Posted on 24 June 2021
Integrating ESG risk is mainstream – impact is the new sustainability frontier for investors
A pioneering report for the first time identifies tools and services to help portfolio managers and other financial institutions look beyond ESG risk and assess the impacts of financial portfolios on the environment, people and society.
The new report by WWF Assessing portfolio impacts: Tools to measure biodiversity and SDG footprints of financial portfolios analyses emerging tools that quantify portfolio ESG impacts and generate information useful for investor decision-making.
Using a number of new tools, investors can now assess the impacts of equity and loan portfolios on an absolute basis or relative to a benchmark. These range from tools which address environmental impacts in general, to those which focus on specifics such as biodiversity, as well as on metrics for delivery on the UN Sustainable Development Goals.
“Investors are already familiar with ESG risks and have access to numerous tools that rate or assess the risks that various environmental factors pose for their investments. Now they are increasingly considering the impacts of their portfolios on nature, people and society. And with more and more investors keen to identify investment opportunities that will benefit people and planet, and avoid those that will cause harm, they need tools that can accurately measure sustainability impacts.” said Joanne Lee, Sustainable Finance Specialist at WWF International.
“Where most ESG tools targeting the financial sector focus on the impacts that ESG-related issues have on financial performance (“outside in”), these tools take the opposite approach, and focus on the real world impact that financial portfolios and investment decision-making have on biodiversity, the environment, or delivery on the UN Sustainable Development Goals (“inside out”). Without understanding their current impact and footprints, investors can't set targets to reduce negative impacts and increase positive impacts through their investment.”
Through case studies using a sample portfolio, WWF looks at how the tools perform, visualize and process the results. WWF also analyzes strengths and limitations of each tool examined, with suggestions on improving data and aligning terminology to support further uptake of the user base .
While still early days for impact assessment/footprinting, the new tools can be applied to deliver various insights, including 1) comparing a portfolio’s impact footprint with a benchmark, another portfolio, or even itself over time; 2) cross-checking claims of sustainability made by an investment fund, to meet potential certification or disclosure requirements; and 3) identifying leaders and laggards in impact performance within a portfolio, to facilitate portfolio rebalancing or to prioritize corporate engagement. These insights can also provide base information for the Science-Based Targets for nature and the Taskforce on Nature-related Financial Disclosure.
“The tools explored in this report will only grow in depth, breadth, and maturity as companies and financial institutions discover and make use of them, and as company reporting advances to embrace more impact-oriented metrics that are standardised. Financial institutions can start to use these tools to understand where impacts and risks lie as they consider how to incorporate impact into their sustainability journey and investment decision-making process. We also encourage regulators and policymakers to ensure that impact measurement is included as part of the continued integration of sustainability factors into policy and regulatory frameworks.” said Lee.
WWF works with tool providers, financial institutions, and regulators to facilitate collaboration, advance impact measurement at technical and policy levels, and support a shift in global financial flows away from nature-negative outcomes and toward nature-positive ones.
Report Launch WEBINAR recording
The report identifies seven tools and services that can help financial institutions better understand and measure the environmental impacts and footprints of their portfolios and funds:
It also identifies a further 11 tools, methodologies, frameworks, databases, and other services that provide impact-related information and outputs for the finance sector.
The report’s four case studies – on two biodiversity-specific tools and two SDG-focused tools – test an example agri-food sector portfolio in a practical demonstration of tool outputs, and offer insight into their strengths and limitations in providing decision-useful information for investors and portfolio managers.
For more information, please contact: Joanne Lee