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19-11-2021 14:40

How to align your investments with the UN Sustainable Development Goals

Have you thought about how your investments can have an impact on real-world challenges? Nordea’s latest ESG Investments publication provides a practical guide to sustainability-themed investing.
Child drinking water with hands

As climate changes are materialising and the world is hit by a pandemic in several waves, private as well as institutional investors are asking themselves how they can be a part of the solution and help fund a more sustainable future, or even address specific global challenges.

This growing interest in sustainability-focused investing should of course be seen as a reflection of a deeper concern about the welfare of people and the planet, but also as an expression of a stronger interest in thematic investing. Thematic investing focuses on long-term trends rather than specific companies or sectors and aims to target the opportunities that arise with global mega trends before they become widely recognised. Examples of such themes could be anything from disruptive new technology to the rise of a new middle class in emerging markets.

Over the past years, the global sustainability challenges and their possible solutions have emerged as a potentially profitable theme that is likely to unfold over the coming years. This gives investors a unique window to address global challenges and at the same time obtain exposure to trends with a strong potential for excess return. That is why it’s highly relevant to approach the theme in a systematic way.

It may seem simple to address social or environmental challenges by investing in companies offering solutions to them, but for the individual investor the realisation of the strategy is somewhat more complex. This is why we have chosen to analyse how to carry out a sustainability-themed investment strategy in Nordea’s latest ESG Investments publication. Here are some of our findings: 

Why sustainability-themed investing?

There are several reasons why sustainability is relevant as a theme and has already attracted much attention from investors. One reason is of course the appealing opportunity to combine a financial and a sustainable objective. Another is the belief that investing in solutions to global challenges will ultimately benefit the global economy and long-term investments. Lastly, particularly major investors are under growing external pressure to ensure that their portfolios take ESG factors into consideration.

Why invest in line with UN’s sustainable development goals?  

All UN members have agreed to adopt the 17 UN Sustainable Development Goals (SDGs) as part of the 2030 Agenda for Sustainable Development. The SGDs are thereby the closest we have to an international strategy for how to achieve a better and more sustainable future. The annual investments required globally to achieve the SDGs are estimated at USD 5-7 trillion. Government investments are not enough to reach the goals. But the goals can be reached if approximately 7% of privately managed investments are mobilised. This is why private investors can play an crucial role by redirecting their investments towards the goals.

As 2030 is approaching, govern­ments will have to introduce new regula­tions and drive capital towards sustaina­ble eco­nomic activities, which will impact indus­tries, companies, regions and countries. The uncertain timing and extent of this shift is a crit­ical component of the overall risk landscape facing investors and the SDGs provide a good framework for understanding the trend and identifying the risks.

What are the most important points for inves­tors to learn? 

In practice, investors interested in a sustainability-themed investment should consider the following steps to align their portfolios with one or several sustainability goals:

605% increase

According to the Global Sustainable Invest­ments Alliance, assets under management (AuM) in sustainability-themed investment strategies increased by 605% during 2016-2020.

 
 

Download the full report

Get more insight and guidance by downloading the full ESG Investments publication:
“Sustainability-Themed Investments. A practical guide for investors”.

Download
 

1) Decide what sustainability theme or goal to align with

Deciding what goal to pursue can be based on personal values or market opportunities the investor sees. The SDG’s are a common international framework to have as a starting point.
 

2) Select relevant sources of data and met­rics to evaluate

Next, the investor needs to decide how to measure alignment with the selected goal. It is important to consider what metrics to evaluate and what source of data to use. In addition to information on SDG alignment, inves­tors should also consider what other criteria the product should fulfil. Our analysis suggests that ESG ratings are a good guideline when selecting the appropriate exposure to sustainability-themed investments.

3) Identify a suitable investment vehicle, such as a mutual fund, to cover the need

Different investment vehicles, such as mutual funds, should be evaluated based on the chosen data sources and metrics. After identi­fying investment products that fulfil the criteria, investors should investigate how well the different alternatives align with the sustainability goal. Behind a positive score might be a large share of underly­ing holdings that are in fact neutral in terms of align­ment with the goal.

4) Investigate how large a share of the portfolio can be invested in thematic funds

If investors want to maintain their current portfolio risk and return characteristics, it is important to implement the thematic investment in the portfolio in the right way. Our analysis suggests that the sustainability-themed equity fund can replace a portion of the global equity exposure. With regard to size, we suggests allocating a maximum of around 25% of the portfolio to thematic investments.

5) Combining several sustainability themes or goals

An investor wanting to pursue several sustainabil­ity goals needs to consider the total portfolio align­ment with the chosen themes/goals. When com­bining several themes in the same portfolio, there is a risk that a fund contributing positively to one SDG could at the same time have a negative impact on another theme.

Young woman collecting trash on beach

Did you know?

That by mobilising approximately 7% annually of privately managed investments globally the UN Sustainable Development Goals can be reached.

 
 

The above steps are relevant for all investors, private and institutional, but not all might have the time and resources to apply all the steps. Private investors may in some cases rely on their financial advisor or asset manager to perform the more complex steps.

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