1. Introduction
The 17 Sustainable Development Goals (SDGs), ratified by the United Nations on 15 September 2015, have been described as “the closestthing the Earth has to a strategy” [
1]. It is also widely acknowledged that the goals set for 2030 cannot be achieved by the public sector alone. Indeed, the greater burden falls on the private sector with estimates that it will have to close the funding gap of
$2.5 trillion per year and to ensure that the private sector provides the expected 50% of the total
$115 trillion cost of funding the SDGs [
2] Fortunately, the investment community is increasingly seeing the SDGs as creating investment opportunities and corporations are looking for the business opportunities they create. The current discussion on the role of the private sector in the achievement of the goals is intense [
3,
4,
5], especially at the institutional level. In May 2018, the European Commission, on the basis of the Recommendations of the High-Level Expert Group on Sustainable Finance [
6], adopted a package of measures that set out a comprehensive strategy to connect finance to sustainability through reorienting capital flows towards sustainable investments, managing financial risk connected to climate change, social issues and environmental degradation and fostering long-termism in financial and economic activities [
7].Besides measures on SDG implementations at a country level, such as the SDG Index and Dashboard of UN Sustainable Development Solutions Network (UN-SDSN), in order to track progress towards the goals and their associated 169 targets at a company level, a large number of tools and “business indicators” have been proposed. The World Business Council for Sustainable Development (WBCSD) together with Global Reporting Initiative (GRI) and the UN Global Compact (Global Compact) have created SDG Compass, a guide with associated tools and knowledge resources to help companies align their business strategies with the SDGs and to measuring and managing their contribution, including an inventory that maps more than 1500 existing business indicators against the 17 SDGs and their respective 169 targets. GRI and the Global Compact have also published a document [
8] to help companies understand the SDGs and their targets. Also, consulting firms such as EY, KPMG, and PricewaterhouseCoopers have developed their own tools to help companies interested in understanding how their strategies can support the SDGs. The SDGs are about “impact”, and in these measures the unit of analysis is not the company, but something outside of the company whose operations affect it, such as reduced gender inequality in a community or replenishment of fishing stocks. However, many of the metrics are about a company’s operations and the impact must be inferred or further calculated, often based on data that lies outside the company’s control. On this topic, Vörösmarty et al. [
9] propose a new approach to evaluate corporate products and services within broader environmental or human beneficiary settings, but true impact measurement is still at an early stage of development. Ideally, an impact measure can be linked to actions in order to show differences, both positive and negative, had the action not taken place. In this paper, we present a framework which will enable investors and companies to contribute to the SDGs by identifying the material ESG issues (what investors care about) by sector that also contribute to the SDGs (what the world cares about). Within the broader framework of the performance implications of sustainability investments [
10,
11,
12,
13,
14] and starting from the evidence of how ESG materiality positively affects financial performance [
15,
16], we aim at providing a new framing able to answer to the long-standing question of “Can a company do well by doing good?” In particular, will contributing to the SDGs be good for a company’s financial performance or will creating these positive externalities actually hurt financial performance? The somewhat unsatisfying but honest answer is “It depends.” Our thesis is that good performance on ESG issues which are material from the perspective of the Sustainability Accounting Standards Board (SASB) but which also have impact on one or more SDGs will be a situation where doing good means doing well.
We chose SASB’s framework as the basis for mapping to the SDGs for two reasons. First, it is focused on investors, not multiple stakeholders, which is the case for the SDGs. This captures the tension companies feel in trying to be responsive to both audiences. Second, it is the only framework that has identified the material ESG issues at the sector and industry level. This is essential since which of the 30 generic ESG issues are material varies substantially by industry.
2. Methodology
The concept of materiality we adopt in this paper is the one used by SASB that was established to identify the material ESG issues at an industry level that are financially relevant for investors, as they affect financial performance [
17]. SASB is a San Francisco-based nonprofit organization established in 2011. SASB’s mission is to develop measurement standards for reporting on material environmental, social, and governance (ESG) issues—often called “non-financial information”—that are of the same relevance and reliability as accounting standards for financial information. Because the materiality of sustainability issues varies across industries [
18], SASB has established the Sustainable Industry Classification System™ [
19] (SICS) comprised of 10 sectors subdivided into 79 industries. Companies are grouped in terms of similar resource intensity, as well as sustainability risks and opportunities.
Industry working groups comprised of companies, investors, and industry experts of various kinds work to identify the material issues for each industry and the appropriate key performance indicator for measuring and reporting on them. It has issued a set of provisional standards for which it has received public comment and is now working on incorporating this feedback into them. Following Phadke and DeMates [
20], we started with a mapping of SASB’s 30 generic ESG issues organized in terms of the categories of environment, social capital, human capital, business model and innovation, and leadership and governance to the SDGs. In our analysis, we didn’t consider SDG 17 since this is an overarching one covering all SDGs. Furthermore, as it is intuitive that different issues might have a different degree of impact on the SDGs, we increased the detail of our analysis by mapping SASB’s 30 generic ESG issues to the target level for each SDG.
