Benchmarking Progress on SDGs
Can the World Benchmarking Alliance succeed where ESG is failing?
“Even seemingly small improvements to the business models of large companies can significantly move the biodiversity preservation needle and enhance the outlook for the sustainability of our planet. This is especially true since public equity is the biggest asset class in the sustainable investment universe.”
-Karner Blue Capital, The Role of Investors in Realizing Nature Positive Outcomes
This week, I was questioning the point of my wormhole around understanding and engaging with the big companies that dominate the ocean economy.
After all, hasn’t ESG already tried that and completely failed?
It seems that the headlines aren’t quite meeting reality. Despite the political blowback here in the U.S., asset managers continue to say that ESG metrics will play a growing role in their investment decisions in the future.
The results of this year’s survey indicate that despite its share of challenges, ESG investing is here to stay for the long haul. Active managers from all major asset classes continue to incorporate ESG considerations in their investment processes and hire for ESG-related roles. As climate concerns surge to the forefront, we expect ESG to only become further rooted in the investment landscape.
+2023 Manager ESG Survey: Climate Risk Dominates - Russell Invesments
I have written before about how I agree with many of the criticisms of ESG. Lumping all of these metrics into one score has become misleading and gameable.
The idea that the entire universe of companies can be ranked and compared by one numerical score reflects our desire to have simple explanations for highly complex issues.
This has led to ESG funds that hold tobacco stocks and ocean ETFs that are basically tech funds.
World Benchmarking Alliance
It was in this frame of mind that I stumbled upon the World Benchmarking Alliance (WBA).
Initially, I wondered why this was the first time I had come across the WBA or read anything about it in my constant (excessive?) news hounding. But the reality is that the World Benchmarking Alliance is a relatively recent development - formally launched in September 2018 at the 73rd U.N. General Assembly, the first set of benchmarks released in 2020.
There just hasn’t been a ton of coverage.
So, what is the World Benchmarking Alliance, who is in it, and what is the need for more benchmarks?
According to their website:
“The WBA will develop a range of corporate benchmarks by 2023 to comprehensively assess the progress of 2,000 companies across major areas of transformation required to achieve the SDGs. The first set of benchmarks will be published in 2020 and will address food and agriculture, climate and energy, digital inclusion and gender equality and empowerment.”
The parts of that statement that caught my attention are the linking of benchmarks to SDGs and this recurring idea that a relatively small subset of companies has a disproportionate impact on our global economy.
This has been the case with the Ocean 100 research and the Ocean50 index. Now, there is also the SDG2000. More on that in a moment…
The core players involved in forming the WBA are Aviva, Index Initiative, and the U.N. Foundation. These groups were “brought together by a common belief that the private sector can strongly contribute to, as well as benefit from, the global ambition of the SDGs and that corporate performance benchmarks are powerful levers for change.”
+How it started - World Benchmarking Alliance
I wasn’t familiar with Aviva, a large insurance and wealth manager based in the U.K. (serving the UK, Ireland, and Canada) that manages about USD 280 billion in assets. Aviva doesn’t separate sustainability from ‘other’ investing, stating that ESG is integrated across all assets.
“we maintain a deep conviction that ESG factors can have a material impact on returns and client outcomes. This is why we integrate ESG considerations into investment analysis and decision making.”
+Responsible Investment Summary 2022 - Aviva
Tying these benchmarks to the SDGs gives them a different level of credibility when addressing the goals. After all, unlike ESG, 193 countries (including the United States) signed on to the U.N. 2030 Agenda for Sustainable Development in 2015.
So, how is progress towards these goals being measured?
“That which is measured improves. That which is measured and reported improves exponentially.”
-Karl Pearson, mathematician
The amazing Our World In Data has an SDG Tracker that visualizes relevant data across all the SDGs. The SDG Tracker is an excellent tool for quickly seeing which countries are progressing on key variables like ending fuel subsidies, establishing MPAs, or combating illegal fishing.
+SGD14: Life Below Water - Our World in Data
However, one of the main things you notice when looking at the OWID visualizations is the gaps. It is easy to identify where there is a lack of progress or lack of reporting at all.
The OWID also represents a consolidated, 30,000-foot view of any particular issue - usually at a national level. Tracking the evolution of large, keystone companies is a more granular look. It represents a more actionable opportunity to identify where changes are happening and where more pressure needs to be applied.
“SDG-centered benchmarks were a missing piece of the puzzle, and the WBA represented an opportunity that could not be missed to fill that gap.”
-World Benchmarking Alliance
The companies care.
The link below is to a press release from Thai Union, the fishing giant (and Ocean50 member). They have taken the opportunity to highlight their #1 ranking relative to their peers in the WBA Seafood Stewardship Index.
Never mind that they received an overall score of just 47.5 out of 100 or that it only required an 18 out of 40 to be ranked number one in “social responsibility” in this segment.
The fact is that they acknowledged this score and ranking. These companies have been pitted against each other. The competition is on.
“At Thai Union, we want to be the most trusted seafood leader in the world,” said Thiraphong Chansiri, CEO at Thai Union Group. “We recognize that to achieve our vision, we must deliver impactful change across not only our own operations but across our global sourcing footprint.”
What is the WBA Measuring?
The metrics of the WBA benchmarks could be placed inside ESG buckets - environment, social, and governance. However, the granularity helps define the measurement and ensure its application to a subset of companies is more relevant.
