From the Yardarm

 

View a brief synopsis of this edition of From The Yardarm.

The Global Goals for Sustainable Development (SDGs), officially known as “Transforming Our World: the 2030 Agenda for Sustainable Development,” consist of 17 goals and 169 targets that were created to end poverty, promote prosperity and well-being for all, and protect the planet.  The SDGs set a course and framework to achieve these objectives.  According to the United Nations Conference on Trade and Development, achieving these goals will require investment as high as $7 trillion, with an investment gap in developing countries of about $2.5 trillion.1  However, achieving these goals could open up $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health and well-being, while creating 380 million new jobs by 2030.2  The goals offer a compelling growth strategy for business and the world economy; however, the SDGs also need business to seize opportunities and advance progress. 

The SDGs have been gaining broad support.  Since their launch, foundations from around the world have contributed more than $50 billion toward achieving the goals.3  Additionally, companies are incorporating the SDGs as a means of mitigating environmental, social, and governance (ESG) risks as part of their overarching business strategy.  For example, 40% of the world’s largest companies currently discuss the SDGs in their corporate reporting.4,5  Identifying good corporate governance – as demonstrated by excellent transparency, risk awareness, and positioning to take advantage of these coming opportunities – could be a major driver of long-term value for investors.  Sustainability and performance in a portfolio work together under the framework of the Global Goals.

History and Development of the SDGs

The Sustainable Development Goals were adopted on September 25, 2015.  They reflect the culmination of a working process among 193 member states covering a broad range of sustainable development issues.6  In a large measure, the SDGs reflect a working agenda aimed at addressing the human and environmental challenges of our age.  These challenges were concisely captured by Ban Ki-moon, the United Nations Secretary-General from 2007-2016; “We don’t have a plan B because there is no planet B.”7

"WE DON'T HAVE A PLAN B

BECAUSE THERE IS NO PLANET B."

~ Ban Ki-moon

The SDGs are an extension of prior United Nations programs aimed at alleviating human deprivation, degradation, and conditions associated with poverty.  The SDGs’ antecedents can be traced as far back as President Franklin D. Roosevelt’s “Four Freedoms” speech on January 6, 1941, which later inspired the United Nations Declaration of Human Rights, General Assembly Resolution 217A.8,9

Most recently, the updated Global Goals are a modification of the ratified United Nations Millennium Declaration established on September 8, 2000, that created the framework for what was called the Millennium Development Goals (MDGs), outlining an eight point program aimed at alleviating conditions of extreme poverty.10  The MDGs had notable successes which included the reduction of child mortality by more than half and lifting more than one billion people out of extreme poverty based upon 1990 benchmarks.11

Goal Evolution: From MDGs to SDGs

2000

2015

Millenium Development Goals

Sustainable Development Goals

Poverty/Hunger

Decent work and economic growth

Zero hunger

No poverty

Education

Quality education

Equality/Women

Gender equality

Reduced inequalities

 

Child Mortality

Good health and well-being

Maternal Health

HIV/AIDS/Malaria

Environment

Climate action

Clean water and sanitation

Life on land

Sustainable cities and communities

Peace and justice

Strong institutions

Life below water

Partnership

Partnerships for the goals

 

Industry, innovation, and infrastructure

 

Affordable and clean energy

 

Responsible consumption and production

Source: PwC Make It Your Business: Engaging with the Sustainable Development Goals, 2015

 

The Business Case for Adoption of SDGs

Responsible investing incorporating environmental, social, and governance (ESG) criteria can be an effective way to counter risks that may impact a company’s financial results.  Corporate issues are subject to differing ESG considerations depending on their industries.  For example, utilities and resource extraction companies are more exposed to environmental factors than a firm operating in the service industry.  Observing management's willingness and ability to proactively manage these ESG factors may not only reduce financial risk but also create the potential for firms to form a competitive advantage relative to their peers.  High-profile corporate missteps call attention to the risks extending outside of traditional financial research.  Notable ones include BP's Deepwater Horizon environmental disaster, which has cost the company $65 billion to date.12  Such financial outlays, in addition to the adverse environmental and community impacts, are not a trivial matter.  As a result, it may not be surprising to see that since the ratification of the SDGs, companies with a combined market capitalization of $9.7 trillion have recognized the importance of providing data on their sustainability metrics by referencing SDGs in their annual report.13

