Previously I have written about the importance of the healthcare, resource transformation, food and beverage, consumption, extractives & minerals processing, renewables and alternative energy, infrastructure, transportation, technology and communications, and services sectors to the 17 Sustainable Development Goals (SDGs). The underlying data for that blog are based on a paper “The Relationship Between Investor Materiality and the Sustainable Development Goals: A Methodological Framework” that I wrote with Professors Gianni Betti and Costanza Consolandi of the University of Siena. A summary of our methodology is provided in my healthcare post. In brief, we mapped the 26 material environmental, social, and governance (ESG) issues (organized in terms of the categories environment, social capital, human capital, business model & innovation, and leadership & governance) in all 77 industries organized into 11 sectors, developed by the Sustainability Accounting Standards Board (SASB), to the 169 targets of the SDGs. Mapping these issues to the SDGs’ targets enabled us to assess how each industry is creating or destroying value for society while focusing on those ESG issues that create value for shareholders. Based on this mapping we created an index that ranges from 0 to 100.
In this post, my final one in this series, I will analyze the importance of the financial services sector. It’s overall score is 14.0—compared to 36.0 for food and beverage, 32.6 for healthcare, 30.4 for extractives & mineral processing, 28.4 for resource transformation, 24.2 for technology and communications, 23.8 for renewables and alternative energy, 21.4 for infrastructure, 20.1 for consumption, 18.1 for transportation, and 15.7 for services—putting it at the lowest end of all sectors. However, I should note that this is based on financial services entities themselves and does not take account of the impact they have through their corporate clients. In contrast to all other sectors, there is relatively little variation across its seven industries. At the top end are asset management and custody services (19.5), investment banks and brokerage (19.2), commercial banks (17.7), insurance (16.5). In the middle are mortgage finance (13.3) and consumer finance (9.9). At the bottom is and securities and commodity exchange (4.4).
This sector has its highest impact on six SDGs. The highest rated one is #4 (Quality Education-32.1 [four of seven targets]). The other five are at a more modest and relatively similar level: #1 (No Poverty-18.3 [four of five targets]), #7 (Affordable and Clean Energy-18.6 [three of three targets]), #9 (Industry, Innovation and Infrastructure-23.8 [five of five targets]), #10 (Reduced Inequalities-18.2 [five of seven targets]), and #11 (Sustainable Cities and Communities-24.1 [six of seven targets]).The lowest rated ones are #8 (Decent Work and Economic Growth-8.8), #12 (Responsible Consumption and Production-6.0), and #14 (Life Below Water-5.7). The low rating of this industry is due to the low number of material issues for each of its industries, although there is variation in what issues are material. There are four issues in SASB’s category of social capital which are material for at least one industry (access and affordability, customer welfare, data security and privacy, and fair marketing and advertising), three in business model and innovation (lifecycle impacts of products and services, environmental social impacts on assets and operations, and product quality and safety, two each in human capital (diversity and inclusion and compensation and benefits) and leadership and governance (systemic risk management and business ethics and transparency of payments), and none in the category of environment. There are four ESG issues which are particularly important given the number of SDGs to which they are relevant: lifecycle impacts of products and services (impacts 11 SDGs), environmental social impacts on assets and operations (nine), access and affordability (eight), and customer welfare (five).
The four SDGS for which the asset management and custody services industry (19.5) has the highest level of impact are #4 (Quality Education-37.5 [three of seven targets]), #5 (Gender Equality-27.8 [five of six targets]), #10 (Reduced Inequalities-27.3 [four of seven targets]), and #16 (Peace, Justice and Strong Institutions-30.4 [four of 10 targets]). These impacts are due to the seven material issues for this industry: lifecycle impacts of products and services (relevant to 11 SDGs), systemic risk management (five), fair marketing practices (four), diversity and inclusion (four), product quality and safety (four), compensation and benefits (three), and business ethics and transparency (one—#16-Peace, Justice and Strong Institutions). The SDGs for which this industry has the lowest impact are #6 (Clean Water and Sanitation-6.1), #13 (Climate Action-11.1), and #14 (Life Below Water-10.0).
The investment banks and brokerage industry (19.2) impacts seven SDG in the fairly tight range of 24.4 to 31.6. The highest two are #11 (Sustainable Cities and Communities-31.6 [three of seven targets]) and #16 (Peace, Justice and Strong Institutions-30.4 [four of 10 targets]). They are followed by #5 (Gender Equality) and #9 (Industry, Innovation, and Infrastructure), both at 27.8. The remaining are #10 (Reduced Inequalities-27.3), #7 (Affordable and Clean Energy-26.1), and #15 (Life On Land-24.4). There are six material issues for this industry, five of which it shares with asset management and custody services. It does not include fair marketing and advertising and instead includes environmental social impacts on assets and operations. The SDGs for which this industry has the lowest impact are #2 (Zero Hunger-10.0), #3 (Good Health and Well-Being-9.8), #4 (Quality Education-0.0), #12 (Responsible Consumption and Production-9.7), and #14 (Life Below Water-10.0).
There are two SDGs for which commercial banks (17.7) have an especially high level of impact: #11 (Sustainable Cities and Communities-47.4 [five of seven targets]) and #9 (Industry, Innovation and Infrastructure-44.4 [four of five targets]). SDG #7 (Affordable and Clean Energy-30.4 [three of three targets]) is also relatively important. There are six material issues for this industry. Four have been noted already: lifecycle impacts of products and services, environmental social impacts on assets and operations, systemic risk management, and business ethics and transparency of payments. The other two are access and affordability (relevant to eight SDGs) and data security and privacy (relevant to one—#16). The SDGs for which this industry has the lowest impact are #4 (Quality Education-0.0) and #8 (Decent Work and Economic Growth-4.2).
The striking thing that insurance (16.5), mortgage finance (13.3), and consumer finance (9.9) have in common is their identically high impact on SDG #4 (Quality Education-62.5 [three of seven targets]). In all three industries, the next highest SDG is in the teens or twenties. This impact #4 comes from the issues of customer welfare and fair marketing and advertising, which are common to all three industries. There are three other material issues for mortgage finance: access and affordability, compensation and benefits, and systemic risk management. The other two for consumer finance are access and affordability and data security and privacy; the other two for insurance are lifecycle impact of products and services and environmental social impacts on assets and operations.
This concludes my series analyzing the relationship between SASB’s material issues and the SDGs. In collaboration with professors Gianni Betti (University of Siena), Cristiano Busco (LUISS University, Costanza Consolandi (University of Siena), and Anna Maria D’Arcangelis (LUISS University), I am now working on the relationship between the financial intensity of SASB’s material issues and financial performance and its implications for corporate reporting by companies. More on this in 2020.