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Why It's Time for Institutional Investors to Embrace SDG

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We Need to Talk: Why It’s Time for Institutional Investors to Embrace SDG-Aligned Investing January 2021 Authors Table of Contents Mirtha Kastrapeli, Founder & CEO, Beyond Alpha Luciana Aquino-Hagedorn Scott Mills, CFA I. Executive Summary 4 About Beyond Alpha II. Methodology 6 Beyond Alpha is a specialized research and consulting firm that fo- cuses on helping mainstream investors adopt investment models III. Addressing Sustainability 7 that target social and environmental outcomes, in addition to tra- Challenges: Expectations Versus ditional market outperformance. We believe such an approach will Reality better position these investors for long-term success. IV. Why Investors’ Actions are Falling 9 Beyond Alpha’s research is designed to fuel capital markets innova- Short tion based on independent, action-oriented, and practitioner-led V. Barriers to Embracing the SDG 12 research around topics of sustainable investment and transforma- Agenda tional change. VI. Changing the Investment Narrative 14 Acknowledgements Around the SDGs We would like to express our deep appreciation to the more than VII. SDG-Aligned Investing: A Better Way 17 40 interviewees who participated in our research. If it were not for Forward their generous time and thoughtful responses, this paper would VIII. Strategies for SDG-Aligned Investing 22 not have been possible. Special thanks to Carolina Ocampo-Maya and Perrine Toledano, from the Columbia Center on Sustainable IX. Towards a Common Goal 24 Investment (CCSI), for their support and valuable contributions. X. Appendix: Case studies 25 This paper has greatly benefited from the professional insights and expertise of the members of our Advisory Board: XI. Endnotes 28 Rick Alexander, The Shareholders Common Dazzle Bhujwala, CERES Pallavi Borse, Institutional Investor (II) Bill Burckart, The Investment Integration Project (TIIP) Marcela Pinilla, BSR Christina Shim and Eduardo Tugendhat, Palladium Bob Stammers, CFA Institute Marilyn Waite, Hewlett Foundation We are grateful for all those involved in the review, production, and design of this paper, in particular Dmitriy Ioselevich from 17 Com- munications, Michael Morgan, and Tamsen Webster. To reference this research, please use this citation: Kastrapeli, M., Aquino-Hagedorn, L., & Mills, S. (2021, January 21). We Need to Talk: Why It’s Time for Institutional Investors to Embrace SDG-Aligned Investing. https://www.beyondalpharesearch.com 2 | Beyond Alpha We Need to Talk Why It’s Time for Institutional Investors to Embrace SDG-Aligned Investing About the Authors Mirtha Kastrapeli Mirtha Kastrapeli is the founder and CEO of Beyond Alpha. She is also a Fellow at Columbia University’s Center for Sustain- able Investment, CCSI. Most recently, Ms. Kastrapeli was Managing Director and Global Head of State Street’s Center for Applied Research, an independent think-tank designed to provide insights about the future of the investment industry. In this capacity, she co-authored multiple papers, including ‘The Big Shift; Finding a New Center of Gravity for the Investment Industry’ in 2019, ‘The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG’ in 2017, and the award-winning study ‘Discovering Phi: Motivation as the Hidden Variable of Performance’ in 2016. She has presented her research and led workshops at dozens of industry conferences globally and c-suite and fund board meetings. Ms. Kastrapeli has over fifteen years of experience in the private and public sectors, analyzing capital markets, and shaping public policy. She spent seven years as a Global Macro Strategist at State Street Global Markets in Boston. In the public sector, Ms. Kastrapeli served as an advisor to the Secretary-General of the Ministry of Economics in Nicaragua. She also worked at the Economic and Commercial Office of the US Embassy in Managua, where she received a Meritorious Honor Award from the US Department of State. Ms. Kastrapeli earned a bachelor’s degree with honors in Finance and Economics from Ave Maria College in Nicaragua and a Master’s Degree in Business Administration, MBA, from the Brandeis International Business School. Luciana Aquino-Hagedorn Luciana Aquino-Hagedorn is an international lawyer with almost 20 years of experience in finance. Ms. Aquino-Hagedorn is currently an angel investor and Senior Fellow at CCSI, where she focuses her research on the theory and practice of impact and sustainable investments. Before that, she was a partner at Goodwin Procter LLP, where she was co-leader of the Impact and Responsible Investing practice. At Goodwin, she focused her practice on advising asset managers and institutional in- vestors in direct investing, fund formation, joint ventures, incentive