Responsible investments need transparent data to mitigate greenwashing

How can asset managers and asset owners ensure that their Responsible Investment portfolios deliver on the United Nations Sustainable Development Goals, benefiting beneficiaries on the one hand, and creating positive real-world outcomes on the other? And how can they then be sure that those same investments are not exposed to greenwashing?

These were just some of the key questions being tackled recently during the Sustainable Development Investment Asset Owner Platform (SDI AOP) seminar in the Dutch town of Zeist. This gathering of like-minded asset owners, asset managers and data experts took place at the headquarters of the Netherlands' major cooperative pension investor PGGM.

The 17 United Nations Sustainable Development Goals (SDGs) were launched in September 2015 as part of the Agenda for Sustainable Development. This is a call to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. The SDGs provide a blueprint to achieve a sustainable future. Sustainable investments with SDG integration can help achieve those goals by directing funds towards companies which demonstratively contribute to the SDGs. And that, explains Jaap van Dam, Principal Director of Investment Strategy at PGGM, is where the SDI AOP comes in.

Global platform

"SDI AOP is a global platform which we have set up with other asset-owners in order to implement the SDI taxonomy and build a standard for investing into the SDGs," he says. Van Dam is also a board member of the SDI AOP's governing body, the Design Authority. "We are creating a community of investors who are jointly advancing the SDI AOP standard for investing in the SDGs. As asset owners we have an intrinsic drive and we primarily want to encourage the standard in order to bring more money to the sustainable development goals in a way that results in positive outcomes in the real world," he says.

It is clear that Van Dam's colleagues in the industry are interested in this standard, launched two years ago. "I am proud to say that the total subscribers to our data currently have more than €10 trillion in assets under management," adds Van Dam.

Different data focus

The key to SDI AOP's success in the two short years of its existence is the quality of the data which it generates. "Our data captures company revenues, and how they are linked to products and services," explains James Leaton, SDI AOP's Research Director. "Our focus differs from data providers who try to navigate the challenges of getting consistent data on the operations and conduct aspects of ESG. The focus on products and services is a tangible, activity-based approach. This data appeals to our users because it is very transparent. We look at the positive contributions from products and services to the SDGs. We provide objective metrics that based on data that is audited, publicly available and robust," he adds. "We then put this raw data through a machine learning process which is then classified and validated by humans with the requisite knowledge to solve data anomalies," Leaton explains.

The platform's organisation is split into three distinct roles:

"We have recently expanded our dataset coverage," says Leaton. "Last year we added US and European fixed income, on top of global equities, so our coverage rose to around 8,700 entities as a base floor for the SDI Universe Coverage; within that around 2,000 come out as SDI classified."

Greenwashing warning

Greenwashing is one of the major pitfalls for the fast-growing responsible investment community. Conveying a false impression or providing misleading information concerning environmental friendliness is fatal for credibility.

But how can professional investors, who have stewardship over the funds of millions of beneficiaries, drill through the marketing spin and clearly assess companies when building their sustainable investment portfolios?

Part of the answer is to use high-quality, transparent data. When seeking to tilt its pension portfolio to the SDGs, Philips Pensioenfonds was wary of greenwashing and the murky data sets which can be associated with this. "Our new investment benchmark is to have 20%-points more invested in companies which contribute to the SDGs with their revenues," explains Arian Borgers, Investment Manager at Philips Pensioenfonds. "And those revenues have to be at least 10% of total revenues." All this must be measurable, he adds.

"When we looked at the SDI AOP dataset we noticed it is not a black box. If you drill down, you can actually find the links to the reports where companies explain why, for example, company x has 24% revenues coming from SDG y. That was a really important reason for us to choose this dataset. We don't want greenwashing: therefore it is important to see the data sources" said Borgers. The word on this dataset is clearly spreading.

