Sustainable Development Goals to ESG Principles

Sustainable Development Goals (SDGs) were established at the 2015 United Nations Summit on Sustainable Development. SDGs have been strengthened by the integration of all three components of sustainable development:

• Economic
• Social
• Environmental

This article places particular emphasis on the environmental aspects of SDGs, exploring their role in approving the concept of sustainable development, prerequisites for filling it with specific normative content, and their significance for the development of ESG principles. Given the increasing role of businesses in advancing sustainable development, this article also emphasizes the Principles of Responsible Investment, which was created by a group of 20 leading investors from various countries, drawing on the UN Global Compact. Although ESG (Environmental, Social, and Governance) principles are rooted in the idea of sustainable development and are not legally enforceable, their widespread recognition among stakeholders grants them significant influence in shaping legal frameworks.

Introduction

Discussions about the well-being of the global community have brought sustainable development back into focus, highlighting the role of ESG practices in business. Experts are actively engaged in defining the ESG agenda and determining how businesses can integrate it into their processes. However, the roots of this approach are firmly established in the concept of sustainable development.

The concept of sustainable development has often been expressed in various international documents with a degree of ambiguity, leaving room for broad interpretation. These documents tend to outline the general principles and goals of sustainable development without providing specific, actionable frameworks or clear definitions, resulting in flexibility but also uncertainty in implementation across different regions and sectors. As a result, the concept is widely acknowledged but lacks consistent clarity in its practical application. Rather, it was an effort by states and other stakeholders to identify the optimal approach for balancing a range of interests related to environmental quality, economic stability, and social considerations.

Subsequently, countries established development goals that identified sectoral issues and called for their resolution through a variety of approaches. The development agenda was first set in motion by the Millennium Development Goals (MDGs) in 2000. The MDGs included 8 goals, 18 targets, and more than 48 indicators of achievement. Social aspects were a dominant focus, with the primary objective being to address economic challenges.

There are 6 goals that reflect the social element of sustainable development, including the eradication of extreme poverty and hunger, the achievement of universal primary education, the promotion of gender equality, the reduction of child mortality, the improvement of maternal health, and the combating of HIV/AIDS, malaria, and other diseases. The environmental component of sustainable development was accorded the least attention in the MDGs, with only three targets included in Goal 7, “Ensure Environmental Sustainability.”

The adoption of the SDGs represented a significant shift in focus from an economic and social development agenda to a more holistic approach to sustainable development. The SDGs aim was to define the interactions between the different pillars of sustainable development, providing a framework for states to align their implementation strategies with the key issues and targets that should be addressed. In this regard, the adoption of the 2030 Agenda for Sustainable Development (hereinafter referred to as the Agenda) represents a significant forward-thinking initiative by the international community.

The Integration of ESG Principles

Ensuring sustainable development requires significant input from a few key stakeholders, including states, international organizations, large corporations, the banking sector, and industry. The integration of ESG (Environmental, Social, and Governance) principles with the SDGs involves aligning business practices with global objectives for sustainable development. ESG principles provide a framework for companies to address environmental sustainability, social responsibility, and ethical governance, while the SDGs set specific global targets related to poverty, inequality, environmental protection, and economic growth. By integrating ESG principles, businesses can contribute to achieving the SDGs through responsible operations, investment strategies, and long-term value creation for society and the planet. As highlighted in the UN Secretary General's report on the implementation of the SDGs, there is a need to “intensify the actions of all actors, including first and foremost the private sector, charitable foundations, non-governmental organizations, educational and cultural institutions, and other members of civil society.”

A significant advancement in the involvement of private sector entities in addressing global challenges and advancing the concept of sustainable development is the establishment of the Principles for Responsible Investment (PRI) by a coalition of 20 leading investors from diverse countries, based on the UN Global Compact. As a result of their efforts, the group developed six guiding principles:

1. Integrate environmental, social, and governance (ESG) factors into investment analysis and decision-making processes.
2. Incorporate ESG considerations into policies and practices.
3. Require investment recipients to provide adequate disclosure of ESG issues.
4. Promote the adoption and implementation of the Principles within the investment sector.
5. Enhance the effectiveness of the implementation of these Principles.
6. Report on activities and progress made in implementing the Principles.

