The United Nations Sustainable Development Goals represent a global consensus on the most pressing challenges faced by humanity. Agreed upon by the 193 U.N. member states in 2015, the 17 SDGs address human rights, gender equity, healthcare, education, and the preservation of air, land, and sea. Achieving the goals is the responsibility not just of governments and nonprofits, but also of the business community.
As such, the U.N. SDGs can serve as a useful framework for sustainable investors. With this in mind, we created the Morningstar® Societal Development Index℠, which looks for companies advancing the SDGs. Selection criteria relies not only on company-level ESG assessments by Sustainalytics, but also Morningstar data on companies’ geographic revenue sourcing. Like many sustainability-screened indexes, Societal Development exhibits attractive investment characteristics in addition to a strong ESG profile.
How we build an index based on the U.N. Sustainable Development Goals
The Morningstar Societal Development Index, like most sustainable investment strategies, employs a combination of exclusionary screening and positive ESG selection. Starting with a massive universe of global equities, it screens out:
- Companies involved with weapons, tobacco, gambling, and other activities that detract from social welfare.
- Companies that Sustainalytics views as embroiled in serious ESG controversies, such as oil spills, accounting scandals, or data privacy breaches.
- Companies that are not compliant with the U.N. Global Compact on sustainability principles.
- Companies whose overall environmental, social, and governance standards lag global best practices.
Companies are then selected based on their Societal Development Score, which considers 32 indicators that Morningstar and Sustainalytics have determined to be most germane to the U.N. SDGs. These span labor standards, financial inclusion, drug donation policies, and behavior related to bribery and corruption.
Geography is another critical consideration. The index favors companies that are active in the areas of the world where challenges are most acute. Companies earn points for operating in markets deemed by the World Bank as low income or Least-Developed Country by the U.N. For this purpose, we leverage Morningstar’s Revenue by Region data set.
Most of the 200 index constituents are household names. Their products and services touch billions of people, and their footprints are massive in terms of workforce and environmental impact. For instance:
- Intel( INTC) earns inclusion thanks to strong labor standards, avoidance of conflict minerals in its chipmaking, and usage of renewable energy.
- Standard Bank of South Africa ( SGBLY) makes its way into the index for extending access to credit, not just in its home market but in lesser-developed countries like Angola and Nigeria.
- Novo Nordisk ( NVO), the Danish pharmaceutical giant, is active in drug donations and thoughtfully manages its supply chain.
- SK Telecom ( SKMTF), a communications services company from Korea, has made admirable efforts in addressing the digital divide by extending the benefits of connectivity to remote areas.
How does an SDG-aligned index perform?
The Morningstar® Societal Development Index℠ has not been around for long, but performance has been strong thus far. The key stress test came with the turbulent fourth quarter of 2018, when the index fell just 8%—significantly less than the global equities market overall. This was due to a preference for companies with sustainable competitive advantages, strong financial health characteristics, and low volatility.
These attributes, assessed through the Morningstar Risk Model, are typical of investments screened on the ESG criteria outlined here.
The index’s positive investment characteristics support the view that ESG factors are material to a company’s financial results. Sustainability isn’t just good for the earth, it’s also good for business.
Dan Lefkovitz is a strategist for Morningstar's Indexes group.