The Zentrum Paul Klee
Bern, Switzerland. (Image: Ricardo Gomez via Unsplash)

Aligning business and finance with sustainable development

While public interventions are crucial, global transformation requires the deep engagement and alignment of the private sector.

By Lisa Sachs and Jeffrey Sachs

In August 2019, the U.S. Business Roundtable released a statement committing its corporate members to deliver value to society by investing in their employees, supporting their communities, and generally considering stakeholder interests alongside shareholder interests. The statement, which updated one from 1997 that had prioritized shareholders above other interests, was met with hope and widespread interest, but also with scepticism.    

After all, many corporations in recent years have failed to honour their “social license to operate.” Even before the pandemic, the world economy was confronted with the yawning and widening gaps between corporate success, on the one hand, and worsening environmental degradation and social inequalities, on the other. Our national and global economies had already crossed many planetary boundaries, creating crises of human-induced climate change, the collapse of biodiversity, massive air and water pollution, and the increased frequency of emerging diseases, giving dire but unheeded warnings of what was soon to arrive with COVID-19. 

The onset of COVID-19 has dramatically amplified these inequalities and injustices. Many of the leading companies that had signed the Business Roundtable statement benefited from national subsidies and relief funds, and from the easing of monetary policy by the Federal Reserve and other leading central banks. Stock markets soared as did CEOs’ salaries. Meanwhile, hundreds of millions of people around the world lost their jobs and livelihoods or suffered sharp disruptions to their incomes. Low-wage earners who kept their jobs were on the front line of the pandemic, bearing the brunt of infections and struggling to earn a living wage. Ironically, while economies slowed in response to the lockdowns, the environmental crises did not. Deforestation probably increased, and while greenhouse gas emissions temporarily fell, they bounced back later. Six years into our commitments to achieve the globally agreed Sustainable Development Goals (SDGs), the SDGs took a major hit, with an outright decline in SDG achievement in 2020 according to the data in the 2021 Sustainable Development Report. 

World progress on the SDG Index

Note: Population-weighted averages.

Source: UN Sustainable Development Solutions Network (2021).

While the signatories to the Business Roundtable statement may not have had a plan to deliver on their commitment, we urgently need to fulfil the multi-stakeholder vision. In other words, we need to “build forward together”, not merely to return unevenly to the pre-COVID world. More than ever, businesses must align with the objectives of the SDGs, the Convention on Biological Diversity and the Paris Climate Agreement. 

What should this look like?

The United Nations Sustainable Development Solutions Network has outlined six SDG Transformations needed to achieve sustainable development. A transformation signifies a major change in the flow of resources and technologies in a key sector of the economy. Transformations require actions by government, business, financial markets, academia and civil society. The six transformations are: (1) Education and skills for all, (2) Healthcare and well-being for all, (3) Zero-carbon energy and circular economy, (4) Sustainable land management and food systems, (5) Sustainable cities and communities, and (6) Digital societies.1

The European Green Deal is the most advanced and comprehensive policy framework in the world for achieving sustainable development and the elements of all six transformations. Notably, the European Green Deal calls for decarbonization by 2050, sustainable land use and food systems (the “farm to fork” programme in the EU), a circular economy and digital inclusion. Many other countries and regions are now following suit with scaled-up public investments towards sustainable development, including the United States, the Republic of Korea, Japan, China and others. 

While public interventions—through policy, investments, regulation and finance–are fundamentally important, each transformation requires the deep engagement and alignment of the private sector. Yet despite the business sector’s critical role, especially that of the corporate sector and financial institutions, we still lack clarity and consistency on what it means for businesses and financial markets to align with the SDGs. 

There has been a proliferation of sustainability reporting, frameworks and guidance since 2015 that all aim to help businesses align with the SDGs, and to help businesses identify the ways they impact on the SDGs. Yet despite the growing attention on the need for alignment, the proliferation of standards has led to more rather than less confusion. The diversity of frameworks and indicators has allowed companies to cherry-pick which activities and outcomes they report on and how, with many businesses ignoring or hiding the environmental and social costs of their products and activities. Many of these reports and frameworks overlook important ways in which businesses are impacting on the SDGs, for instance through the products themselves or through the companies’ lobbying activities. 

The commitment of the Business Roundtable to consider stakeholders beyond corporate shareholders is a start. Yet it is insufficient. We therefore recommend the following standards for businesses vis-à-vis their stakeholders.