Principles for Responsible Investment

The Principles for Responsible Investment (PRI) are a set of voluntary guidelines designed to help investors incorporate environmental, social, and governance (ESG) factors into their investment decisions. Launched in 2006 with support from the United Nations, the PRI aim to promote responsible investing by encouraging investors to consider the long-term impact of their financial decisions on society and the environment. The six principles emphasize ESG integration, active ownership, transparency, and collaboration among investors, with the ultimate goal of fostering sustainable global financial markets. PRI signatories commit to aligning their investment strategies with these principles.

The Association, established by the Principles for Responsible Investment to promote these guidelines and the UN's initiative to engage the private sector in the global sustainable development agenda, has published a list of recommended actions to implement each of the principles.

Incorporating ESG factors into investment analysis and decision-making processes:

• Incorporating ESG issues into investment policy statements.
• Supporting the development of ESG tools, metrics, and analysis.
• Assessing management's ability to incorporate ESG issues.
• Soliciting investment service providers to integrate ESG factors into analytical reports and research.
• Encouraging academic and other research on the topic.

Incorporating ESG factors into policy and practice:

• Develop an active ownership policy in line with the Principles for Responsible Investment.
• Implement voting rights or monitor compliance with voting policies.
• Develop engagement opportunities and implement joint initiatives.
• Participate in the development of policies, regulatory frameworks, and performance standards.

Proper ESG disclosure by investment recipients:

• Request standardized reporting on ESG issues.
• Request the inclusion of ESG issues in annual financial reports.
• Request information from companies on the adoption of relevant regulations, standards, codes of conduct, or international initiatives.
• Support shareholder initiatives and decisions that promote disclosure of ESG issues.

Promoting PRI Adoption in the Investment Sector

• Incorporating PRI-related requirements into requests for proposals.
• Reviewing relationships with service providers that do not meet ESG expectations.
• Supporting the development of tools for benchmarking ESG integration.
• Supporting regulatory or policy changes to facilitate PRI implementation, etc.

Enhancing the Implementation of PRIs

• Engage in networks and information platforms to share tools and pool resources to utilize investor reports as a source of learning.
• Collaboratively address emerging issues.
• Develop appropriate joint initiatives.

Updating Stakeholders on PRI Implementation Progress

• Disclosure of information on the integration of ESG issues into investment practices.
• Disclosure of information on the implementation of active ownership policies.
• Disclosure of requirements to service providers regarding PRIs.
• Engagement with beneficiaries on ESG issues and PRIs.
• Use of reporting to raise awareness among a wider group of stakeholders, etc.

Furthermore, the Association of PRIs and other relevant entities are committed to disclosing the content of environmental, social, and corporate sustainability factors in order to implement the principles of responsible investment. Environmental factors include, for example, greenhouse gas emissions, energy consumption, water consumption, and waste generation. Social factors include working conditions of employees, labor costs, average wages, and staff turnover. Corporate factors include capital structure, controlling shareholder, controlled persons, management history, role and place in the state economy.

Furthermore, a considerable number of diverse standards, recommendations, and regulations have been adopted at the international and national levels on the ESG agenda to date.  Concurrently, despite the existence of legal instruments, numerous challenges remain in the implementation of ESG principles. For instance, the aforementioned EU directive mandates the disclosure of pertinent information but lacks specifications regarding reporting standards. This, coupled with the multitude of standards, undermines the efficacy of legal regulation and the value for stakeholders.

The practice of non-financial information disclosure in terms of sustainability has several shortcomings:

1. There is wide autonomy in the choice of information that can be disclosed.
2. The quality of information is significantly variable, as it is in most cases not subject to audit.
3. There is significant dependence on the issuer of information and the voluntary nature of its provision.

Conclusion and Future Perspectives

The integration of SDGs with ESG principles represents a significant step toward fostering sustainable and responsible practices across various sectors. By aligning ESG criteria with the SDGs, organizations can more effectively address global challenges such as environmental sustainability, social equity, and ethical governance. This alignment not only enhances the implementation of the SDGs but also provides a structured framework for evaluating and improving corporate practices in line with global sustainability objectives.

Looking ahead, further efforts should focus on refining the integration of SDGs and ESG principles to ensure more precise and actionable guidelines. Enhanced collaboration between stakeholders, including governments, businesses, and civil society, will be crucial in translating these principles into effective policies and practices. Additionally, continued research and innovation will be needed to address emerging sustainability challenges and adapt the ESG framework to evolving global priorities. By advancing these efforts, we can strengthen the alignment between SDGs and ESG principles, driving more impactful and sustainable outcomes for the future.