Why SDGs are a game changer

LPs are increasingly using the Sustainable Development Goals as investment themes, according to Actis’s head of responsible investment.

Encompassing 17 global goals, with 169 individual targets, the United Nations Sustainable Development Goals have the potential to change the way companies as well as public organisations operate. They cover a broad range of social and economic development issues, from eliminating poverty and hunger through to improving education and employment opportunities. But how can private equity firms adopt and – importantly – measure outcomes against the SDGs?

We spoke to Actis’s head of responsible investment, Shami Nissan, about the extent to which the SDGs are game-changing for the private equity industry and its portfolio companies and about how these goals may develop in years to come.

How do you view the SDGs?

The SDGs hold credibility beyond any initiatives seen to date and have gained a significant level of traction, given they are only two years’ old. They go further than their predecessor goals – the Millennium Development Goals – in that they clearly articulate how the private, public and philanthropic sectors can make a difference. They provide us all with a global ‘to do’ list.

Importantly, the SDG framework highlights that the goals cannot be achieved without the active participation of the private sector. The language used supports the commercial case for making a difference in the communities where business operates. The SDGs highlight that, for economies and societies to thrive, people need access to basic services, such as healthcare, education, affordable energy, fair and decent jobs, and sustainable infrastructure. For the private sector to thrive, economies and societies must flourish. As an investor in emerging markets, Actis has a profound understanding of the scale of opportunity in these markets, but also the opportunity to deliver against the goals. We invest in sectors which have a huge role to play in delivering progress against the goals, including for example healthcare (Goal 3), education (Goal 4), renewable energy (Goal 7), green real estate (Goal 11) and more. In aggregate, Actis companies support 116,500 jobs and livelihoods (Goal 8).

How is private equity responding to the SDGs?

Shami Nissan

In 2017, we saw a growing clamour around the investment case for working with the SDGs – they have been profiled at every conference I have attended and feedback on how Actis is contributing to the targets has been encouraging.

Many large institutional investors are also talking articulately about what the SDGs mean for them. We’ve seen some of the large Dutch and Swedish pension funds publish views on how to navigate the SDGs – outlining which of the 17 goals and 169 targets they see as ‘investible’ and which are not. For example, Goal 1 No Poverty relies heavily upon public sector intervention/contribution. However, SDG 7 Affordable and Clean Energy is one where the private sector (in particular the investor sector) has a large and critical role to play. The renewable energy sector is a key focus for Actis, and we are proud to contribute to SDG 7. We calculate our renewables investments have contributed to the avoidance of over 1.6 million tonnes of CO2 into the atmosphere, and 90 percent of power generation from our last fund vintage is from renewables.

Has that led to any institutional commitment to the SDGs as yet?

It’s early days, but yes, we’ve already seen substantial amounts being committed by investors. Dutch pension fund PGGM, for example, has invested €10 billion in line with four SDG themes – climate, food security, water scarcity and health. It’s targeting €20 billion by 2020.

How is that LP interest feeding into private equity action?

It is being led by many of the larger investors in Europe, as well some of the large public pension plans in North America. We are being asked by existing and prospective investors to describe our contribution to the SDGs.

We have developed a methodology that assesses our contribution. The methodology enables us to report back to these LPs on a number of the goals across our past and current portfolio – for example, we have provided two million students with access to quality education via six investments, and have avoided 1.6 million tonnes of CO2 in 2016 by providing affordable and clean energy. Our methodology is still a work in progress and there do remain grey areas within the industry as to how to describe contribution.

What kinds of issues do you have to grapple with to measure and describe your contribution?

There is no standardised way to report one’s contribution to SDGs so Actis has focused on developing an approach which is robust, defensible, stands up to scrutiny and is evidence-based. We conducted an exercise of some depth to look at the contribution of each individual portfolio company to each of the 17 SDGs. Further, we calibrated the contribution level as either ‘major’, ‘moderate’ or ‘partial’.

This is one way to map how a fund and its constituent investee companies contribute to the SDGs. The challenge lies in the contribution level: some companies will inherently contribute significantly to one explicit SDG (eg, a healthcare or education company); others may contribute to a number SDGs but to a lesser context.