compensation, and investments, including sustainable timber and agriculture. Ms. Aquino-Hagedorn is fluent in Spanish and has extensive experience in cross-border investments involving assets in Latin America, Africa, Europe, and Oceania. Prior to rejoining Goodwin in 2015, Ms. Aquino-Hagedorn was Senior Vice President of Natural Resources at Harvard Management Company (HMC), where she was involved in all legal aspects of HMC’s global forestry and agriculture portfolio. Before joining HMC, Ms. Aquino-Hagedorn was an associate in Goodwin’s Boston office, where she counseled clients on fund formation, transactional and regulatory matters. She also previously worked as a foreign associate for Linklaters in New York City and began her legal career at Le Pera & Lessa in Bue- nos Aires. Ms. Aquino-Hagedorn holds a J.D. from Boston University School of Law, an LL.M. from Columbia Law School, and a law degree (abogada) from the Facultad de Derecho y Ciencias Sociales de la Universidad de Buenos Aires. Scott Mills, CFA Scott Mills is an investment professional with more than fifteen years of industry experience in fundamental equity analysis and business development. Scott is currently the Chief Investment Strategist at Proactive Planning Partners, a Registered Investment Advisor based in New York City. Scott is also Vice President of Sales & Business Development at Charity Foot- prints Inc. (CF), a social enterprise startup and fundraising platform serving nonprofits and the private sector. At CF, based on his core belief that businesses and nonprofit organizations can drive positive change in the world, he facilitates strategic partnerships that align with corporate social responsibility initiatives and philanthropic goals that amplify impact. Scott re- cently joined Columbia Center on Sustainable Investment, CCSI, focusing his research on Sustainable Investing. Previously, Scott was a Senior Equity Analyst at Voya Investment Management in New York City. In this capacity, he led and managed fundamental stock selection in the Global Healthcare sector across multiple strategies with $45 Billion in total assets. Scott earned his Bachelor of Science in Finance from Rutgers University and is a CFA® charterholder. Beyond Alpha | 3 We Need to Talk Why It’s Time for Institutional Investors to Embrace SDG-Aligned Investing I. Executive Summary The multiple crises of 2020 contributed to a growing Furthermore, the SDGs provide a framework to analyze the awareness of the scope and scale of the sustainability externalities that companies should internalize to be more challenges that we face, from the climate emergency and resilient vis a vis the expectation of future crises, more the loss of biodiversity to systemic racism and income stringent regulations, growing societal pressures, and the inequality. Alongside this growing awareness, there has move towards stakeholder capitalism. From an investor’s been a parallel increase in sustainable investing as part of perspective, the UN PRI notes that the SDGs can help in- rising interest from institutional and individual asset own- vestors understand “the sustainability trends relevant to ers to use their capital to help address the world’s most investment activity and their fiduciary duties,” thereby pressing challenges. resulting in better risk management and opportunities at the micro and macro level. However, despite record inflows into sustainable invest- ments, these investment vehicles appear unable to sup- These reasons explain why the SDGs are increasingly be- port the kind of progress that is needed. The past year has coming adopted in the corporate and financial world as revealed the deep vulnerabilities of our economic, social, a way for businesses and investors to show how they are and environmental systems and how interrelated and in- attempting to address different sustainability challenges. terconnected these systems are today. But to turn the increased interest in sustainability from a trend to a transformation will require investors taking a A better path forward is needed to take all systemic risks more holistic approach that aligns all investment activities into account, thereby turning expectations for progress with the SDGs. into tangible results. Towards SDG-Aligned Investing The UN Sustainable Development Goals (SDGs) can offer such a path. Introduced in 2015 and agreed to by all the Existing sustainable investment approaches by asset own- 193 members of the UN General Assembly, the SDGs pro- ers and asset managers have largely fallen short in deliver- vide a robust and comprehensive framework for strength- ing on expectations for progress. For example, ESG integra- ening our shared social and environmental systems by tion is one of the most prevalent sustainable investment 2030. Although
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