Monitoring of SDG investments should be integrated into a company’s existing corporate-governance mechanisms, including oversight by the board of directors or a specialized committee, risk management and internal controls, external audit, and reporting through the main communication channels for financial and sustainability information.
Other mechanisms – such as executive compensation and issuance of financial instruments – can also be used to ensure a transparent process for monitoring and reporting on the implementation of a company’s SDG strategy and investments.
Board Oversight
As part of its oversight role, the board can oversee the SDG strategy using specific KPIs and targets. It can also monitor SDG investments to ensure effective use of its financial and other resources. Lastly, the board can ensure the quality and credibility of sustainability information. This can be done by the board itself or specialized committees, including the audit, risk management, governance, and sustainability committees.
Risk Management
Companies can also leverage their risk management framework to monitor the risk of SDG strategies and investments and how they contribute to the overall risk profile and appetite of the company. This includes both operational risk and financial risk (credit risk and liabilities).
Internal Controls
Companies can integrate monitoring of SDG investments and performance on KPIs and targets into the internal control systems designed to ensure the reliability of financial and nonfinancial accounting and reporting. This includes the internal audit, which is designed ensure accuracy of financial information and nonfinancial information. It also includes the compliance function, which is can be used to mitigate the risk of negative sustainability impact.
Independent Verification
Existing processes for the external audit of financial information and assurance of sustainability information can be used for the independent verification of financial and nonfinancial information related to the implementation and the results of the SDG strategy.
Disclosure and Transparency
Existing communication and reporting channels such as the annual, sustainability, and integrated reports or direct investor relations can be used to effectively communicate with investors on the implementation of the SDG strategy and the measurement of its impact.
Executive Compensation
Executive compensation can be tied to performance on SDG targets, and KPIs can be established to monitor and incentivize the implementation of SDG strategies and investments.
Financial Transaction Documentation, Pricing and Covenants
Capital market transactions, whether the issuance of equity or bonds, provide another opportunity for companies to strengthen the monitoring of SDG investments and incentive to perform on associated KPIs. This can be done in the documentation, pricing or covenants associated with financial products issued by the company.
- Bond prospectus. The prospectus, or offering memorandum, is a document that is legally required when advertising a bond to investors. It can be used to describe a company’s SDG strategy and investments and the targets and KPIs associated with it.
- Use of proceeds. Bond and loan documentation typically includes a description of the use of proceeds, although these are generally nonbinding. This clause can be used to describe specific investments that a company is contemplating as part of its SDG strategy. In addition, companies can issue use-of-proceeds green, social, and sustainability (GSS) bonds with strict monitoring of how the funds are used.
- Pay-for-performance. Sustainability-linked loans and bonds can be used to link performance on SDG targets and KPIs to the cost of capital, thereby providing a powerful incentive and monitoring mechanism for investors to ensure the implementation of the SDG strategy and investments.
