How finance can respond to lack of SDG progress

However, owing to a range of different factors, there has been a lack of progress on most of these SDGs over the past year, compounding a worrying longer-term picture.

Now, more than ever, it is up to investors, businesses and governments to help drive real change across asset classes.

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Our third annual SDG Reckoning Report takes a closer look at the role of private investment in driving change. It makes for sobering reading; but also highlights numerous areas of opportunity for sustainable and impact investors.

Achieving Net Zero

The SDGs provide a critical guide for both governments and investors to accelerate efforts to reach net zero and avoid the most harmful effects of climate change.

With over 50% of greenhouse gas emissions (GHGs) emitted from the generation of energy, investors are naturally drawn to SDG 7 (Affordable and Clean Energy).

However, reducing emissions from energy will not achieve Net Zero alone. There are several other SDGs that have a direct climate focus.

For example, SDG 12 (Responsible Consumption and Production) seeks to address growing consumption patterns and the waste it creates, re-purposing that waste as a valuable input back into the economic system.

SDG 9 (Industry, Innovation and Infrastructure) will also play a crucial role in pioneering new solutions to the climate crisis, where sustainable infrastructure supports the clean technology and innovation necessary to upgrade today’s carbon intensive industrial activities.

Addressing inequalities

Ongoing health and cost-of-living crises have highlighted the need to address inequality and drive more equitable capital allocation towards the social SDGs.

Access to vital infrastructure within underserved markets, both physical and digital, is one of the clearest ways to tackle social challenges.

Focusing on high-quality companies with a technological and scale advantage that should enable them to generate strong financial returns – and drive social change – over time is key.

For example, companies offering affordable mobile payments systems for unbanked populations – and those using their scale to provide affordable access to credit in an environment of rising interest rates – can support financial inclusion and empower entrepreneurship within the informal sector.

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Historically, investing to support SDG 10 (Reduced Inequalities) and SDG 4 (Quality Education) has proven difficult due to the perceived lack of investment opportunities in public markets.

However, the pandemic has accelerated the pace of digitalization within spaces such as education, leading to newly listed edtech platforms scaling up to meet enhanced demand in online education.

This can represent a more affordable, accessible and flexible option compared to more traditional educational institutions.

The role of private debt

Private debt investments are generally focused on a more concentrated range of business activities in comparison to companies that borrow in public markets to direct capital to finance projects which have demonstrable social and economic impact.

There are certain SDGs where investment opportunities in private markets are especially prevalent.

For example, SDG 11 (Sustainable Cities and Communities) maps to investments in green buildings, green transport and social housing and SDG 7 (Affordable and Clean Energy) maps to energy efficiency and renewable energy.

Looking forward, there are opportunities in SDG 3 (Good Health and Wellbeing) in larger companies in the private space.

Investments in Electric Vehicle (EV) infrastructure is likely to be an area for growth as well as investing in companies with highly circular business models (SDG 12 Responsible Consumption and Production).

In the private debt space, there is also an opportunity to effectively target less ‘straightforward’ SDGs like SDG5 (Gender Equality) and SDG10 (Reduced Inequalities), through targeted, structured financings, such as blended finance transactions in conjunction with development banks.

Infrastructure

Infrastructure is a key enabler of economic growth and it is essential to mobilize capital to combat climate change.

This presents an opportunity to invest in new technologies that support existing systems and to transition existing assets into more sustainable models. Such investments in renewables and energy transition for example, seek to support SDG 7 (Affordable and Clean Energy).

Making economic growth more sustainable and inclusive through infrastructure supports SDG 11 (Sustainable Cities and Communities).

Investments which deploy capital to construct assets and scale businesses not only create permanent and temporary jobs, but also support wider economic growth.

Investing in solutions

When looking at private assets, solutions to three urgent challenges stand out from an investment perspective: climate change and environmental degradation, inequality, and the need for innovative and accessible healthcare.

Opportunities in this latter area include supporting the venture ecosystem for innovation in life sciences, such as those growing out of medical research at universities. Another area for potential growth and opportunity is the circular economy, aligned with SDG 12 (Responsible Consumption and Production).

This is a high priority challenge given the urgent need to tackle pollution and protect natural capital from unsustainable extraction and production methods.

Investing in companies that recycle plastic and other feedstock into materials that can be used in both industrial products and consumer goods can help drive positive outcomes for this goal.

Ben Constable-Maxwell is head of sustainable and impact investing at M&G Investments