Institutional Investors’ Contribution to SDGs through ESG Investment

<p>Sustainable Development Goals (SDGs) initiatives by companies have gained high expectations from various stakeholders given the increasing role of companies around the globe. However, there are two major obstacles for companies to implement such initiatives; (i) the nonbinding nature of SDGs and (ii) the perception that such SDGs initiatives do not leads to corporate profit.</p><p>As a solution to these obstacles, this paper focuses on ESG investment and its mechanisms to influence corporate behavior. ESG investment refers to the investment in companies that address environmental (E), social (S), and corporate governance (G) issues, which are referred to as “ESG issues”.</p><p>The first section compares SDGs and ESG investment. SDGs are fixed issues that various governments agreed in 2015 to resolve by 2030. ESG, in contrast, is a framework in which investors and companies will apply to address environment/social issues in priority determined by investors/companies. The specifics of E-S-G have changed over the years to reflect the social and environmental issues of the time and the environment surrounding investors and companies. Therefore, an increase in the amount of ESG investment does not necessarily mean that all the goals of SDGs will be achieved. On the other hand, companies are increasingly aligning their ESG focuses with SDGs. Given the overlap between ESG and SDGs, ESG investment contributes in achieving SDGs.</p><p>The second section illustrates the mechanism of ESG investment in addressing environmental and social issues surrounding companies. ESG investment differs from ordinal investment mechanism in two new ways. First, it provides indicators and data on a company’s efforts to address ESG issues, which forms part of “non-financial information” that has not been measured in the past. Second, investors now utilize this indexed and databased information when incorporating ESG and actively engaging with companies.</p><p>In the third section, this paper introduces case studies of the Government Pension Investment Fund of Japan (“GPIF”) and BlackRock, Inc. to demonstrate how ESG investment has actually contributed in achieving SDGs. When GPIF announced the introduction of an ESG index in 2017, listed companies widely recognized ESG investment. Since then, Japanese companies have increasingly promoted SDGs, such as climate change and gender diversity. BlackRock has drastically changed its investment policy towards ESG in 2020, and since then it has voted in favor of a significant number of pro-climate change related shareholder resolutions. In the ExxonMobil’s case, investors including BlackRock appointed three environmentalist directors to ExxonMobil’s board. Then half a year from such appointment, ExxonMobil declared its intention to become net zero by 2050.</p><p>Commitment to SDGs by large institutional investors is having a significant impact on companies. As a consequence, more and more companies are connecting their issues to SDGs.</p>