Impact tools to measure biodiversity are effective but the results are difficult to compare, the World Wide Fund (WWF) report ‘Assessing portfolio impacts: tools to measure biodiversity and SDG footprints of financial portfolios [pdf]’ finds.
A number of useful tools already enable investors to quantify the impact of the companies in their portfolios on biodiversity and progress towards the UN’s Sustainable Development Goals (SDGs).
However, difficulties in comparing their outcomes could hold back efforts to encourage wider adoption of responsible investment policies, according to the report from environmental organisation WWF.
Until recently, analytical tools aimed at the financial sector have tended to focus on the impacts that ESG-related issues have on a company’s financial performance.
But initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) and Taskforce on Nature-related Financial Disclosures (TNFD) are encouraging investors to do the opposite: assess the impact of financial portfolios and investment decision-making on biodiversity and ESG.
In its report, the WWF identified tools that measure investments’ impact on biodiversity and ESG and put them through their paces using a sample portfolio of ten big companies with a global footprint.
The portfolio largely comprised agri-food concerns, reflecting that sector’s role as a driver for nature and biodiversity loss, mainly through land use.
The tools tested by WWF were a mixture of those aimed at biodiversity and holistic tools, which assessed social and governance factors, as well as the environment.
“We wanted to really focus on impact measurement tools that allow investors and asset managers to assess impact at a portfolio level with a global scope, and good coverage of sectors and companies,” said Joanne Lee, a Sustainable Finance Specialist at WWF International and co-author of the report at the launch event last week.
Versatile tools already available
While the sector remains at an early stage of development, WWF found readily available tools that could compare a portfolio’s biodiversity impact footprint with a benchmark, or with another portfolio, or assess the portfolio’s own impact over time.
These tools also enable “cross-checking claims of sustainability made by an investment fund, to meet potential certification or disclosure requirements; and identifying leaders and laggards in impact performance within a portfolio, to facilitate portfolio rebalancing or to prioritize corporate engagement,” the authors said.
However, comparing outcomes from different tools remains problematic, given the lack of uniformity in approach.
“Even within the same tool category, the results are not directly comparable with each other, because they use different data sources, modelling approaches, and/or metrics. They also use different ways to present their results visually,” the report said.
The lack of a standardised approach to environmental impact assessment for investments could be a potential obstacle to wider adoption of these tools, it added.
Sector specialists expect these pioneering tools to rapidly become more sophisticated, but are divided on whether there should be an emphasis on greater harmonisation of their methodology in the short-term, or whether more time should be allowed for competing tools to prove their worth.
Ladislas Smia, Head of Sustainability Research at Paris-based asset manager MIROVA, stated at the report launch event that he did not believe standardisation was the most pressing issue.
“I think it would be a pity to have only one or two data providers, which use exactly the same methodology,” he said, adding that the market would benefit from being able to choose from a wider range of tools.
Different companies within a portfolio require different types of analysis. “My strong conviction is that we need to agree on some key principles, rather than the strict methodology,” he said.
He cited the fact that for some types of firms, such as a fast-food chain, the biodiversity footprint of the entire supply chain needs to be considered in addition to that of the company itself.
He also said tool providers needed to take into account positive as well as negative impacts of investments in agri-food businesses, in order to catalyse change towards less harmful practices in the industry, rather than just encouraging disinvestment to make a portfolio greener.
But Leonie Jesse, Associate Director at KPMG’s Sustainable Finance practice in The
Netherlands said that standardisation and harmonisation of tools, though challenging, should be a priority.
“I'm not afraid that if we harmonise that we won't be innovative enough,” she said. “As an end buyer of an investment firm or a participant of a pension fund you must be able to distinguish between several investments and see what's going okay and what's not going okay,” she said.
“You can only do this if we all use the same kind of metrics or all use the same kind of methodologies.”