Are the SGDs good news for the business community?

I do think there are opportunities for business but they will require really innovative thinking. Usually when a company improves its environmental, social, and governance (ESG) performance it hurts its financial performance, unless it innovates in products, processes and business models. The UN member states have signed on to the SGDs and big companies are being exhorted to contribute. The 17 SDGs are wide-ranging and the narrative emerging is that the public sector can’t reach these goals by itself. When you look at the world, you have a relatively small number of countries that matter and can make a big difference. But you also have a relatively small number of companies and investors that can make a difference.

The concentration of economic power has gone up a lot. About 1 000 companies have 55 or 60% of the world’s market cap and there is further concentration in the top 100. What those big companies decide to do, and push through their big supply chains, will make a huge difference to whether the SDGs are met or not. The concentration is even greater on the investor side. The world’s top five asset managers control about 20% of assets under management and the top 10 have about 30%.

Even for the largest companies, no one company can make a big difference to all 17 SDGs. Each one has to pick their shots based on their sector and corporation strategy. And if the investment community does not support what companies are doing, then they are not going to have a big incentive to support their selected set of SDGs.

“A sustainable strategy is how a company creates value
over the long term.”

It is important to distinguish between “sustainability” and “sustainable” strategies. A sustainability strategy is a set of CSR programmes; they are not bad things and companies have a right to do them, such as meeting particular stakeholders’ needs and through corporate philanthropy. But a “sustainability strategy” is not going to make a big difference to the long-term prospects of the company and investors are not going to care about it. A “sustainable strategy” is how a company creates value for shareholders over the long term while contributing to a sustainable society. This is when you get into the notion of materiality. There is a subset of ESG issues that are important to investors and these are the ones a company needs to focus on. At the same time there are other issues that, while not material, are important to a company’s stakeholders. They cannot be ignored because a company’s license to operate ultimately comes from civil society. But these “societally significant” but non-material issues should not receive the same amount of resources in terms of money, top management time and attention, and cash.

Do US companies know about the SDGs?

I don’t hear a lot of discussion in USA companies about the SDGs. They have sort of heard about them. They have so many things coming after them: integrated reporting, the sustainability accounting standards board, questionnaires to fill out, focusing capital on the long term … and these are things that are in their world more.  But let’s face facts. The USA still has the majority of large companies and even more so investors. If the USA isn’t on board with the SDGs, it’s hard for me to see how they will be accomplished.

This is where US companies are saying: “The UN proposed this, my government signed on to it, and in the meantime I have investors asking me why my quarterly earnings aren’t higher. I know I need to pay more attention to sustainability and other standards and demands … and now there are the SDGs: so what about I supposed to do?” And it is kind of the same with the investment community.

What kind of work do you do regarding the SDGs?

I´m trying to understand is how the SDGs and their associated 170 business indicators, focused on impact to society, are related to material issues to investors, such as defined by the Sustainability Accounting Standards Board (SASB). What is material varies by sector. Investors don’t care about a bank’s carbon emissions, though employees might, but they care a lot about how the company manages risk. Access to medicine is material for a pharmaceutical company but not for an oil and gas company. Intuitively it’s pretty obvious. Material issues for a sustainable strategy are sector specific.

Here’s the crux of the problem. Right now the SGDs are at the stage of getting awareness and visibility, but the hard fact is that 17 things as big and ambitious and complicated as this cannot be optimized. At the global level – although no one seems to want to talk about this. For example, one NGO cares about an environmental issue while another NGO cares about jobs for people – so there are conflicts and the ones caught in the crosshairs will be companies. A company will decide to pick up an opportunity related to an SGD and inevitably some group will say “I’m not happy with that because I care about this other SGD”. 

So how will the tradeoffs these conflicts create be made? Through the company’s board of directors. The prevailing ideology is that the duty of the board is to put investors first. In fact, the fiduciary duty of the board is to the long-term interest of the corporation. So the board is ultimately going to have to say “these are the SDGs that matter to the long-term prosperity of our company” and then they will have to back management when they come under pressure from short-term shareholders simply interested in quarterly earnings.

How come you work with these issues?

Anybody who cares about sustainable development needs to figure out where they can best make a difference. It can be technological innovation, public policy, legal intervention, stakeholder campaigns or whatever. The place I am best positioned to play is the capital markets – the interface between giant companies and investors and the intermediary firms like accounting and sell-side firms. I am looking for levers. Reporting is a lever, clarifying fiduciary duty is a lever. If you can change the behavior of big companies and big investors, it can make a big difference.