Beware SDG “rainbow washing”: Aegon AM’s Beacham

In 2015, the 17 Sustainable Development Goals (SDGs) were adopted by all United Nations Member States as a universal call-to-action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.

“The SDGs provide a framework for identifying sustainable themes and initiatives to help to solve the many and varied sustainability challenges facing the world,” says Miranda Beacham, Head of ESG – Equity and Multi-Asset Group at Aegon Asset Management. “For countries and governments to achieve the SDG goals they need the support of the private sector.”

While Beacham believes the SDGs are a useful tool to help identify sustainable initiatives, “they are not the best way to think about sustainability impacts at the individual company level. Rather, the nature of the goals is to spur governments into making policy changes.”

Below Beacham takes a closer look at the issues and limitations of the SDGs in bringing about these changes:

Issue 1: Which pieces fit the SDG puzzle?

“Looking at things from a micro perspective, when analysing and investing in companies, it is easy to map certain investments to some of the goals. For example, an electric car manufacturer will sit comfortably in SDG 13 (Climate action), but what about the other end of the value chain?

“A lithium miner, for example, is an essential piece of the puzzle in creating electric cars. However, no third-party screening tool will give any credit to this activity because the direct impact of the company is less favourable – but no lithium miner means no electric vehicle! This means the SDGs become an imprecise tool to describe the sustainability impacts of a portfolio of listed equities.”

Issue 2: Risk of ‘Rainbow washing’

“A further issue with SDGs is that there is a lot of subjectivity involved from a corporate and investment perspective. The goals were written for governments and the targets attached reflect that. So, if a company is claiming to align with the goals, they should be aligning with the targets. Some of these targets also translate to the private sector more easily than others. For example, with SDG 7 (Affordable Clean Energy) the target is better infrastructure for renewables, an easy theme to invest in. In contrast, SDG 3 (Health and Well-being) has targets based on factors such as infant mortality, which is difficult to align with the activities of many healthcare companies.

“The fact that the goals were designed for governments hasn’t stopped companies aligning themselves with SDG badges. But there is nobody assigned to verify these badges and to call out the worryingly rampant practice of ‘rainbow-washing’, where a vast range of SDGs, many rather tenuous, are linked to a company. We have discovered many examples of companies making ludicrous claims, such as a tobacco company claiming to align with nine of the SDGs, including Health & Wellbeing.”

Issue 3: SDG alignment favours large caps

“We also find the kind of companies that typically make these claims are those that are larger and have the resources to commit to disclosure around how they align. This adds further to our concern around the large-cap, developed-market bias that is so prevalent in systems designed to quantify the world of sustainable investment.”

“In conclusion, the SDGs provide a valuable tool for identifying themes and initiatives for sustainable investment. But they do have significant limitations, which investors should understand. We have built our own framework to identify second and third-order impacts, such as the contribution of lithium miners to clean transport which we believe is a better way of identifying sustainable companies. Such a framework requires diligent bottom-up analysis and a willingness to look beyond the obvious impacts. But it is worth it, as it leads to stronger and more sustainable portfolios.”