Hero Clean Energy

Capitalizing on the Sustainable Development Goals: A New Opportunity for Investors

By Matthew McGuire, Managing Director, The Abraaj Group

The last 30 years have been extraordinarily transformative ones for humanity, as economic structures and opportunities have shifted enormously. Put most simply, during that time the percentage of people living in what is defined as extreme poverty has declined from about 40% of the world’s population to less than 10% of it; and those considered wealthy has increased from less than 10% to over 30% of the world’s citizens.

When several billion people’s fortunes change so notably, societies are transformed and new opportunities arise.

One such set of opportunities are framed by the United Nations’ Sustainable Development Goals (SDGs), which have emerged by consensus as the priorities for global change over the next 13 years. Building on the success of the Millennium Development Goals (2000-2015), the SDGs were ratified in 2015 and they have been embraced by global leaders in government, business, philanthropy, education, and finance. They offer a coherent framework for addressing the core needs of our planet and its people, and they provide a template for collective action  in doing so. In fact, many see the SDGs as the guidebook for targeting quality investments while addressing the world’s most pressing problems.

For investors and corporate leaders, the framework offered by the SDGs is useful because it identifies areas where capital can be allocated most productively. That is true from a financial perspective in that they outline areas with especially high unmet demands for particular goods and services (such as healthcare, education, and energy); and it is true from a social perspective insofar as effectively providing those goods and services that will radically improve the lives of people the world over. Philips, the Dutch healthcare technology business, is an example of a company that is already taking advantage of the opportunity. It has oriented its growth strategy around the SDGs, publicly aiming for 95% of their revenues to be tied to fulfilling the SDGs by 2025, and with the intent to “improve the lives” of 3 billion people by then as well. Philips’ stock price, by the way, is up significantly since announcing their strategic commitment to the SDGs.

Importantly, what the SDG framework also makes clear is that social and financial returns are deeply reliant on one another.

It explodes the false dichotomy of investors having to choose between doing well and doing good, because it lays out the path for doing well by doing good. As more people have moved out of poverty in countries on every continent, expendable income has increased along with demand for what businesses have to offer. And as businesses have been able to meet that demand, they have been able to lower costs and stimulate even greater social change in the markets where they operate.

To that end, the U.N.’s Business and Sustainable Development Commission – a group of CEOs and civic leaders from around the world – has identified US$12 trillion of new market opportunities that have been opened up by the SDGs. The Commission focused on four sectors that make up 60% of the world’s real economy: food and agriculture; cities; energy and materials; and health and well-being; and it lays out concrete ways that businesses can shift their strategies and their models to capitalize on the opportunities in those sectors.

 

 

What makes the opportunities so compelling is the support and the momentum that has been generated by the U.N.’s myriad stakeholders agreeing to the SDGs. With 193 countries agreeing that these goals are vital to their interests, companies and investors are finding partners in new markets and creating new business models that did not exist in previous eras. For example, Sweden’s development agency has funded a limited first-loss facility for an infrastructure fund run by the IFC (the Managed  Co-Lending Portfolio Program) that raises the ratings of projects to a level where insurance companies can invest in them. By doing so, they are attracting billions of dollars to emerging market infrastructure projects – from institutions that had never invested in such assets before. And given IFC’s long and enviable record of impressive risk-adjusted returns in the space, that is giving those investors access to new sources of alpha that they were shut out of prior to Sweden’s intervention.

Just as importantly, business, government, and civic leaders have all taken note of how ‘Sustainability’ generally and the SDGs specifically, have captured the imagination of Millennials around the world. As the generation that has only known a highly-connected world, and as a group that is coming of age as climate change manifests itself more clearly by the day, Millennials have embraced the importance of addressing the SDGs more forcefully than anyone else.

Their consumption choices, their lifestyle choices, and their financial choices are all driven by sustainability concerns to a much greater degree than others are. To succeed in capturing the attention of this large, active, and increasingly wealthy  group, many businesses have come to realize that focusing  on one or more of the SDGs must be core to their strategies and to their allocation decisions. It is quickly becoming a business imperative, and those who think of sustainability as an after-thought will suffer competitively in the years ahead.

The question for investors, of course, is how to execute on  the possibilities presented by the SDGs. How to capitalize  on them, in fact. That is the topic of focus, and one we look forward to exploring now and in the years ahead.

Matthew McGuire  is a Managing Director at Abraaj. Follow @AbraajGroup on Twitter or The Abraaj Group on LinkedIn for insights on the trends that are shaping our markets, industries, sectors and businesses.