On 6 October 2020, the United Nations Development Programme (UNDP) issued a new set of voluntary standards (the Standards) for private equity, debt and venture capital fund managers to contribute to the UN's Sustainable Development Goals (SDGs) through their investment funds. The Standards "outline a clear system and a common language to help [fund managers] achieve significant social and/or environmental impact through their investments."1

This Legal Update discusses how these new Standards provide a practical framework for fund managers to better translate the non-financial impact of a fund to the market through the lens of the SDGs. We discuss the broader spectrum of sustainable investing approaches for fund managers and investors, ranging from impact investment to ESG integration, and provide additional practical advice in our comprehensive article, "Private Equity for the Public Interest: The Evolution of ESG and Considerations for Asset Managers and Investors."

What are the SDGs?

The SDGs are the core of the UN's 2030 Agenda for Sustainable Development, an ambitious 2015 UN resolution by all 193 countries of the UN General Assembly to make unprecedented global strides in sustainability by 2030 (2030 Agenda). Among the 2030 Agenda's aims are ending poverty and hunger, taking urgent action on climate change and fostering peaceful, just and inclusive societies.

The 17 SDGs are the individual goals that, if achieved, would bring the 2030 Agenda's vision to life. The SDGs broadly address matters of people ("End poverty in all its forms everywhere"), planet ("Ensure availability and sustainable management of water and sanitation for all") and prosperity ("Reduce inequality within and among countries"). Each SDG has its own set of detailed targets that build upon the higher-order SDG. Together, the 17 SDGs include 169 such targets.

For example, SDG 3 is to "Ensure healthy lives and promote well-being for all at all ages". The numerous targets for this SDG include "By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births" and "By 2020, halve the number of global deaths and injuries from road traffic accidents". The Standards help bridge the gap between these critically important goals and the world of private equity.

The Standards

The Standards comprise three foundational elements, four Standards and certain "practice indicators" that provide additional, practical guidance for achieving each Standard. The foundational elements are (i) contributing to sustainable development and achieving the SDGs, (ii) demonstrating respect for human rights and other responsible business practices and (iii) effectively managing impact and decision making. The four Standards are:

  • Strategy: Embedding the foundational elements into purpose and strategy

    • For example, Strategy Standard 1.1 is "The Fund develops an impact thesis (or theses) embedding contributing positively to sustainable development and achieving the SDGs in its purpose and strategy." According to the Practice Indicator for this Standard, the Fund's impact thesis should specify the SDG or other outcome areas it intends to achieve, the type of impact it intends to achieve and the context of the Fund's impact risk appetite and tolerance.

  • Management Approach: Integrating the foundational elements into operations and management approach

    • For example, Management Approach Standard 2.2 is "The Fund establishes and pre-screens potential investments to assess strategic alignment with its purpose and strategy, including its impact thesis and portfolio level impact goals." If an investment has any material gaps against the Fund's pre-screening criteria, but the Fund wishes to advance the investment to the due diligence phase, the Practice Indicator for this Standard dictates that the Fund should work to rectify such issues through the negotiation of impact terms and plans.

  • Transparency: Disclosing how the foundational elements are integrated into purpose, strategy, management approach and governance, and reporting on performance

    • In this Standard, "The Fund discloses how it integrates contributing positively to sustainable development and achieving the SDGs into its strategy, management approach, governance and decision making, and reports (at least annually) on its performance." According to the Practice Indicator, the Fund should publically report, at least annual, on its impact performance at both the portfolio level and, where feasible, the investment level.

  • Governance: Reinforcing commitment to the foundational elements through governance practices

    • In this Standard, "The Fund's commitment to contributing positively to sustainable development and achieving the SDGs is reinforced through governance practices of the Fund and the Fund Manager." Among other things, the Practice Indicator for this Standard requires Funds to maintain active oversight of its governing bodies, while Fund Managers should respect human rights and maintain corporate governance policies.

While the UNDP has designed the Standards for Fund Managers to use, other market participants will no doubt find them useful. As the UNDP notes, the Standards can help investors shape the fund due diligence process by framing questions for Fund Managers in terms of the SDGs and the requirements in the Standards. Indeed, the UN Principles for Responsible Investment's first recommendation for limited partners in its "Technical Guide for Limited Partners: Responsible Investment in Private Equity" is to engage with general partners on ESG issues. The Standards can provide a common reference point for the parties to begin this conversation. Further, analysts and advisors can use the Standards to benchmark a Fund Manager's sustainability practices, while governments and policymakers might align policy and regulation around private funds with the Standards.

More Impact on the Horizon

While the Standards remain voluntary, there may be new incentives to implement them in the future: the UNDP is currently developing a voluntary external assurance framework and an "SDG Impact Seal" that could easily signal a Fund's sustainability to investors.

The UNDP also continues to develop SDG Impact Standards for various other market participants and products through its SDG Impact initiative. The UNDP is consulting on SDG Impact Standards for Enterprises through 15 December 2020, and will soon launch a second round consultation on SDG Impact Standards for SDG Bonds.

1 UNDP, "UNDP issues new guidance for private equity funds to look beyond bottom line" (6 October 2020), available at: https://www.undp.org/content/undp/en/home/news-centre/news/2020/UNDP_issues_new_guidance_for_private_equity_funds_to_look_beyond_bottom_line.html