Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
ESG Data Signals
Trucost Sustainable Development Goals (SDG) Analytics
Sustainable development considerations
In 2015, the United Nations launched the 17 Sustainable Development Goals (SDGs) that were adopted by 193 countries. The SDGs outline a set of objectives to be achieved by 2030 that aims to end poverty, hunger and inequality, while tackling climate change, improving health and education, and spurring economic growth.
The market opportunity
Achieving the SDGs will require US$5 trillion to US$7 trillion ($7.1 trillion-$10 trillion) in annual investment and the United Nations Conference on Trade and Development (UNCTAD) outlines how sustainable and responsible investments represent high- potential sources of capital for the SDGs.1 According to the Business and Sustainable Development Commission, putting the SDGs at the heart of the world’s economic strategy could unlock US$12 trillion ($17.1 trillion) in opportunities and 380 million jobs a year by 2030.
As of 2016, US$18.2 trillion ($26 trillion) was invested in this asset class,3 and the bond market for sustainable business is growing. For example, in 2018 global green bonds reached US$155.5 billion ($$220 trillion), up 78% from the previous year.
In contrast to the earlier Millennium Development Goals, the SDGs not only emphasise the role of government and non-government sectors, but of businesses to operate responsibly and pursue opportunities to solve societal challenges.
Trucost SDG Analytics
Trucost SDG Analytics dataset helps investors understand which companies are contributing towards the SDGs and how they are doing so through their current business models. It also provides information on how exposed a company may be to SDG-related risks, or risks that may detract from achieving the Goals. The data can be used by investors to analyse potential exposure to a variety of SDG-related risks, measure SDG-alignment, benchmark companies against each other in terms of their SDG performance, screen or optimise portfolios, and report to stakeholders.
Trucost evaluates the positive impact companies may have on the SDGs via how they generate revenue. SDG- aligned revenues evaluate the share of revenue derived from products, services, and technologies that contribute to SDGs. The share of SDG-aligned revenue is determined by mapping company revenue by product category to a database of SDG positive impact products and services, called the Trucost Positive Impact Taxonomy. This database was developed by Trucost, based on a bottom-up analysis of the 169 SDG targets to identify categories of products, services, and technologies that directly contribute to the achievement of each target. Products and services may be relevant to multiple SDG targets due to the interrelationships inherent in the SDGs.
Creating an SDG Revenue Factor
Using the Trucost SDG Revenue Share dataset, investors can now calculate the proportion of company revenues that are aligned to the 17 Sustainable Development Goals. We aggregated the percentage of revenue for each company from the 17 SDGs and arrived at a total percentage of a company’s revenue that is aligned to all SDGs. For example, Johnson & Johnson (JNJ) has 100% of its revenue stream in total from the 17 SDGs.
SDG Revenue Backtest
Is there any outperformance/underperformance within equities that exhibit higher/lower percentages of SDG revenue?
We ran a backtest on the S&P 500 and the MSCI World indices using the following criteria:
S&P 500
Tertile 1 (contains the companies that have the highest exposure to SDG revenue) outperforms Tertile 3 on average by 19bps/month, or an average Top/Bottom Spread of 2.1% annually.5 Interestingly, Tertile 3 outperforms Tertile 2 in 2018 until the Covid-19 sell off in 2020, this would require further analysis as to ascertain why.
MSCI World
Tertile 1 (which contains the companies that have the highest exposure to SDG revenue) consistently outperforms Tertile 3 on average by 14bps/month, or an average Top/Bottom Spread of 1.6% annually.
Aligning portfolios with the SDGs
After analyzing the SDG revenue dataset within the S&P 500 and the MSCI World, we can see that the Top Tertile outperforms.
Using these results how would a portfolio constructed from the Top tertile equities perform versus its underlying benchmark?
We constructed portfolios based on the S&P 500 and the MSCI World indices using the following parameters:
- Top Tertile of equities from SDG Revenue rebalanced monthly.
- Country & Sector Neutral.
- Equally weighted positions within Sector/Country Exposures.
SDG Portfolio – S&P 500
From January 2014 to August 2020 the S&P 500 went up 125.8%, in the same period the 180 SDG Portfolio went up 136.2%, a difference of +10.4% over the course of the analysis. The realized tracking error of the 120 portfolio is just 0.58%, with a Sharpe of 0.7 versus 0.645 for the S&P 500.
SDG Portfolio – MSCI World
From January 2014 to August 2020 the MSCI World went up 73.3%, in the same period the SDG Portfolio went up 86%, a difference of +12.7% over the course of the analysis. The tracking error of the portfolio is just 1.09%, with a Sharpe of 0.58 versus 0.56 for the MSCI World.
Summary
Investors can calculate the proportion of company’s “Sustainable Development Goal” revenues that are positioned for achieving the UN’s 2030 Sustainable Agenda. In doing so, companies can be aligned to these goals while also being able to identify their outperformance/underperformance versus their high/low exposures to SDG revenue.
Portfolios can be aligned to SDG top tertile companies whilst maintaining their underlying benchmark characteristics. The SDGs have garnered widespread backing for their effective harmonization of the three dimensions of sustainable development – social inclusion, environmental protection, and economic growth. This analysis provides additional insight on companies that are pursuing sustainable development through their business models as well as historical performance.
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Written by Liam Hynes, EMEA Head, Capital Markets Product Specialists, S&P Global Market Intelligence.
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