According to the WBA, seven “systems transformations” are required to achieve the SDG goals.
These systems transformations are:
Social
Agriculture and Food
Decarbonization and Energy Transformation
Circularity
Digital Inclusion
Urban Transformation
Financial System Transformation
The benchmarks the WBA has come up with to measure progress on these seven system transformations include:
The benchmarks seek to rank 2000 critical companies on relevant benchmarks, giving executives and investors a way to compare progress towards the SDGs. The scores also offer an opportunity to compare companies within a given industry on progress toward a specific and relevant goal.
For example:
“The Climate and Energy Benchmark assesses the highest corporate carbon emitters. It measures their progress against the Paris Agreement and SDG 13 and inspires action for the low-carbon transition.”
Specific benchmarks naturally lend themselves to coverage by narrow or wide groups of companies. The Seafood Stewardship Index currently covers 30 companies, the Financial System benchmark covers 400, and the Nature benchmark includes 1000.
The SDG2000
The WBA’s SDG2000, or 2000 most influential companies to address the SDGs, is based on that familiar concept of ‘keystone companies.’ This same concept led to the Ocean 100 research, which I translated into the Ocean50 index.
“The private sector is critical to achieving the U.N.’s Sustainable Development Goals by 2030. The SDG2000 list identifies the 2,000 most influential companies, from Algeria to Vietnam. These are the companies that are going to shape our future.”
The WBA lists five criteria for identifying companies for the SDG2000.
These include (quoted from methodology):
The company dominates global production revenues and/or volumes within a particular sector.
The company controls globally relevant segments of production and/or service provision.
The company connects (eco)systems globally through subsidiaries and their supply chains.
The company influences global governance processes and institutions.
The company has a global footprint, particularly in developing countries.
+SDG2000 Methodology - WBA
The first criterion, dominating global revenue, is the primary ranking factor for the Ocean 100. The Ocean 100 thesis was to identify the largest companies in the ocean economy by revenue and highlight how they capture an outsized portion of revenues in each segment.
Their research also highlighted, much like the WBA, that while these companies have outsized political and economic clout, affecting change in these firms also has outsized results and ripples through the entire global economy.
While it is undoubtedly a fact that many of these companies are engaging in destructive practices, achieving the change we need is not possible without these companies.
Divestment isn’t an option.
SDG2000 and the Ocean50
Within the SDG2000, 29 members of the Ocean50 index are represented, and 25 have been benchmarked in some way.
Container Shipping and Port Operations
Most members of the container shipping segment in the Ocean50 were measured in the 2022 Transport benchmark. In 2024, they will be assessed in both the Transport benchmark as well as the Nature benchmark.
Most port operations companies will be indexed in the Nature benchmark in 2024.
Cruise Tourism
All three members of the cruise tourism segment will be indexed by the Nature benchmark in 2024.
Seafood
WBA benchmarks cover most Ocean50 seafood companies (10 of 11), and it is easy to see why. While the Seafood Stewardship Index applies, they will also be indexed under the Nature and the more general Food and Agriculture benchmarks.
Where Narrow Benchmarks Beat ESG
More narrowly focused benchmarks that are a tighter fit for a company’s business operations make for a powerful addition to more general ESG metrics. This becomes obvious when considering companies’ inclusion and exclusion from current benchmark company sets.
On the inclusion side, the Seafood Stewardship Index is the most straightforward example. Only one company out of eleven in the Ocean50 seafood segment (Daisui) isn’t included in the SDG2000. All ten are benchmarked by the SSI.
“Seafood companies play an important role in restoring overfished stocks and dealing sustainably with other fish stocks to ensure resource sustainability, food security and the well-being of coastal communities.”
The same can be said for the container shipping industry.
Of the seven companies in the Ocean50 container shipping segment, only one (HMM) is not included in the SDG2000. Of those six, five were indexed by the Transport benchmark in 2022. COSCO Shipping was omitted, but all six will be in the 2024 Transport benchmark.
Conversely, every Ocean50 company that is in the SDG2000 but not indexed by any of the benchmarks is in the Marine Equipment and Construction segment. (Hyundai Engineering & Construction will be indexed in the Buildings and Urban benchmarks in 2024 due to operations outside marine construction.)
I appreciate that these companies are recognized as systemically important but don’t cleanly fit the current methodologies.
Similarly, the Shipbuilding and Repair segment of the Ocean50 is entirely unrepresented in the benchmarks. Only Keppel Corp is a member of the SDG2000 and will be indexed by the Urban benchmark in 2024.
But this clear delineation of what fits is exactly what ESG lacks.
The large, all-inclusive umbrella has become diluted as it was massaged to accommodate everyone.
In the cases of Marine Equipment and Shipbuilding, a different benchmark would might be formulated to fit and compare the companies in this industry that research has shown to be so influential on our oceans. But making companies fit a benchmark that doesn’t reflect their operations isn’t helpful to anyone.
On the Right Track
I’ve been struggling with the feeling that I’ve drifted away from the more esoteric segments of the blue economy that fascinate me - the group bringing back pole and line fishing, the progress being made to scale seaweed farming on the East Coast of the U.S., and zero-input aquaculture.
These smaller yet critical solutions will change how we engage with the oceans in the future.
However, the work of the World Benchmarking Alliance and its direct relevance to the Ocean50 reaffirmed being on the right track in trying to better understand the impact these large corporations.
I’ll just have to find more time to add more research in these other, less visible industries as well.