United Nation’s 17 key goals a cornerstone of responsible investing.

(Editor’s note: Alphinity is presenting at the upcoming ASX Investor Day).

In 2017, Alphinity – the boutique equities investment manager – began applying a sustainability lens to investments in the Alphinity Sustainable Share Fund and this has become a positive screen to supplement the more conventional negative screens; that is, excluding companies engaged in undesirable activities and poor environmental, social and governance (ESG) practices.

Alphinity’s approach has since evolved into applying a net sustainability score to each company based on its products/services and operations.

The fund’s portfolio aims to be biased towards companies “doing good”: those making net contributions towards achieving one or more of the UN Sustainable Development Goals (SDGs). It also seeks to avoid companies whose activities are inhibiting the achievement of the goals. The SDGs are an internationally agreed framework to achieve a better world.

The origins of socially responsible investing (SRI) can be traced back to the Quaker and Methodist movements in the mid-eighteenth century. Methodist leader John Wesley urged his followers to shun profiting at the expense of their neighbours.

Huge social change in the ’60s and ’70s

It was in the 1960s and 1970s that SRI started to become more prominent along with the US civil rights movement, an increasing awareness of environmental issues and the start of the anti-apartheid movement, in which several universities, churches and cities pulled their investments in companies with operations in South Africa.

SRI has seen many iterations and interpretations over the past 50 years, moving from merely excluding certain activities to also negatively screening out stocks based on the Environmental, Social and Governance (ESG) qualities of a company. ESG, however, tends to focus more on the internal operations and processes of a company and less on external activities that might cause good and/or bad outcomes.

More recently there has been growing interest in impact investing, which aims to achieve “good” social or environmental outcomes. One major issue has been the lack of an agreed and unified system defining what a good and bad outcome might be, and the activities that cause them.

There is also some debate around whether buying shares in companies on the secondary market can really be having an impact or whether you are just joining efforts that are already being made, and that impact investing is arguably only credibly exercised by asset owners in the unlisted space.

Notwithstanding this, we believe aligning yourself with companies doing good for society is still a worthy ambition and improves the financial ability to pursue activities contributing to these goals. In addition, if executed well, it can also be financially rewarding.

The UN Sustainable Development Goals (SDGs)

In 2015 the United Nations agreed to a unifying set of 17 goals which, if achieved by 2030, would make the world a significantly better and more equitable place to live. They address high-priority problems that in the eyes of governments must be solved in order to reach desirable levels of global development in a sustainable way. The 17 goals have been expanded into 169 detailed underlying targets.

Figure 1: The UN Sustainable Development Goals

This next wave of sustainable investing aims to actively support positive investment outcomes, not just try to eliminate negative ones. One challenge is that the SDGs were largely designed to direct government priorities rather than business activities; they largely describe what countries need to do (or stop doing) to achieve the goals and identify the structural changes that need to take place in the economy.

Although there are some SDGs that companies will generally struggle to meet, they can still be used to map prospects for Australian companies.

The SDGs most relevant to Australian companies

Of the 17 SDGs, we believe Australian companies can provide the most material contribution to:

• Zero hunger/good nutrition (SDG 2).
• Good health and wellbeing (SDG 3).
• Quality education (SDG 4).
• Affordable and clean energy (SDG 7).
• Infrastructure (SDG 9).
• Sustainable cities (SDG 11).
• Responsible consumption and production (SDG 12).
• Climate action (SDG 13).

A number of Australian companies address two SDGs – responsible consumption and production (SDG 12) and climate action (SDG 13). Sectors that score well within these goals are resource companies producing essential metals for development, healthcare, insurance and utilities, waste management, tech and telecommunications.

Sectors such as energy and consumer staples that have significant resource footprints in water, waste and land use tend to score poorly on the waste (SDG 12) and climate (SDG 13) goals. Some consumer staples companies contribute to obesity and lifestyle disease by producing highly processed food or sugary drinks; these tend to score poorly on nutrition (SDG 2).

Applying SDGs to Australian companies to build a portfolio that supports UN social priorities

The Alphinity team and the external sustainability experts on the Sustainable Share Fund Compliance Committee have been applying SDG considerations to Australian equities, seeking to identify the opportunities and risks facing each company in the investable universe to give a net SDG score to each company.

This is a high-level process that requires good data and, importantly, sound judgement. Alphinity is also working closely with Citigroup, leaders in sustainable research, to help apply the SDGs to the investment process.

How Alphinity incorporates SDGs into the investment process

Step 1: Define the investable universe

We begin with the ASX 300 and apply a screen to identify companies with adequate liquidity that:

• Perform activities compatible with the fund’s charter.
• Have strong ESG characteristics.
• Support one or more of the UN SDGs.

Companies generating more than 10 per cent of revenues from activities considered incompatible with the fund’s charter, such as high-impact fuels, gold mining and animal mistreatment are excluded.

Many companies inadequately disclose how they perform according to the UN SDGs so Alphinity uses the research databases of independent research organisations, MSCI and Citi along with the Sustainable Share Fund Compliance Committee, to gain further insights.

Step 2: Find compelling sustainable companies

Using Alphinity’s investment philosophy and process, we combine fundamental and quantitative research to identify quality, undervalued companies in an earnings upgrade cycle.

Step 3: Construct a balanced portfolio of 35-55 companies with attractive investment fundamentals and prospects

We do not identify with any particular investment “style”, as our approach has proven successful though a number of different market cycles, although our process will typically have a slight bias towards growth.