Investors are using the SDGs as a framework for measuring risk and impact.  The 17 goals map well to environmental, social, and governance (ESG) data commonly used in investment analysis.  Such an analysis is used to evaluate how securities contribute to the UN’s Sustainable Development Agenda and also to evaluate exposure to risks as seen through an ESG lens.  The same factors that make it worthwhile for corporations to report and adopt the agenda, also improve performance and investment returns.  Strong management quality and proactive business practices tend to enhance business sustainability.

THE BUSINESS CASE

FOR GOOD GOVERNANCE"

IS CLEAR

Wells Fargo provides an excellent example of the cost of poor governance.  The company, with unreasonable sales goals and a toxic culture, clearly violated SDG 8, which focuses on inclusive and sustainable economic growth and full, productive employment.  This was done not only without regard to their employees’ well-being, but the company also actively harmed their customers and community.  Recent scandals have cost the bank a significantly diminished stock price, a tarnished reputation, and $1 billion of fines related to insurance and mortgage abuses.  The chart on the next page details some of the major events relative to the stock price of the bank.  Each negative development clearly impacts price, and thus investment return. The Wells Fargo board had received communications as early as 2005 indicating possible cultural problems, but ultimately the decentralized structure of the bank, which gave too much deference to department heads, allowed the problem to fester.  Reports show that the board learned about the firing of 5,300 employees with the rest of the world in September of 2016, only highlighting the poor communication in the organization.  These issues stress the importance of evaluating board and corporate structure through a framework such as the Sustainable Development Goals.14

The business case for good governance is clear.  However, assessing the strength of governance goes beyond just a financial and structural analysis.  Companies and investors are increasingly looking at inclusion and diversity as a source of competitive advantage.  A gender-inclusive base of management and board members offers an edge, bringing a wider range of perspectives and experiences to the business.  Gender diversity is correlated with both profitability and value creation.

According to the McKinsey report “Delivering through Diversity,” companies in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profit margin relative to peers than companies in the fourth quartile.  When the same set of companies is measured by earnings before income and taxes (EBIT) margin, those in the top quartile were 27% more likely to have industry-leading performance.15  Additional research by Credit Suisse on 2,400 companies has shown that greater gender diversity also attracts an investment premium.  They show that companies with at least one female director generated a compound excess return per year of 3.5% for investors since 2005 compared to companies where the boardroom is entirely male.  The study also revealed that companies with female CEOs attract a 19% premium on the price-to-book multiple and show return on equity (ROE) 19% higher on average.  It’s important to note that unfortunately, the data is somewhat constrained due to the relatively small number of female CEOs in the sample, composing 3.9% of total at the time of the report.16

A separate and ongoing study by MSCI revealed that over a five-year period (2011 – 2016) US companies that began the period with at least three women on the board experienced median gains in ROE of 10 percentage points and earnings per share (EPS) of 37%.  In contrast, companies that began the period with no female directors experienced median changes of one percentage point in ROE and -8% in EPS over the period.17 The issue is gaining traction within the investment community, with assets in the US funds focused on gender diversity growing at an 81% compound annual growth rate from 2014-2017 to around $910 million.18  The growing focus on ESG/impact investing suggests that assets focused on investing in gender diversity will continue to grow.  Saturna is committed to this goal from a business perspective in that we have female representation in executive management and on the board.  Additionally, the firm incorporates gender diversity as an important part of the investment analysis process.  Details are provided in our 2018 Impact Report.