Table 1 describes the 17 SDGs and
Table 2 presents the description of the targets of SDG 8 as an example.
These mappings represent the basis of our framework as they allowed us to calculate two different sets of indices (both at a goal and a target level):
- (a)
a set of indices that measure the ability of SASB’s issues to impact the SDGs and the relevance of SASB’s issues to the SDGs;
- (b)
a set of indices that measure the ability of each industry and each sector to impact the SDGs.
Moreover, mapping at the target level allowed us to calculate, for each of the abovementioned sets, secondary indices that measure the intensity of impact on a given SDG of each SASB’s issue. In our analysis, we considered 107 targets. The 169 targets also include
means of implementation targets to facilitate outcomes. SDG17, which covers global partnership, comprises 19 such targets, and there is a total of 43 more under SDGs 1–16 (where they are separately identified using small letters after the goal number, e.g., 16.b: Promote and enforce non-discriminatory laws and policies for sustainable development) [
21]. Target selection is shown in
Table 3.
For the first group of indices, at a goal level for each SASB issue
i (
i: 1 to 30) we identified the number (G) of SDG(s) impacted; in other words, a generic SDG
j could be impacted (
impi,j = 1) and a generic SDG
l could not be (
impi,l = 0). We then calculated for each SASB issue the
SDG Relevance Index (
SRI) as the ratio between the number of SDGs impacted by a specific material issue to the total number—16—of SDGs:
At a target level, for each SASB issue i (i: 1 to 30) we identified the number (Tj) of targets impacted in a specific SDG j; in other words, a generic target t in SDG j (t: 1 to Tj) could be impacted (impi,j,t = 1) and a generic target s in the same SDG j could be not (impi,j,s = 0).
We then computed for each SASB issue the
Target Relevance Index (
TRI) as the ratio between the number of targets impacted by a specific material issue on the total number of targets, that shows the ability of each SASB’s issue to impact targets. This could be written by generalizing Equation (1), in the following way:
To measure the intensity of impact on a given SDG of each issue, for each SASB issue and for each SDG
j we calculated, as a secondary index, the
Target Specific Relevance Index (
TSRI). If a SASB issue
i impacts on a generic SDG
j (i.e.,
impi,j = 1), then the TSRI is the ratio between the number of SDG
j targets impacted by a specific material issue to the total number of targets of SDG
j. The TSRI is defined as:
By symmetry with the previous step, we also look at the number of SASB’s generic ESG issues that impact each of the SDGs (
MI) and calculate an
ESG Relevance Index (
ERI) for each SDG
j to measure the extent to which the SDG is impacted by the 30 SASB issues:
At target level, to measure the extent to which the single target is impacted by the 30 SASB’s issues, we looked at the number of SASB’s issues affecting each target and calculated an
ESG Target Relevance Index (
TERI)
:In this case, as a secondary index for each SDG we calculated an
ESG Target Specific Relevance Index (
TSERI) averaging the
TERIs related to each SDG:
However, we should add a caveat to this first set of measures. Our proposal is based simply on counts of various kinds. It does not take into account the fact that a material SASB issue in one sector could be more important than another due to the absolute value of the topic (for example, the total amount of GHG emissions is likely to vary across sectors). If we had a credible weighting scheme, we could propose a more refined methodology based on fuzzy set theory, and the results could be different. We make an attempt to present such advanced methodology later in this paper in
Section 4. This same caveat applies to our analysis at the target level. From a company perspective, and investors in the company, the critical question is which SDGs are impacted by the material ESG issues determined by SASB for its industry and how a focus on ESG material issues can contribute to the SDGs; we calculated a second set of indices that provide a measure of the ability of each industry and sector to impact the SDGs. For each SDG
j and for each industry
nk (
nk: 1 to
Nk) in a given sector
k (
k: 1 to 10), we counted the number of industry-specific material issues impacting the SDG (
MIk) and calculated the
SDG Industry Impact Index (
ISII) as the ratio (multiplied by 100) between the number of industry-specific material issues and the total number of SASB general ESG issues (above defined as
MI) affecting the single SDG
j; in the formula:
At the target level, for each industry
nk (
nk: 1 to
Nk) in a given sector
k (
k: 1 to 10), we counted the number of industry-specific material issues impacting each target
tj in each SDG
j (
TMIk) and for each target we calculate the
Industry Target Impact Index (
ITII) as the ratio (multiplied by 100) between
TMIk and the total number of SASB general ESG issues (defines as
TMI) affecting the single target
tj in SDG
j; in formula:
Also, in this case, as a secondary index, for each SDG we calculated an
Industry SDG Target Impact Index (ISTII), as the ratio (multiplied by 100) between the sum over targets in SDG
j of the number of industry-specific material issues impacting each target
tj in each SDG (
TMIk), and the sum over targets in SDG
j of the total number of SASB general ESG issues affecting the single Target
tj in SDG
j; in formula:
At a sector level
k and at a goal level, the
Sector SDG Impact Index was computed averaging the single
ISIIs:
At a target level, for each sector
k, the target
tj in SDG
j Impact Index (
STII) was computed averaging the single
ITIIs:
The corresponding secondary index, for each sector
k, is the
Sector SDG j Target Impact Index (
SSTII), computed averaging the single
ISTIIs:
An
Average SDG Impact Index was finally computed both at industry (
AISII) and sector (
ASSII) level, averaging the
ISIIs and
SSIIs, respectively:
An
Average SDG Target Impact Index was finally computed both at the industry (
AISTII) and sector (
ASSTII) level, averaging the single
ITIIs and
SSTIIs:
A synthesis of the calculated indices is presented in
Table 4.