First, businesses need to learn, understand and adapt to the six deep transformations needed to achieve the SDGs. Businesses should understand: (1) what is needed to decarbonize national and global energy systems by mid-century, and what that decarbonization pathway implies for their sector; (2) the patterns, causes and effects of pollution in its various forms and of irreversible species loss; (3) how certain food and beverage products (such as sugar beverages) and overall unhealthy diets are dramatically increasing the incidence of non-communicable disease, including among children; and (4) how business decisions (such as on aggressive tax avoidance) can adversely impact poverty, inequality, food insecurity and conflict.

Second, and crucially, businesses need to commit to the principle of Do No Harm. Many of the harms caused by businesses—pollution, tax evasion, land grabs, union-busting and so forth—are costs imposed on society to squeeze out greater earnings for shareholders. Enriching shareholders by impoverishing society, such as through pollution or tax evasion or land-grabbing, is not acceptable. If the Business Roundtable declaration means anything, it means curbing such anti-social business practices.

To capture the myriad ways in which businesses should align with the SDGs, we at the Columbia Center on Sustainable Investment (CCSI) suggest that businesses, and indeed all stakeholders—including policymakers, standard-setters, reporting frameworks, employees and investors—ask themselves the following four questions of businesses. ​​

4 questions of business
In view of businesses' alignment with the SDGs, the Columbia Center on Sustainable Investment (CCSI) suggest that all stakeholders ask themselves the above four questions of businesses. ​​

These four areas of concern—product lines, production processes, supply chains and corporate citizenship—constitute the main arenas for business action for sustainable development. We believe that companies will prosper by examining their strategies, performance and metrics along these four lines. Our own current goal is to work with businesses to help sharpen these questions and thereby create consistent and useful tools for aligning practices and reporting with the SDGs.2

Sustainable Finance

These six transformations are a long-term investment programme. Quality education, healthcare for all, a green and circular economy, sustainable farming, sustainable cities and digital access for all require outlays of trillions of dollars annually worldwide. Sustainable investing (or so-called “ESG investing”) should mean nothing more nor less than ensuring that financial investments support the transition path to a sustainable global economy. Standards and regulations for ESG investing should encourage active engagement and a forward-looking alignment of capital investments with the critical objectives of sustainable development. Responsible investing means ensuring companies and assets are fully aligned with the necessary transformations. 

One of the complexities of the six transformations is that the investments needed to achieve them are almost always a combination of public and private investments rather than public or private investments alone. We are dealing with complex societal changes that involve both public goods (e.g. environmental protection) and private goods together. Blended financing (a mix of public and private investment outlays) is therefore an intrinsic part of the financing that lies ahead. 

Overall blended finance market (2010-2020)

Note: Blended finance data collected for 2019 reflects a preliminary estimate, based on publicly available data. 

Source: Convergence Blending Global Finance (2020).

We still lack a suitable global framework for financing the SDGs. Even the much-vaunted promise of US 100 billion per year from the rich to the poor countries for climate-related investments (for both mitigation and adaptation) has still not materialized, though the promise was first made in 2009 and was supposed to be in effect no later than 2020. There are also huge financing shortfalls for the other transformations. Developing countries are rightly and understandably raising their collective voice at the UN and other venues to pronounce that the sustainable development agenda will fail unless there is a vast increase in public and private financial flows to their countries. 

We are therefore calling for three major actions on investment for sustainable development. First, there should be a vast increase in official financing available to low-income developing countries so that these countries can invest in the SDGs. One major conduit for such increased financing should be the Development Finance Institutions (DFIs). Second, every nation should create a policy framework consistent with the six transformations to help guide investment flows. Third, financial regulators and ESG scorecards should be guided by and based on the long-term transformations needed to achieve the SDGs, and the goals of the Paris Agreement (including decarbonization by 2050 or sooner ) and the Convention on Biological Diversity (including the end of deforestation and the expansion of protected areas).

  • Lisa Sachs is Director of the Columbia Center on Sustainable Investment at Columbia University.
  • Jeffrey Sachs is University Professor and the Director of the Center for Sustainable Development at Columbia University, and President of the UN Sustainable Development Solutions Network.

Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).

References

  1. Sachs, Jeffrey D., et al. (2019) "Six transformations to achieve the sustainable development goals." Nature Sustainability 2.9: 805-814.
  2. See, e.g. Perrine Toledano et al. (2020) Aligning electric utilities with the Paris Agreement and the SDGs. Columbia Center on Sustainable Investment and Sustainable Development Solutions Network; and Sachs J. et al. (2020) Fixing the business of food. How to align the agrifood sector with the SDGs. Barilla Foundation, UN Sustainable Development Solutions Network, Columbia Center on Sustainable Investment, Santa Chiara Lab University of Siena.

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