'Critical issues are being neglected in narrow focus on climate'

Analysts at Impak Analytics say the sector's focus on tackling climate change has led to a neglect of other critical environmental and social issues, which are all interconnected. 

A failure to comprehensively address environmental and social risks hinders progress toward achieving the UN's global sustainable development goals and can be harmful to overall financial stability, say Velina Serafimov and Marion Bitoune, chief impact officer and ESG research manager at Impak Analytics respectively.

The Canadian-French impact rating agency recently published a study on sustainability reporting and SDG alignment among STOXX 600 companies.

FTAdviser In Focus has spoken to Serafimov and Bitoune about what they make of what they found.

Social issues are more and more being understood as posing a financial risk as well.

FTA: What are the UN’s global SGDs designed to achieve and what role do businesses play in ensuring this is achieved?

VS & MB: The sustainable development goals were created by the UN in 2015 as a roadmap to achieve a more sustainable and equitable world by 2030, featuring 17 goals and 169 targets addressing the most urgent global challenges across social, economic, and environmental domains.

Achieving them requires annual investments of $3.3-4.5tn (£2.7-3.7tn), a task beyond governments and public financing alone.

Our research shows that presently 15 per cent of SDG targets progress as intended, while 48 per cent show insufficient progress, and 37 per cent stagnate or regress. In this context, the private sector emerges as a pivotal stakeholder.

FTA: What role do companies play in the global effort to achieve these targets?

VS & MB: Viewing companies solely as drivers of economic growth and job creation in achieving the 2030 agenda oversimplifies the situation.

Companies generate employment, but the labour conditions of that employment determine whether there is a true contribution to the SDGs.

Therefore, it is critical to consider how business is done to achieve the SDGs and what role they have to play to contribute to global sustainability.

Firms should advocate for SDG-supportive policies, raising awareness among stakeholders.

FTA: To what extent is this being achieved?

VS & MB: During the 2023 SDG Summit in September, leaders voiced their commitment to this vision and acknowledged their crucial role in its achievement.

However, our analysis underscores that businesses are falling short of fulfilling these roles; the actual implementation of actions lags behind the public pledges and the level of ambition.

There is still a lot of confusion about what a positive contribution is as well, so companies may think they are creating positive impact when they are in fact mitigating their negative impacts.

Despite a notable increase in business engagement during the initial seven years of the 2030 agenda, the pace and scale of this involvement still need to be aligned with the urgency of the SDGs.

As we embark on the latter half of the SDG era, harnessing and accelerating private-sector contributions is imperative, propelling us towards achieving the 2030 goals.

FTA: Your study shows a mere 4 per cent of the total STOXX 600’s combined revenue has a positive contribution to the SDGs. What do you make of what you found? 

VS & MB: It is definitely a low number, probably lower than one would expect, as we took a rigorous, non-complacent approach.

We think there is still a lot of confusion about what a positive contribution is as well, so companies may think they are creating positive impact when they are in fact mitigating their negative impacts.

If all companies mitigated their negative impacts we wouldn’t need them to create positive impacts in the first place, but that’s not the case yet, and companies are probably starting with the low hanging fruits, ie mitigating negative impacts first, as they should.

FTA: Two-thirds of companies are not mitigating all of their negative contributions, but they are mitigating problems in relation to climate, clean energy, gender equality and economic growth. Would you call this greenwashing? 

VS & MB: Companies are not always competent at identifying their material impacts. This is why materiality assessment is a major component in regulatory discussions and efforts. 

Sometimes impacts are located in a complex supply chain or outside of direct control by the company. Apart from the fact that some companies do not acknowledge it to be in the scope of their responsibilities, addressing it requires more means and effort.

It is also what’s called cherry-picking: companies choose SDG topics that suit their comfort zones and immediate profitability goals.

Greenwashing is the conscious or unconscious act of putting your company's environmental or social performance in a more favourable light than it actually is. When companies do not address their negative impacts correctly and claim to be sustainable, it could be considered as greenwashing. 

FTA: Do businesses have a responsibility to work towards SDGs that do not present a business case for them for the greater good?

VS & MB: Not necessarily. Their responsibility lies first and foremost in addressing the SDGs for which they contribute negatively properly, which might not be all of them.

If all companies were addressing their negative consequences on all impacted SDGs, there wouldn’t be so much of a need for positive impact generation as explained earlier.

Regulations also nudge companies towards the most relevant activities: the EU taxonomy indicates which environmentally sustainable activities are expected in which sectors.

So naturally, it is not expected from a fishing company to address the issue of housing accessibility for example, although creativity in business modelling is always possible and wouldn’t be harmful. 

FTA: The financial sector is good at focusing on tackling climate change but neglects much else. What could be the consequence of that? 

VS & MB: The financial sector's predominant focus on addressing the climate crisis, while important, has led to a neglect of other critical environmental and social issues.

This narrow focus on climate change overlooks the interconnectedness of environmental and social matters, which are pivotal for overall financial stability.

After all, the reason why we care so much about climate change is to protect human beings – or because it has such significant consequences on banks’ balance sheets.

But social issues are more and more being understood as posing a financial risk as well.

The consequence of this neglect could be a failure to comprehensively address environmental and social risks, hindering progress toward achieving SDGs.

Financial institutions should avoid isolating their importance as this could distract them from fostering positive change and identifying profitable investment opportunities.

FTA: What can investors do to entice companies to do more? 

VS & MB: The current emerging consensus on investors' contribution to impact identifies the following strategies:

• Capital allocation/investment and divestment: investor’s thesis is driven by evidenced positive social and environmental outcomes at investee level and chooses to allocate its capital accordingly.
• Non-financial engagement: engaging the company to meet certain standards of impact.
• Internal firm management: investor takes a more prominent role in the management to improve practices.

FTA: What do you say to those who say investments will only ever have a very limited impact on shaping the world in real terms? 

VS & MB: As explained above, equity investors can have a significant contribution and affect companies’ behaviour, which in turn affects the real world.

There is some debate about divestment strategies, but proxy voting and engagement is proving to be much more impactful.

While strategies differ a bit, the same can be said for fixed income investors, which can provide incentives for companies to meet certain sustainability goals for example.

carmen.reichman@ft.com