The Addis Ababa Action Agenda welcomes voluntary initiatives and encourages greater accountability by the private sector to embrace business models that have social and environmental impacts, and that operate sustainably. At the same time, it also emphasizes the importance of policies and regulatory frameworks.
In terms of private-led voluntary initiatives, the Addis Agenda:
- Urges businesses to embrace a core business model that takes account of the environmental, social and governance impacts of their activities
- Commits to promote sustainable corporate practices, including integrating environmental, social and governance factors into company reporting as appropriate, with countries deciding on the appropriate balance of voluntary and mandatory rules
- Encourages adoption of principles for responsible business and investing and supports related work of the Global Compact
- Commits to work towards harmonizing the various initiatives on sustainable business and financing, identifying gaps, including in relation to gender equality, and strengthening the mechanisms and incentives for compliance
- Encourages investors to take measures to incentivize greater long-term investment such as reviews of compensation structures and performance criteria
- Encourages impact investing
- Calls on standard-setting bodies to identify adjustments that could encourage long-term investments within a framework of prudent risk-taking and robust risk control
- Endeavour to design policies, including capital market regulations where appropriate, to promote incentives along the investment chain that are aligned with long-term performance and sustainability indicators, and that reduce excess volatility
More individual investors are expressing interest in sustainable investing practices (from 71 per cent in 2015 to 85 per cent in 2019, in one survey). Financiers are increasingly divesting from companies that are at odds with some of the SDGs. For example, a group of institutional investors representing nearly $4 trillion of assets under management—the UN-convened Net-Zero Asset Owner Alliance, committed to transitioning their investment portfolios to net-zero greenhouse gas (GHG) emissions by 2050. In the banking sector, 130 banks from 49 countries have committed, through the Principles for Responsible Banking launched in 2019, to work with their clients to encourage sustainable practices.
More funds have been allocated to impact investment, which aims to generate positive social and environmental impact alongside a financial return (i.e., “doing good” as an explicit investment objective). Respondents to a 2018 industry survey, who collectively manage $239 billion in impact investment assets, invested over $33 billion into more than 13,000 impact investment projects, primarily in energy, microfinance and financial services. Yet, while sustainability-aligned investment strategies and impact investment assets have increased, they still represent a small portion of overall financial assets.
The private sector transformation is not happening fast enough nor at the required scale. Such a transformation will require:
- rethinking corporate governance: Some business leaders have started to rethink their fundamental approach to business. In 2019, CEOs of almost 200 firms, representing nearly 30 per cent of US market capitalization, redefined the purpose of a corporation away from a sole focus on shareholders to include all stakeholders—customers, employees, suppliers, communities and shareholders—based on the idea that each stakeholder is essential to a company’s long-term success. These are important developments, but they alone are unlikely to alter corporate behaviour sufficiently, particularly in the absence of proper accountability mechanisms and change in corporate governance (and internal incentives).
- raising public policy ambitions: Public policies are key to providing incentives for companies to align their businesses with sustainable development objectives. There are already some positive developments: for instance, the number of carbon-pricing initiatives continues to increase, now covering about 20 per cent of GHG emissions. However, in most cases, the price levels remain too low to change behaviour (less than 5 per cent of the global emissions are priced at a level compatible with the goals of the Paris Agreement) and there has been public pushback against certain initiatives, such as increases in gas prices. A carbon price would create a level playing field so that companies that do take carbon goals into account would not be penalized with lower financial returns in the short run.
- making financial system a force for change: A common definition of Sustainable Development Investing (SDI) could help establish norms that differentiate investment strategies and define minimum thresholds that investment strategies and products should meet to qualify as SDG-aligned. Fundamental analysis at the company level is also critical to analyse the real impact of individual companies on the SDGs. In addition, enhancing corporate disclosure is key to reinforcing accountability frameworks. To structure policy actions, Governments can develop a strategy to promote sustainable finance and consider designating an institution in charge of implementing it.
Relevant SDG indicator
- How can investors move from greenwashing to SDG-enabling? (UN/DESA Policy Brief #77, 28 May 2020)
- Is Wall Street on a mission to make the world more sustainable? (Policy Note, September 2019)