A new report and framework by WWF – “Resilient and Sustainable Portfolios: A Framework for Responsible Investment“- will support asset managers to develop robust Environmental, Social, and Governance (ESG) capabilities amidst emerging expectations to manage sustainability risks, opportunities and impacts.
The framework provides clarity on best practice responsible investment in what can be seen a new era of fiduciary duty. Asset owners are being asked to be accountable to their beneficiaries to build resilient and sustainable portfolios and demonstrate prudent management of assets – not only to safeguard long term returns but also to account for the impacts of their investments on real world outcomes.
In the EU, financial institutions must now disclose material ESG risks and their processes for managing these, as well as the environmental and social impacts of their products and investment strategies. Similarly, California’s two largest pension funds – the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System – must now legally factor climate risk into the management of their combined $570 bn in pension assets. Later in April, the Network for Greening the Financial System (NGFS), a global network of supervisors and central banks, including five of Asia’s, will provide further clarity on the use of transition scenario analysis and a stock take of supervisory and macro prudential approaches towards managing climate risk and enhancing disclosure.
Additionally, with the rising number of ESG mandates from asset owners – not only in the US and EU but also increasingly in Asia – asset owners also need to ensure that their selection processes reward external asset managers best positioned to manage ESG issues and deliver impacts.
The framework can support asset owners to meet the higher standards of ESG integration expected by emerging regulations and changing beneficiary expectations by a) better defining their expectations of asset managers and b) assessing how asset managers are developing the requisite expertise to deliver on these mandates. Conversely, the framework can support asset managers to improve eligibility and competitiveness for bids – for example by assessing their implementation of the Principles for Responsible Investment (PRI) or the recommendations of the Taskforce for Climate Related Financial Disclosures (TCFD) – while improving the long-term resilience and sustainability of their portfolios. It can also be used by wider stakeholder groups to assess the extent to which asset managers implement the sustainability criteria most important to them, for example on issues such as climate change, deforestation, water risk, engagement with companies, and transparency.
Jeanne Stampe, Head of Asia Sustainable Finance at WWF and founder of the Asia Sustainable Finance Initiative (ASFI) says “responsible and sustainable investment is not only about managing risk but also using the power of the finance sector to create the world we want to live in – a world that delivers on the Paris Agreement and Sustainable Development Goals. This framework provides a science based architecture for creating resilient and sustainable portfolios and meeting the growing expectations from asset owners, regulators, and society to this end.”
Firstly, it recommends that asset managers set clear expectations for the sustainability practices and disclosure of their portfolio companies, and that these are based on science based, multi stakeholder standards. Through ongoing monitoring and engagement with companies to improve both their performance and disclosure, stronger ESG practices by asset managers can go a long way in driving the shift to low carbon and sustainable business models and the disclosure of science-based, comparable, and forward looking data by portfolio companies.
Secondly, it encourages asset managers to develop deep, science-based ESG integration capabilities – a prerequisite for driving outcomes in line with the Paris Agreement and the Sustainable Development Goals. Science-based tools and criteria, often based on asset-level data, can be used in parallel to corporate disclosures to overcome current low levels of disclosure. For example, 42 of Europe’s largest asset owners have worked with WWF to assess the alignment of their public equity and bond portfolios with the 2 degree global warming scenario using the 2° Investing Initiative’s PACTA (Paris Agreement Climate Transition Assessment) tool. On the basis of such assessments, asset managers will increasingly need to support asset owners to align their portfolios to well under 2 degrees through stock selection and engagement with portfolio companies.
The indicators draw from existing best practice recommendations from the TCFD and PRI, and layer on science based standards, targets and impacts. These draw on WWF’s expertise from being part of cutting edge global sustainable finance initiatives such as the EU Technical Expert Group tasked with delivering on the Sustainable Finance Action Plan; its work with some of the world’s largest companies on transforming their business models; developing science based sustainability standards, and from leading on-the-ground conservation projects.
Taken together, the framework can help assess how well asset managers are building resilience in their portfolios whilst aligning financial flows to support sustainable development in line with Paris Agreement. In this way, the finance sector can harness its power to create positive economic, environmental and social outcomes that maximize value for all stakeholders.