Sustainability risks and financial stability

The finance industry is increasingly aware that the stability of our financial system depends on the stability of our planet's natural systems.

Climate targets set out in the Paris Agreement are driving the development of forward-looking and scenario-based portfolio assessment tools that help investors align their portfolios to absolute targets such as a science-based carbon budgets.

These emerging tools complement those that already exist for climate-related financial risk assessment, which are more widely understood by financial institutions.

Aligning financial portfolios

A stable climate is just one of the planet's natural systems that provides the foundation for societal and economic well-being.

WWF's work on portfolio alignment provides a foundation for a systemic approach to managing natural capital across all 'planetary boundaries' - climate, forests, freshwater, oceans, wildlife and land - and moving beyond simply understanding and assessing them only as environmental risks.

Financial portfolio alignment should measure performance in relation to science-based sustainability objectives, through analysis of underlying assets and their positive or negative contribution to these objectives.

Conceptual framework

WWF's proposed Conceptual Framework for Aligning Finance for One Planet examines environmental indicators available to assess investment sustainability in 'absolute' terms, existing financial portfolio assessment methodologies and tools available for this purpose, and what is needed to enable portfolio alignment across sustainability topics.

The scoping study of available science-based sustainability targets, methodologies and tools reveals a significant lack of fit-for-purpose targets as well as assessment methodologies beyond climate change. Although more tools and methodologies are being developed for financial institutions to better understand nature-related risks, for investors and regulators who wants to ensure that financial portfolios absolute contributions are aligned with science, the options are seriously limited.

The proposed Conceptual Framework is a step towards enabling the systemic transition we need for global financial stability. WWF is calling on all financial institutions, regulators, data and rating providers, and the scientific community to start filling the gap. The way we invest matters.
 

Further Information

For further information, please contact:

Magnus Emfel magnus.emfel@wwf.se
Joanne LEE jlee@wwfint.org