[MUSIC] After completing steps one and two, you will likely have a list of more SDG outcomes than you may actually want to invest in. Very few investment portfolios, even very large ones, can manage outcomes for every SDG. Instead, you want to make smart decisions about which negative and positive impacts you want to influence with your capital. We call this Principled Prioritization, borrowing from the language of the UN Global Compact. As investors, you'll want to prioritize your list of potential SDG outcomes from step two by considering how they align with your investment thesis, with your size and potential for influence, and with your expectations for risk and financial return. These considerations are also key concepts in the UN SDG Impact Standards for investors on setting strategy. We recommend undertaking principled prioritization of SDG outcomes by asking five questions. First, how well does each SDG outcome align with your investment thesis? You want to explore alignment with your asset, geography, industry, risk, and return priorities. You might want to expand your investment thesis to create more fit with your SDG outcome goals. Or you might need to eliminate some SDG goals because they don't align with investment priorities. Don't forget to explore the outcome indicators for each SDG target. They're often quite specific about the metrics of interest and the who they are designed to serve. Having clarity on these what who combinations will help you identify where SDGs naturally aligned with your investment interests and where the connection may not be as clear. Second, what is the landscape of investable options for each SDG outcome? Given the specific overlap between your investment priorities and SDG outcomes, there may be few or many opportunities for investment. The SDG impact standards ask you to draw on available research and data from reputable government, scientific and civil society organizations to understand the terrain for SDG investment in the markets in which you're working. For a given SDG outcome, is it feasible for your organization to identify investable options? Are there enough investment opportunities to allow you to make good choices? Or are there gaps you can fill that will give you some competitive advantage? Third, how well is the SDG outcome aligned with your size, network and potential for influence? If you're managing billions of assets and investing globally, you have more potential for influence on sustainable development than many other investors. Carving out a very small portion of those as related to SDGs may cause some to ask why your commitment is so small when your influence is so great. Conversely, even very small investors can have outsized influence by leveraging not only their assets, but their networks and voice. You want to match your muscle with your commitment. The SDG impact standards ask that investors ensure the magnitude, either by scale or depth, of their intended impact is commensurate with their size. This consideration also aligns with the first principle of the IFCs operating principles for impact management. Fourth, what can you do within current investments versus through new investments? For example, if your investment thesis has included investing in transportation companies and your SDG outcomes are around climate change, are there places where your current investments are not working toward climate change, but could be improved? Remember, SDG outcomes ask you to consider reducing harm in current activities as well as increasing positive impact in current or new investments. Fifth, are there cross cutting SDG goals that you want to add as factors for all your investments, such as paying workers, a living wage, working toward climate change or enhancing gender or racial equity? For example, in its 2020 year in review report, Bain Double Impact, a middle market impact investment fund based in Boston defined both the SDGs the fund has chosen as investment verticals or themes and also the SDGs that they are addressing as cross cutting outcomes across all investments. These five questions summarize some complex considerations. Now, we'll show you examples of what this process and its outcomes could look like. Akhil's fund thesis is creating a 15% net return to investors inside a 10 year fund using private equity. They aim to identify enterprises that could grow five to 10X in the first three years of investment. Akhil decided to explore the actual outcome indicators for each SDG target they identified in step two to see which seem well aligned with their investment thesis and the landscape of investable options. For example, for his financial inclusion theme, he explored the targets under SDG eight on decent work and economic growth. The accompanying indicator 8.6.1 is the proportion of youth aged 15-24 years, not in education, employment or training. This means that an investment aimed at SDG 8.6 would need to serve youth aged 15-24. The team's research reveals that investment opportunities in education and employment training for this population are more slow growth than the fund's target return parameters. So, they eliminated SDG 8.6 from their priority list and ultimately selected 8.3, 8.10 and 5A. Paula, our pension fund manager, worked with consultants to better understand the priorities of her pension holders and the strategies other pension funds have developed. This work concluded with recommendations that at a global scale, the fund could undertake significant efforts in two areas, climate change and equity and inclusion. Paula made a presentation to the governance level investment committee of the fund and provided evidence of robust investment options across all asset classes that could address climate change with data showing financial performance meeting or exceeding the portfolio's benchmarks. Her process uncovered less data on financial performance on equity and inclusion investments. But she presented research, including Stanford University's 2019 study showing that allocators have trouble gauging the competence of racially diverse teams, which has led to undervaluing racially diverse fund managers. The committee acknowledged that many of their pension holders are minorities, women and members of other historically disadvantaged groups. Given this, the committee overwhelmingly agreed it was a core responsibility of the fund to be responsive to the needs of its stakeholders and to stretch themselves in learning about investable options inequity and inclusion. The committee signed off on Paula's goal of developing investment plans for $20 billion dollars through significant investments in both areas, climate and equity and inclusion. And further, they narrowed their goals to specific SDG targets in each. They also gave her flexibility to decide the allocation of funds between the two goals. Understanding that investment options in climate change might be easier to find quickly, but they wanted equity to be important. So, they asked Paula and her team to make concrete recommendations for the first three billion of investment in equity and inclusion in the next six months. Paula's final SDG targets are listed here. Making it real. Prioritize your SDG outcomes based on overall fit with your strategy. Look for fit between SDG goals and financial risk and return, and evaluate the landscape of investable options that match your criteria. Make special consideration for areas where stakeholder priorities are significant, but where alignment with financial assumptions is low. What flexibility can you have in meeting them? What kinds of data and evidence could help you discover other options? Sometimes you can be creative and find ways to meet stakeholder needs that will align with your goals in unexpected ways. Review outcome indicators. When you're considering SDGs and targets, look at the actual outcome indicators for each SDG target. They're often quite specific and will help you understand the difference between, say, investing in education versus investing in the education related SDGs. The SDGs are largely focused on underserved populations, so pay attention to the what who combinations they include. Right size your effort. How well is the SDG outcome aligned with your size, network, assets and potential for influence. Both the SDG impact standards and the IFC operating principles for Impact management ask that the scale and or intensity of the intended portfolio impact is proportionate to the size of the investment portfolio. Consult outside data on need. Be sure you're drawing on available information and data from reputable government, scientific and civil society organizations to set goals that are aligned with needs in the industry's geography and communities in which you're working. Consider portfolio wide SDG outcome goals. Consider cross cutting SDG goals that you might want to add as factors for all investments and embed human rights. Be sure to look for ways to embed respect for human rights and other responsible business practices in your approach. At the end of this step, you'll have a prioritized list of SDG outcomes that align with your financial goals and stakeholder priorities and that are proportionate to the scale of your assets and influence.