It’s notoriously difficult to measure impact and responsible investment outcomes. To what extent do the SDGs help with this and to what extent do they muddy the waters?

There are no standardised metrics for measuring SDGs, and leaders need to think carefully about measuring and reporting as it relates to responsible investment, impact investment and/or SDGs.

However, the SDGs do provide a useful framework for private equity investors as well as a common language. The 169 specific targets provide visibility for firms trying to assess their contribution and impact agenda. This provides a degree of granularity which is useful. As a responsible investor, Actis has always measured ESG performance improvements (eg, H&S improvements via injury reductions, financial savings from energy efficiency gains, etc) and we have also tracked impact metrics (eg, job creation, gender parity). This gives us a very helpful starting point when it comes to considering how to report against SDGs.

There is still work to be done on translating the goals into a private equity setting. I sit on the EMPEA sustainability steering committee, which consulted with signatories to understand which topics are top of mind, and where we can provide guidance. SDGs emerged as a top issue. In response, we will be providing guidance on areas such as how to measure contribution and where responsible investing and SDGs overlap, with a view to addressing the industry on this in May 2018.

So, with better understanding, would SDGs ultimately provide the answer to measuring impact and outcomes?

I think they are a useful framework, but they are not a panacea as there are no standardised measures. If you look at impact investing in particular, the IRIS metrics devised by GIIN – the Global Impact Investing Network – are generally accepted and recognised as fit-for-purpose set of impact metrics. These are clearly defined metrics that are crisply explained. With responsible investing, there is no standard set of metrics, although of course there is growing consensus on how to report on certain aspects such as CO2 disclosure.

The lack of a common SDG reporting framework will of course mean that not all firms will report in the same way.  This leaves room for different approaches – some will repurpose their existing sustainability/ESG reporting. From an asset owner perspective, investors won’t be able to compare apples with apples.

All firms purporting to contribute to SDGs will need a basket of measures that provide an evidence base for their contribution. At Actis, this includes a raft of metrics ranging from gender diversity across our portfolio companies (27 percent of the workforce is female; 15 percent of board members are female) to the number for people accessing electricity from Actis companies (65 million).

So how does SDG contribution look in practice?

The ArcSkills Programme that we launched in Kenya provides an example of how this might be measured. Faced with the difficulty of finding qualified construction workers on our real estate developments and with a high youth unemployment rate in the country, we launched a construction training programme. Hundreds of trainees completed the course, with an average age of 24, of which 40 percent were female. Of the 95 percent who received certification, 70 percent had secured income-generating opportunities and of these, 81 percent were employed and 19 percent self-employed.

This single initiative addresses a number of the SDGs, and importantly, it demonstrates the commercial opportunity of doing so. It has improved the pool of workers we can draw on in Kenya, has enabled us to build faster, in a safer manner and to better quality standards. n

Operationalising our values

Torbjorn Caesar, senior partner at Actis, highlights the importance of working with the local communities

So how do you put all of this into practice?

Our people went to school and university in our markets, we understand the needs of local communities and we are well placed to build relationships and to address some of the issues they face. We understand the value of training and hiring local labour forces, improving working conditions and ensuring that contractors treat their workers fairly and with respect.

We also recognise that local support for our investments through building transformational and sustainable businesses is essential if we are to operate in our markets over the long term. In energy, for example, we have invested over $2.1 billion in more than 31 companies across 25+ countries generating 15GW of energy capacity and directly impacted 68 million consumers. Another example might be investing in access to education through our pan-African platform Honoris United Universities or access to healthcare through our pharmaceutical business Symbiotec. It also includes putting in place hyper-local initiatives, like at our Indian energy business Ostro, to provide safe, clean drinking water for local people.

Our investment teams are incentivised to deliver positive outcomes and we have also devised impact models that measure our portfolio companies’ progress across the spectrum of financial, environmental, social and governance factors. We set company management teams rigorous – but achievable – targets and monitor these on a quarterly basis. In energy, for example, safety issues are the most important to get right – that’s where we start our improvements when we invest. Yet it’s also important that the weight we place on achieving these targets is constantly fine-tuned so that we can prioritise areas where we know that we can really make a difference.

This article was sponsored by Actis. It appeared in the Responsible Investment supplement published with the February issue of Private Equity International.