It is now widely accepted that the private sector, both companies and investors, is essential to accomplishing the 169 targets in the 17 Sustainable Development Goals (SDGs). Of course, there is a tension here. The SDGs are about making the world a better place. That is not the primary reason companies exist, although the state of the world matters to them. Thus, they should work to create a better world while still delivering the expected returns to their shareholders. This can be done by focusing on the material environmental, social, and governance (ESG) issues that matter for value creation and knowing which SDGs and their targets will benefit. Choices must be made. As shown in a study by Mozaffar Khan, George Serafeim, and Aaron Yoon, high performance on these material ESG issues improves financial performance. High performance on these ESG issues will also contribute to the SDGs.
Since the material ESG issues vary by industry (e.g., access to medicine is material for a pharmaceutical company but irrelevant to a chemical company where carbon emissions is material), it follows that any given industry will be more important to some SDGs than others. In a recent article in the MIT Sloan Management Review Professor Costanza Consolandi of the University of Siena and I have identified the three industries which are most important for each SDG based on an analysis at the SDG level. We have also shown that the healthcare sector is the single most important one for achieving the SDGs, followed by resource transformation, consumption, and non-renewable resources (all three of which are about the same). We reach this conclusion using a methodology based on mapping the material ESG issues identified by the Sustainability Accounting Standards Board (SASB) for its 79 industries aggregated into 10 sectors to the SDGs. The SDG impact of an industry is a function of the number of its material issues (out of SASB’s universal list of 30) and which SDGs they are relevant to.
With Professor Gianni Betti, also of the University of Siena, we extended this analysis down to the target level of the SDGs. Through this detailed and somewhat complex analysis, we are able to show how each industry can contribute to which targets of the SDGs based on an index ranging from 0 to 100. We hope this will provide a useful narrative to companies, enabling them to explain to their shareholders and other stakeholders how they are both creating economic value and addressing pressing environmental and social challenges. We also hope it will help investors make decisions in their investment decisions and engagement activities in companies.
Here is an overview of our findings based on a target-level analysis for the healthcare sector which is comprised of six industries: biotechnology, pharmaceuticals, medical equipment, healthcare delivery, healthcare distribution, and managed care. The first two, with identical scores based on a materiality analysis, have the highest and equal impact on the SDGs with an overall index of 53.7 on a score of 0 to 100. (The methodology is described in our paper.) They are followed by medical equipment (45.6), healthcare delivery (25.6), healthcare distribution (14.3), and managed care (13.8). Clearly there is substantial variation within the healthcare sector in terms of its importance to the SDGs and to which ones. Biotech and pharma are particularly important for SDGs:
- #4 (Quality Education-87.50)
- #6 (Clear Water and Sanitation-66.7)
- #9 (Industry, Innovation, and Infrastructure-66.7)
- #11 (Sustainable Cities and Communities-68.4)
- #14 (Life Below Water-65.0).
The SDGs for which biotech and pharma are least relevant are:
- #1 (No Poverty-40.9)
- #7 (Affordable and Clean Energy-43.5)
- #8 (Decent Work and Economic Growth-45.8)
- #13 (Climate Action-33.3)
- #16 (Peace, Justice, and Strong Institutions-43.5).
Medical equipment is particularly important for:
- #2 (Zero Hunger-60.0)
- #4 (62.5), #12 (Sustainable Cities and Communities-64.5)
- #14 (65.0)
- #15 (Life on Land-61.0)
Using a cutoff point of 60.0, Healthcare delivery is only important for #4 (62.5). From a materiality perspective, healthcare distribution and managed care are relatively unimportant to the SDGs, with the former have a maximum index of 33.3 for #13 and the latter a maximum index of 37.5 for #4.
These findings show that an industry can contribute to the SDGs beyond the intuitively obvious, as illustrated by biotech and pharma for SDG #3 (Good Health and Well-Being-52.9), which actually ranks behind their top five. The reason for this is that our methodology is fundamentally based on a mapping of SASB’s material issues to the SDGs. For example, the total count of SASB’s material issues on the nine targets in SDG #3 is 51. Not all of these are issues are material for the biotech or pharmaceutical industries and so the count is 27, resulting in an index of 52.9. In contrast, for Quality Education, the total count of SASB issues on its seven targets is only eight. Biotech and pharma have a count of seven, resulting in an index of 87.5. Thus, these indices are the ratio of the number of material issues in an industry relevant to a target to the total number of SASB issues that are relevant to it.
Our methodology does not attempt to assess the absolute magnitude of an industry on the targets of an SDG. This is a function of a number of variables including quantitative metrics of an ESG issues (e.g., volume of carbon emissions and employee turnover) which, in turn, are a function of industry and company size. Rather, our methodology is designed to evaluate the extent to which issues material to an industry, relative to all the material issues relevant to a target, are relevant to the targets of the SDGs. The virtue of this approach is that it broadens the view of companies regarding which SDGs they can contribute to. For example, the processed foods industry in the consumption sector has the same index as biotech and pharma for SDG #3 (Good Health and Well-Being) of 52.9.
At the same time, our methodology provides a very clear focus on exactly which targets a company can contribute to while improving their financial performance. For example, there are three targets for SDG #13 (Climate Action). Seven of SASB’s issues are relevant to Target 13.1 (Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries), but only three of these (energy management, lifecycle impact of products and services, and supply chain management) are material for the biotech and pharma industries. Two SASB issues are relevant for Target 13.2 (Integrate climate change measures into national policies, strategies and planning) but none of these are material for the biotech and pharma industries). However, one of these, regulatory capture and political influence, is material for the healthcare distribution industry. None of the SASB issues are relevant to Target 13.3 (Improve education, awareness-raising and human and institutional capacity on climate change mitigation, adaptation, impact reduction and early warning.) This illustrates that there are some SDG targets where the private sector cannot play a meaningful role and the entire burden will lay on the public sector.
This materiality-based analysis of SDG impact can be useful to investors as well. The investment community, perhaps even more than the corporate community, sees the SDGs as opportunities for value creation. It is also concerned with the systemic degradation that will result if the SDGs are not achieved. The very large asset owners and asset managers are “universal owners” who cannot diversity away from system-level risk, the issue The Investment Integration Project is focused on. While there are clearly investment opportunities in companies whose products and services are directly relevant to the SDGs, such as those in renewable energy and water conservation, investors also want to know if all of the companies in their portfolios, particularly the largest ones, are making the world a better place or making it worse. By knowing which of a company’s material issues are relevant to which SDG targets and knowing the company’s performance on these issues, investors can make this assessment.
Costanza, Gianni, and I are now working on a paper that will evaluate on a performance basis the extent to which the private sector in the U.S. is currently contributing to the SDGs using ESG performance measures from TruValue Labs, a big data sustainability company. This will enable us to show where the private sector is providing strong support to the SDGs through its material issues and where it is not. At the same time, I will be writing a blog about the other nine sectors in SASB’s classification system similar to this one on healthcare. Next up is resource transformation.