GENDER DIVERSITY ON THE BOARD

AND IN THE C-SUITE CORRELATES WITH

BETTER FINANCIAL PERFORMANCE

Gender diversity on boards and in executive management integrates easily into the framework of the Sustainable Development Goals.  One of the targets within SDG 5 – Gender Equality is to “ensure women’s full and effective participation and equal opportunities for leadership at all levels of decision-making in political, economic and public life.”  To guide the process of achieving the goals, the United Nations provides implementation strategies: in this case, to “adopt and strengthen sound policies and enforceable legislation for the promotion of gender equality and the empowerment of all women and girls at all levels.”19  When investors and corporations use this framework, these targets provide a guide to measure impact and risk. 

SDGs: A Valuable Framework, Not a Passing Fad

The SDGs help formalize an important framework for both investors and companies to communicate potential risks and also to offer greater transparency regarding better business practices.  The resulting outcome is that the SDGs are quickly gaining traction. For example, approximately 40% of the 250 largest global corporations are reporting on the UN Sustainable Development Goals.  Companies are increasingly focused on key areas – which tend to have global impacts – such as Climate Action (SDG 13), reported by 64% of respondents, and Decent Work and Economic Growth (SDG 8), reported by 59% of respondents.  Other issues with relatively high profiles include Good Health and Well-Being (SDG 3) at 55%, Responsible Consumption and Production (SDG 12) at 54%, and Gender Equality (SDG 5) at 52%.20  Corporations are increasingly identifying specific goals that are highly relevant to their business conduct and analyzing impact in achieving those goals.   

Companies that are making greater efforts to disclose potential material ESG risks can look to the SDGs as means of identifying key stakeholders.  For example, the business consulting firm PwC has categorized how 10 different industries may affect SDG stakeholders through their business activities and supply chain. The "SDGs: Top business impacts by industry" table details the breakdown of material SDGs by industry.  Several goals are common themes and thus reflect the most reported information − such as Climate Action (SDG 13) and Decent Work and Economic Growth (SDG 8), both of which are instrumental when evaluating risk and business models.

Pursuing sustainable and inclusive business models can unlock significant economic opportunities, including but not limited to stock performance related to a gender diverse board, or the fact that a company’s license to operate and ability to win large public-sector contracts is increasingly influenced by its ability to demonstrate the economic value it generates for the local and national economy. 21,22  Given the benefits of this framework from both a risk and value perspective, we expect to see adoption continue to grow.  

Saturna’s investment process incorporates many of the material sustainable development goals.

Our proprietary ESG model scores all of our investment holdings on the major risk and impact factors within the goals.  Climate, resource use, company gender diversity, and fair employment standards are all considered before purchase. Ultimately, risk, impact, and best business practices are all aligned such that choosing the best actors under the framework of the Sustainable Development Goals can also lead to good investment and return decisions. 

 

Footnotes

1 Niculescu, Mara. Impact Investment to Close the SDG Funding Gap, June 13, 2017. http://www.undp.org/content/undp/en/home/blog/2017/7/13/What-kind-of-blender-do-we-need-to-finance-the-SDGs-.html 

2 Business and Sustainable Development Commission. Better Business Better World, January 2017. http://report.businesscommission.org/uploads/BetterBiz-BetterWorld_170215_012417.pdf 

3 Ekram, Arif and Bradford, Lauren. Foundations Have Invested $50 Billion in the SDGs, But Who’s Counting? http://sdgfunders.org/blog/foundations-have-invested-50-billion-in-the-sdgs-but-whos-counting/lang/en/ 

4 Blasco, J.L., King, A., Jayaram, S. How to Report on the SDGs: What Good Looks Like and Why It Matters, February 2018. https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2018/02/how-to-report-on-sdgs.pdf

5 Schatz, Roland. SDG Commitment Report 100: Tracking Companies’ Efforts to Contribute to the Sustainable Development Goals. https://www.cbd.int/financial/2017docs/un2017-scr100.pdf 

6 International Organization for Migration. 2030 Agenda for Sustainable Development. https://unofficeny.iom.int/2030-agenda-sustainable-development

