The blueprint for ethical investment

Sustainable investment, particularly in renewable energy, emerged as the most rapidly expanding theme in Foreign Direct Investment in 2021. Today, present-day investors continue to rebolster support – with 85% of CFA Institute members stating that they integrate sustainability considerations when making investment decisions (CFA Institute, 2023). 

ESG investing encompasses a wide range of socially responsible investment approaches, including those aligned with the United Nations’ Sustainable Development Goals (SDGs). SDGs provide a roadmap for establishing a sustainable and resilient operational landscape that can effectively guide both institutional and retail capital towards ethical investing.

SDGs in context

Whilst SDGs have been subject to several critiques, evidence shows that achieving the 17 goals could unlock US$12 trillion of market opportunities and create 380 million new jobs (United Nations, 2023). As a result, it is absolutely justified to interpret and embrace such alliance with the SDGs as advantageous for business. Proactive integration has proven to help mitigate the risks associated with ‘ESG’ issues to reduce regulatory compliance costs, minimize reputational risks, and enhance resilience to external shocks. In addition, by aligning with the global agenda for sustainable development, companies can build trust, foster loyalty, and enhance their social license to operate. The private sector’s involvement is also crucial in achieving scalability. Progress accelerates significantly when companies embrace the challenge and perceive themselves as agents of social transformation. 

While a commitment to increased sustainable investment in capital markets is evident, implementing real change to already well-established investment practices is difficult, particularly with a lack of clear, reliable, and consistent data. Nonetheless, innovative solutions continue to reach the market, and persistent focus on improving the alignment of methodologies will continue to further enhance the accuracy and strength of SDG measurement indicators in ESG investing.

Please scroll to the bottom of the page to view the interpretation of the above charts.

SPDR’s Retail ETF also reflects preferences to the same goals

• SDG 1 No poverty – Enforcing improved purchasing practices to minimize occurrences of non-compliance within the supply chain.
• SDG 9 Industry Innovation & Infrastructure – Investing in innovative circular economy technologies, models, and approaches to promote energy efficiency.

Upon closer examination, we can drill down and isolate the top securities that contribute to these defined biases. When concentrating on the goal “Industry Innovation and Infrastructure” for the two ETFs, the common factor influencing the tilt is underweight positions in three Magnificent 7 (Mag7) stocks —Apple, Meta, and Alphabet. 

With a combined market cap of roughly $6.5 trillion, Apple, Meta and Alphabet are looked to as market leaders. Consistent and favorable returns have naturally increased Mag7 positions across global benchmarks and ETF’s. This is evident in the above analysed S&P 500 benchmark that holds a 6.18% position in Apple. Though the financial returns of such stocks continue to be overtly optimal, all three companies have defined negative SDG scores, suggesting that their commitment to positive social and environmental returns are ‘misaligned’.

Both Manufacturing and Retail show a negative active weight for companies with poor MSCI SDG scores (for example neither ETF holds Apple). Deliberately choosing to avoid stocks with negative scores, despite consistent returns, works to reaffirm the sectors’ inclination towards positive impact. Moreover, as active managers continue to face difficult investment decisions, particularly around Mag7 stock picking, utilising Style Analytics new MSCI SDG alignment screens can help to identify positions in one’s portfolio that either bolster or undermine an investment philosophy or mandate.

In summary, although ongoing scrutiny and adaptation are crucial to ensure continued effectiveness of SDGs in promoting sustainable development, it is evident that they serve a defined purpose for investors. Whilst continued market maturity and improved availability of data will overcome some of the inherent challenges, it is ultimately down to the individual to challenge their own perception that will command the future of sustainable investing for both people and planet.

Interpreting the charts

MSCI ESG Ratings Distributions Chart

• AA/A = Leader
• A/BBB/BB = Average
• B/CCC = Laggard

Please visit ESG Ratings for further information.

SDG Net Alignment Score

• Score > 5.0: Strongly Aligned.
• Score between 2.0 and 5.0, inclusive: Aligned.
• Score less than 2.0 but higher than -2.0: Neutral.
• Score equal to or less than -2.0 but higher than -10: Misaligned.
• Score equal to -10: Strongly Misaligned.

Please visit: MSCI & SDG & Alignment & Methodology.pdf

Thank you for taking the time to read this report; please reach out to [email protected] for any questions or queries.