As the momentum for sustainable investing continues to grow, the need to filter out funds and investors that are built on greenwashing will continue to increase. A pioneering report by the World Wide Fund for Nature (WWF) identifies tools and services to help portfolio managers look beyond environmental, social and corporate governance (ESG) risks and assess the real world impact of their financial portfolios.
Titled “Assessing portfolio impacts: Tools to measure biodiversity and sustainable development goals (SDG) footprints of financial portfolios”, the report analyses seven up-and-coming instruments to measure ESG initiatives and generate useful information for investors. Investors can use these measures to assess the impacts of equity and loan portfolios on an absolute basis or relative to a benchmark.
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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 United Nations (UN) SDG. The tools highlighted by WWF help sustainability professionals measure present impact rather than offer future projections.
Investors are already familiar with ESG risks and have access to numerous tools, says Joanne Lee, sustainable finance specialist at WWF International. Investors are now increasingly considering the impacts of their portfolios on nature, people and society. ”Without understanding their current impact and footprints, investors can’t set targets to reduce negative impacts and increase positive impacts through their investment,” Lee says in a press release.
Investors also face regulatory pressure to do so. The EU’s Sustainable Finance Action Plan (SFAP) and its major components, like the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), incorporate requirements for investors to disclose their alignment with the taxonomy and the negative material effects on sustainability factors that are caused by or related to their investments.
“Where most ESG tools targeting the financial sector focus on the impacts that ESG-related issues have on financial performance, 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 SDG,” says Lee.
WWF says measuring biodiversity impact is more challenging than measuring climate impact, especially for investment portfolios. While CO2-equivalent emissions are used to measure climate impact, many variables come into play when measuring impact on biodiversity. In addition, data for each of the variables “range from good to non-existent” and disclosure mandates are highly limited in most cases.
WWF also says that nature-related impacts are also much more location-dependent than climate, which compounds the difficulty in measuring impact even within a single organisation. The report identifies seven tools and services that provide impact measurements relevant for portfolio investors and institutions.
The Corporate Biodiversity Footprint, the Biodiversity Impact Analytics and the Biodiversity Footprint for Financial Institutions tools are biodiversity-specific while three other instruments span the UN SDG: the Portfolio Impact Footprint, the Sustainable Investment Framework Navigator and the Portfolio Impact Analysis Tool for Banks. Finally, there is a general environmental company assessment tool known as the Net Environmental Contribution metric.
While still in its early days of adoption, the WWF says these tools can be applied to deliver various insights, including comparing a portfolio’s impact footprint with a benchmark, another portfolio or even itself over time. They can also be used to cross check claims of sustainability made by an investment fund, to meet potential certification or disclosure requirements or identifying leaders and laggards in impact performance within a portfolio, to facilitate portfolio rebalancing or to prioritise corporate engagement.
These insights can also provide base information for the science-based targets network (SBTN), which aims to guide companies and cities to set nature-related targets that are built on existing sustainability tools, approaches and platforms; and the taskforce on nature-related financial disclosure (TNFD). Endorsed earlier this month by finance ministers from the Group of Seven (G-7) nations, the TNFD aims to provide a framework on nature-related disclosures to shift finance from nature-negative to nature-positive.
“When formally established, TNFD will be tasked with delivering a framework to guide nature-related financial disclosure by 2023, which will include impact assessments as well as risk and dependency,” says WWF.
Until then, the impact and data from the tools will be a key input for financial institutions in their disclosure of impacts. “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,” says Lee.
“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.”