A new value-chain for Sustainable Responsible Investing

The World Bank's first equity-linked bond to explicitly support the SDGs is redefining the role of capital markets in promoting sustainable development.

The launch of the United Nations’ Financial Innovation Platform in October 2016 called for direct engagement from the financial sector in achieving the Sustainable Development Goals (SDGs). These 17 interlinked goals were established to guide international cooperation to achieve sustainable development, end poverty, build peace and tackle climate change.

The swift response from the capital markets suggests a change in the way that the industry is set up to take action and support such crucial initiatives. The recent surge in investor demand for sustainable investment is well documented, but the response to the SDGs exposes nothing less than a realignment of capital markets around sustainable development at every stage of the value chain.

There now exists a well-developed infrastructure delivering fully-fledged opportunities for investors to align their financial objectives with sustainability goals such as equality, poverty, clean energy and more. The UN’s Financial Innovation Platform and the SDGs are compelling example of how industry participants are collaborating to successfully to channel finance into socially responsible projects and companies worldwide. Here we examine the new SRI value chain step by step, to reveal how capital markets players are redefining their role in sustainable development.

A call to action
The Sustainable Development Goals were designed by the UN to mobilise efforts to end all forms of poverty, fight inequalities and tackle climate change. They act as a rallying call, but equally provide a framework for action on sustainability, specifically targeting players from the private sector and financial world, as well as governments and NGOs, to take an active part in their success.

The powerful combination of clear objectives from a recognised sponsor and framework for implementation position these initiatives well for adoption by capital markets. .

Building Ethical-Indices
Specialist research and index providers are engaged to align these goals with the financial requirements of investors, by creating equity indices composed of publicly listed companies.

Crucially, these specialists filter the companies in the index to meet sustainable development targets, such as tackling poverty and hunger, or promoting peace.

In the case of the Solactive SDG World Index, eligibility is based on Vigeo Eiris’ Equitics© methodology; only selecting companies which have a clear, positive net impact on sustainable development. Solactive, an index provider, then applies financial, risk and diversification filters to reach the final composition. This can now form the basis of a variety of investor products.

“With the Sustainable Development Goals Index series, Solactive is providing the basis for investment products that mirror the UN’s SDGs,” said Steffen Scheuble, CEO of Solactive AG.

“We are very pleased to support this initiative building momentum and capacity for sustainable growth and responsible investment. It is a smart solution meeting the growing expectations of investors towards companies’ contribution to the UN Sustainable Development Goals.” Nicole Notat, CEO, Vigeo Eiris.

Financing via Debt Capital Markets
There is an unprecedented opportunity for private investors to support the SDGs through financing channels set up by development finance and public sector institutions. The World Bank is leading the charge on this effort by issuing bonds that support the SDGs-raising around $50 billion annually for projects in health, education, sustainable infrastructure and other areas.

The World Bank is a vital source of financial and technical assistance to developing countries around the world. Its activities focus on achieving two goals: ending extreme poverty by 2030, and promoting prosperity by fostering the income growth of the bottom 40% for every country. Every project supported by the World Bank advances the SDGs.

Through its annual borrowing program, the World Bank raises funding for its activities and offers investors a direct opportunity to support the SDGs. As a triple-A rated agency, it is also an appealing proposition for a very broad investor base.

Institutions like the World Bank and other development and public sector agencies can play a key role in raising funding for the SDGs-and for raising awareness of global development priorities in the capital markets.

“Achieving the Sustainable Development Goals will require increased collaboration from public sector, private sector, and individuals. The World Bank’s twin goals – eliminating extreme poverty and boosting shared prosperity – are aligned with the SDGs. By buying World Bank bonds, investors have the opportunity to support companies in a way that supports sustainable development,” said Arunma Oteh, Vice President and Treasurer, World Bank.

Banks Provide the Bridge
Banks bring all the elements together, structuring investment opportunities that incorporate both the bonds and indices.

“This effort is in direct response to the UN Secretary-General’s launch of a Financial Innovation Platform (FIP) that calls for innovations and new financial models in support of the SDGs. Through this innovative program, we can help our clients meet their increasing need to align financial objectives with global sustainability objectives” says Olivier Osty, Executive Head of Global Markets, BNP Paribas.

Banks also connect the product with an investor base which includes institutional and retail investors to create the final links in this vital chain. Banks provide investors the chance to contribute to projects in the real economy which drive sustainable growth, within a structure that also addresses their financial and goals. The key enabler of the trend is the investors. Their appetite for sustainable investment opportunities is growing rapidly, driven by the ascendant influence of their own SRI policies and the increasing regulatory, and yield, incentives for sustainable activity.

Reporting Back
Institutional investors can receive feedback on the environmental, social and governance (ESG) performance of the companies in the Solactive SDG World Index through reports prepared by Vigeo Eiris’. Reporting on risk assessment factors such as controversy exposure, business involvement screening, and carbon footprint help investors integrate ESG factors more easily into their investment decision-making process.

Here we see a mature infrastructure in place empowering the capital markets universe to play a role in sustainable and responsible development worldwide, aligning investors’ financial goals with the funding needs of transformative sustainable development projects.