4. Conclusions, Limitations and Further Research
In the introduction we noted the importance of the private sector in contributing to the achievement of the SDGs. Both the public and private sector need to understand the varying degrees to which the latter can support the former in achieving the SDGs. In the aggregate, the private sector will be more important to some SDGs, and their specific targets, than others. This paper provides specific guidance on how the private sector can support the SDGs by mapping the material issues that create value for shareholders to SDG targets that will make the world a better place. Our research shows that for each sector, there are particular SDGs where it has high impact and for each SDG there are particular sectors that have a high impact on it, and some sectors are more important to the SDGs in aggregate than others. The same is true at the target level.
None of these findings are surprising since it would be expected that some sectors would be more relevant to a particular SDG than others. What perhaps is surprising is to see that a few sectors stand out in terms of their impact on the SDGs and that some SDGs are more impacted by SASB’s ESG topics than others. The former means that the success of a few sectors will largely determine whether the SDG goals are met. The latter means that while some SDGs will substantially benefit from the private sector “doing well”, others will benefit to a lesser extent.
As introduced in the methodology section, a limitation of the matching between SASB’s material issues with the SDGs or their targets is its definition as a dichotomous variable (impact/not impact). It does not take into account the fact that a material SASB issue in one sector could be more important than another due to the absolute value of the topic. If we had a credible weighting scheme, the results could be different. This same caveat applies to our analysis at the target level. Another caveat is that we treat the impact of a material ESG issue as equal if it is relevant to an SDG. Just how important a material issue is to a SDG could vary according to its nature. For example, GHG emissions could be more important to achieving the success of some SDGs than others even though it has an impact on all of them. This too applies at the target level.
However, we believe that each material issue could impact a single SDG or target with a varying degree between 0 and 1; in this way, we can take into account fuzzy set theory (Zadeh, 1965) [
23]. In the social sciences, fuzzy set theory has initially been adopted to study poverty and social exclusion [
24,
25]. Later, this methodology has been successfully implemented to monitor the effects of marital disruption on well-being [
26], to measure the multidimensional education mismatch [
27], to measure labor participation [
28], and to study multidimensional measures of quality of life [
29]. The positive results achieved while applying the fuzzy set approach to fields other than poverty demonstrate its wide applicability and robustness.
In the context of the matching between SASB material issues with the SDGs (or their targets), such varying degrees are defined as membership functions (m.f. = ) to the fuzzy set of impacted SGSs. In other words, each SDG is impacted by a certain SASB material issue, but a varying degree from 0 to 1. Clearly, the approach proposed in Part II is a special case of the fuzzy approach, where the membership functions are either 0 (impi,j = 0) or 1 (impi,j = 1).
This methodology could be implemented, for example, in Equation (17), which could be rewritten as:
for which Equation (17) is a special case when the impact could only be fully present or absent. We think this analysis is helpful for two broad audiences. The first is the corporate community. For it, they can use it to determine which SASB issues are most congruent for them in terms of both doing well and doing good. In particular, since we have mapped the material ESG issues in each industry to the target level of the SDGs. This provides a company a well-structured narrative. It can simply point to its performance on its material ESG issues and the SDG targets for which these issues are relevant.
The second audience is investors. Again, assuming that ESG performance metrics are available, an investor can assess the implications at the target level to the relevant SDGs. The same can be done in a portfolio basis. At both a company and portfolio level, the above caveats apply. To this we would add adjustments based on company size (such as by revenues or market cap) and perhaps the location of their operations. While investors must put investment returns first, they are increasingly recognizing that the system-level impacts of their portfolios will affect their ability to generate these returns over the long term. Important work is being done here by The Investment Integration Project (TIIP), a research service that helps investors to move their level of analysis beyond just portfolios to include the context in which these portfolios exist [
30].
In order to serve both audiences, we are looking for ways to provide our detailed mapping in the public domain.
We would like to conclude with one final reflection. If good metrics existed for company performance on their material issues, one could use these ESG measures as proxies for SDG impact. They obviously wouldn’t be impact measures. For the most part, the key performance indicators recommended by SASB are output measures which have outcomes that lead to impacts [
9].
True measures of impact are difficult to obtain since they require data from outside the company. Impact measures are about positive and negative externalities being created by a company’s operations. Most work to date on impact measurement has been done in the private markets. Developing methodologies for doing so in the public markets will be important for achieving the SDGs.