between industries and the SDG. For example, as the prime connection between people and planet, the food industry can help achieve multiple SDGs. This is shown by our research results in Figure 5, which map the percentage of companies highlighting a specific SDG in the food sector. The majority prioritize climate action, good health and well-being and clean water and sanitation, but there is a broad scope of goals covered across the 16 companies we evaluated.
This process helps to identify industry-specific ideas for action, as in many ways the SDGs serve as a guide to future policy direction. In understanding the significance of the SDGs for their industry, value can be found by issuers in developing clearer links between business strategy and policy agenda, including staying ahead of policy interventions designed to drive SDG achievement3. Certainly we have already seen how the growing global body of green legislation and national energy transition policy agendas have had a material impact, both positive and negative, on corporate performance and objectives in sectors like energy, utilities and autos.
Demonstrate a thorough assessment of business risk, including negative impact, and opportunities
Developing an in-depth understanding of the business case is an important step, which could be related to aligning with, and preparing for, new business opportunities, getting ready for regulatory shifts and evolving investor demands, and better engagement with new customer preferences that SDGs have the potential to strengthen. For example, there are opportunities in the transition to business models that have the potential to be less destructive for the environment and society e.g. auto (alternative vehicles), utilities (renewables) and pharma (unmet medical needs). According to some estimates4 , the goals could create market opportunities reaching trillions of dollars.
One issuer that demonstrates the business opportunity in putting sustainability at the center of a corporate strategy is consumer goods company Unilever. In 2010 it launched a Sustainable Living Plan, a blueprint for sustainable growth, with objectives that align and support the SDGs and are underpinned by targets. Unilever’s Sustainable Living brands are growing 46% faster than the rest of the business and delivered 70% of its turnover growth5.
The negative risks to people and planet in a company’s operations and value chain also needs to be considered. Trade-offs need to be closely managed, for example in ESG investing the term ‘Just Transition’ is a framework that considers the livelihood and rights of workers in the shift to a low carbon economy and sustainable production. In our review of SDG reporting we identified some efforts that begin to address potential negative impacts. Spanish utility Endesa, a majority-owned subsidiary of the Italian utility Enel, seeks to minimize the net biodiversity loss resulting from its business activities. The ‘no net loss’ approach by nature means negative externalities are captured.
Set targets to demonstrate that the company is serious about growing business value
This is where companies seem to run into the biggest challenge, with just 19% of issuers that reference the SDGs in reporting setting targets. Considering that there is no universally agreed upon set of standardized indicators, this is not surprising. As noted, a common starting point is using existing data that companies are already collecting. Going forward, for other priority areas, there needs to be indicators that most adequately express the relationship between business activities and their impact on sustainable development, so that performance can be tracked over time. A five-step process is often used to understand which data should be collected and where there are gaps as shown in Figure 6.
Syngenta, a global provider of agrochemicals and seeds, is seeking to achieve impact on the SDGs through its Good Growth Plan, and has set ambitious outcome-focused targets. Through its Good Growth Plan, Syngenta seeks to increase the average productivity of major crops by 20% without increasing land use and enable 20 million smallholders to increase productivity by 50% by 2020. Setting targets can also strengthen relationships with business partners, such as suppliers, by bringing them on board to support the company in achieving its goals. Marriott International, the diversified hospitality company, engaged with key stakeholders on its next-generation 2025 Sustainability and Social Impact Goals, for which it will be begin reporting on progress in 2018.These 2025 Goals are designed to support meaningful progress toward the SDGs. In engagement with PIMCO’s ESG analysts, this issuer highlighted that brand standard is the ‘holy grail’ of the franchise relationship, and it has built it the 2025 objectives into its standard-setting for franchisees.
Thank you to Marie Wiegert who contributed to this report.
1 Use of proceed SDG Bonds: Bonds with strict accountability of the use of proceeds toward eligible green, social, or climate activities and a link to the SDGs. They are issued in accordance with the Green and Social Bond Principles (ICMA) and the Climate Bond Standard (CBI), which have both mapped their respective frameworks to the SDGs. Use-of-proceed SDG bonds can be issued by companies, Governments and municipalities as well as for assets and projects. They can be unsecured, backed by the creditworthiness of the corporate or Government issuer. They can also be secured with collateral on a specific asset.
2 Telefonica Integrated Report (2017)
3 More countries are outlining investment roadmaps in their Voluntary National Reviews on SDG implementation, directly linking shared sustainability objectives with their policy agendas, including Canada, France and Australia, among others.
4 In its report Better Business, Better World, the Business Commission for Sustainable Development finds that the SDGs provide the private sector with a new growth strategy and pipeline of investment opportunities. It identifies four key sectors that are worth at least US$12 trillion: Energy $4.3 trillion, Cities $3.7 trillion, Food & Agri $2.3 trillion, Health & Well-Being $1.8 trillion.
5 Unilever Sustainable Living Plan (2018)