Model Mandate
Part 2: Sustainable Development Investing
2.1
What is Sustainable Development Investing SDI?
There are different definitions of Sustainable Development Investing (SDI). This guidance uses the definition developed by the GISD Alliance to support the achievement of the UN Sustainable Development Goals (SDGs).
The SDGs provide a blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including poverty, inequality, climate change, environmental degradation, peace and justice – challenges that create risks to our economic systems and all those who depend on them.
To achieve the SDGs there is a pressing need to increase the level of capital and financing committed to each of these objectives. By allocating a greater share of their resources to SDI and being active stewards of those investments, asset owners and managers can make an essential contribution.
Sustainable Development Investing (SDI) refers to deploying capital in ways that make a positive contribution to sustainable development, using the Sustainable Development Goals (SDGs) as a basis for measurement.
The contribution can be made through products, services, and/or operations or through projects financed across asset classes and in multiple sectors or themes.
The positive contribution of an investment should not be outweighed by negative impacts from the same investment over the life of this investment.
Investors can strengthen their positive contribution through active ownership, such as engagement for more sustainability in companies, sectors and projects they invest in, as well as through greater investment in developing countries.
- GISD Alliance definition |
Many investors already integrate sustainability factors into their investment decision-making and stewardship to a varying degree and for a variety of reasons. They recognise that long-term systemic risks and opportunities will determine their ability to achieve a return on their investments over the longer term, have ethical concerns or are responding to client or regulatory pressure.
As important as this is, sustainable development investing goes further. It requires investors intentionally to target their investments and act to influence the behaviour of markets and investee companies in order to achieve sustainability objectives. Investment institutions can also use the SDGs as a set of criteria to assess potential firm-specific environmental and social risks.
Some investors have already started on this journey, recognising that failure to address issues like those identified in the SDGs raises grave consequences for societies and economies. An increasing number of institutional investors, particularly those with a long investment horizon, see addressing these concerns as fully compatible with generating sustainable investment returns and with their fiduciary duties.
Regardless of their current position, all investors will need to take action sooner rather than later in response to the increasing number of national, regional and international regulations and public policy interventions designed to incentivise or require them to do so.
2.2
What should investors do?
We encourage all investors to undertake a three step process to determine how best they can use their investments to support the SDGs and achieve positive outcomes for their beneficiaries and clients. For asset owners, these steps are explained in more detail in Part 3 of the guidance.
Step 1: Research
Asset owners:
- Ensure that you understand the extent to which your fiduciary duties permit or require sustainable development investing.
- Familiarise yourself with any current and impending regulatory requirements that might affect what you invest in, where you can invest and how you are expected to report.
- Engage with your clients, beneficiaries and other stakeholders to understand their expectations and priorities.
Asset managers:
- Assess the extent to which your current portfolio and investment products address sustainability objectives.
Step 2: Review
Asset owners:
- Review your investment objectives, strategy and supporting policies to ensure that priority sustainability considerations are reflected across your portfolio.
- Consider setting a target for the percentage of your assets to be allocated to SDI.
- Identify which SDGs you wish to prioritise when allocating your SDI.
- Develop capabilities and processes to enable you to monitor how the SDI elements of your mandates are being managed
Asset managers:
- Review your asset allocation, investment decision-making and stewardship policies and processes to ensure they are capable of delivering SDI outcomes across your portfolio.
- Consider adjusting the balance of your portfolio and investment products to increase the share allocated to SDI.
- Review your standard contract terms to ensure they adequately reflect SDI outcomes.
Step 3: Implement
Asset owners:
- Incorporate SDI objectives and targets in segregated mandates.
- Incorporate SDI selection criteria when awarding mandates in pooled funds.
- Ensure SDI is on the agenda when reviewing or renewing existing mandates.
- Undertake regular monitoring to ensure objectives and targets are being met.
Asset managers:
- Consider introducing new SDI focused funds.
- Consider increasing the SDI content of your existing funds in terms of asset allocation and resources devoted to monitoring and engagement.
Incorporating sustainability in investment portfolios and mandates
The levels below show the different ways in which sustainability can be reflected in investment mandates. It does not represent a sequence that needs to be followed, nor are the different approaches it describes mutually exclusive. The approaches described in Levels 1-3 can help to meet the objectives of Level 4. Investment portfolios and individual mandates may include elements of more than one of these approaches.
Level 1: Negative screening - Excluding certain sectors, companies or projects for their poor sustainability performance relative to industry peers or based on the negative contribution those assets and issuers may provide towards the SDGs.
Level 2: Positive screening – Including or overweighting investments in sectors, companies or projects . selected for their positive sustainability performance relative to industry peers or based on the positive contribution those assets and issuers may provide towards the SDGs
Level 3: Full integration – building the assessment of sustainability factors into all aspects of the investment decision-making and portfolio management process, including stewardship activities, as a long-term strategy to manage risks and improve returns.
Level 4: Sustainable development investing - targeting companies, sectors, markets or projects with the express objective of supporting the achievement of one of more of the SDGs while also realising a financial return. |