7 Ki-Moon, Ban. Secretary-General’s Remarks to the Press at COP22, November 15, 2016. https://www.un.org/sustainabledevelopment/blog/2016/11/secretary-generals-remarks-to-the-press-at-cop22/

8 Hulme, David. The Millennium Goals (MDGs): A Short History of the World’s Biggest Promise, September 2009. https://www.unidev.info/Portals/0/pdf/bwpi-wp-10009.pdf

9 United Nations. History of the Document. http://www.un.org/en/sections/universal-declaration/history-document/index.html

10 United Nations Millennium Declaration. http://www.un.org/millennium/declaration/ares552e.htm

11 United Nations Development Program. Sustainable Development Goals: Background on the Goals. http://www.undp.org/content/undp/en/home/sustainable-development-goals/background.html

12 Bousso, Ron. BP Deepwater Horizon Costs Balloon to $65 Billion, January 15, 2018. https://www.reuters.com/article/us-bp-deepwaterhorizon/bp-deepwater-horizon-costs-balloon-to-65-billion-idUSKBN1F50NL

13 Schatz, Roland. SDG Commitment Report 100: Tracking Companies’ Efforts to Contribute to the Sustainable Development Goals. https://www.cbd.int/financial/2017docs/un2017-scr100.pdf 

14 Egan, Matt. Wells Fargo Scandal: Where was the Board? April 24, 2017. https://money.cnn.com/2017/04/24/investing/wells-fargo-scandal-board-annual-meeting/

15 Hunt, V., Yee, L., Prince, S., Dixon-Fyle, S. Delivering Through Diversity, January 2018. https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity 

16 Rohner, Urs. The CS Gender 3000: The Reward for Change, September 2016. http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=5A7755E1-EFDD-1973-A0B5C54AFF3FB0AE

17 Thwing Eastman, M., Rallis, D., Mazzucchelli, G. The Tipping Point: Women on Boards and Financial Performance, December 2016. https://www.msci.com/documents/10199/fd1f8228-cc07-4789-acee-3f9ed97ee8bb 

18 Gender Lens Investing: Investment Options in the Public Markets, Fall 2017.  https://www.veriswp.com/wp-content/uploads/2018/02/GLI_Investment_Options_In_Public_Markets_2017.pdf

19 United Nations. Goal 5: Achieve Gender Equality and Empower All Women and Girls. https://www.un.org/sustainabledevelopment/gender-equality/ 

20 Consultancy.uk. Just 40% of Global Companies Reporting on UN Sustainable Development Goals, April 4, 2018.  https://www.consultancy.uk/news/16521/just-40-of-global-companies-reporting-on-un-sustainable-development-goals

21 Scott, Louise. Creating Insight: Navigating the Global Goals. https://www.pwc.com/gx/en/services/sustainability/sustainable-development-goals/navigating-global-goals.html 

22 PwC. https://dm.pwc.com/SDGSelector/ 

 

Important Disclaimers and Disclosures

This material is for general information only and is not a research report or commentary on any investment products offered by Saturna Capital.  This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.  To the extent that it includes references to securities, those references do not constitute a recommendation to buy, sell or hold such security, and the information may not be current.  Accounts managed by Saturna Capital may or may not hold the securities discussed in this material.

We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment.  Investors should not assume that investments in the securities and/or sectors described were or will be profitable.  This document is prepared based on information Saturna Capital deems reliable; however, Saturna Capital does not warrant the accuracy or completeness of the information.  Investors should consult with a financial adviser prior to making an investment decision.  The views and information discussed in this commentary are at a specific point in time, are subject to change, and may not reflect the views of the firm as a whole.

All material presented in this publication, unless specifically indicated otherwise, is under copyright to Saturna.  No part of this publication  may be altered in any way, copied, or distributed without the prior express written permission of Saturna.

As of September 30, 2018, no Saturna Fund held any securities of British Petroleum, Credit Suisse, PwC, or Wells Fargo.