Clean and rule-based

NN Investment Partners chose the SDI-AOP dataset as one of the sources for developing its Sustainable Investment Framework  to determine what are considered sustainable investments in line with the definitions of the Sustainable Finance Disclosure Regulation (SFDR). "One of our key considerations was the greenwashing element," says Ewoud Tan, Lead RI data and tooling at NN Investment Partners. "We saw some data suppliers tilting towards SDGs figures which we did not find credible," he says. "SDI-AOP scored better on transparency than most of the parties we looked at. Other important considerations were the way the data is
presented and the fact that SDI-AOP is open to a collaborative approach, as we have clear opinions ourselves."

Other asset managers concur: "An increasing number of our clients are considering using the SDI AOP because it is a very clean, rule-based dataset," says Monique Donders, Country Head Netherlands at BlackRock, the world's largest asset manager. "It is auditable and a very clear translation mechanism from the SDGs to specific securities. This is particularly relevant because the SDGs were not designed with investors and pension funds in mind." BlackRock currently only uses SDI AOP for Dutch clients: “However, I think SDI AOP has global potential,” Donders adds.

APG serves 4.7 million Dutch people and manages a total capital of over 600 billion euros on behalf of Dutch pension funds and their members and beneficiaries. "We apply the SDI taxonomy to our entire portfolio. This means to both public markets and private markets," explains Claudia Kruse, APG's Managing Director Global Responsible Investment and Governance. SDI data is a key factor in the methodology for the APG Qontigo Responsible Investing Index Strategy. "The RI Index can be tailored to specific client preferences of which the SDIs are an important policy aspect," she says. Claudia Kruse is also the Chair of the board of the SDI AOP Design Authority.

Future developments

Responsible investment: incorporating environmental, social and governance (ESG) factors into investment decisions, is a relatively young field, yet more and more investors and beneficiaries want to see their money used in a sustainable way. Their main motivation is to allow their money, their pensions, to have positive real-world impact. The SDI AOP dataset is a tool for asset managers and asset owners to achieve this.

"We use the SDI AOP data set to classify our entire portfolio based on the taxonomy which applies to all asset categories," says Piet Klop, Head of Responsible Investment at PGGM. "We report on the share of our assets under management which is aligned with the SDGs. This is important. We think in terms of pensions with purpose. And this is the purpose part, which we want to quantify as well as we can."

Klop adds that PGGM used the same dataset to tilt the entire passive beta portfolio towards companies that contribute more to the SDGs. But he is also looking ahead: "Our interest looking forward is complementing the revenue-based portion of the SDI dataset with a forward-looking dimension such as patents," he explains. "Everything which will help us understand how a company will be positioned related to these big global challenges will be a key improvement to the dataset."

Innovations ahead

Research Director James Leaton is working on this: "In terms of innovation, we are studying the forward-looking aspect of our product. We are researching how we can get a sense of which companies are heading in the right direction towards increasing their contribution towards the SDGs," he says.

"This does take time in terms of development. We have to train the machine learning, test it and validate the outcomes and get feedback from the market. But we would rather take our time and do this properly and have high-quality credible data at the end."

One aspect not yet available in SDI AOP dataset which asset managers and asset owners are also clearly seeking is for the dataset to take into consideration the negative aspects of corporate behaviour. "You can't just talk about one side of the coin, and ignore what there may be in terms of negative contributions. We want them to come into the picture too," says Klop.

Leaton: "We are looking into negative and adverse impacts and potentially expanding the spectrum of classifications which we have in order to include the adverse side. This has certainly come up in discussions with potential SDI AOP community members."

The event attendees were clearly inspired not only by the interesting matters discussed, but by the fact that this was one of the first physical events many had attended in recent years: "this is the first time I have worn my suit in two years," admitted one attendee. "I find that the information exchange is considerably higher offline," said another. That information exchange continued long after the seminar's closing speeches and this well illustrated how the conversation on how to incorporate Sustainable Development Goals into responsible investment strategies is far from over.