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Double Materiality Driving Investor Demand for Impact Tools

WWF report surveys growing market for impact measurement tools; cites increased need for investors to understand their impact on people and planet.

A new report examines tools for institutional investors to measure the impact of their portfolios on people and planet, both at a broad level and relative to specific themes and objectives, such as the UN Sustainable Development Goals (SDGs).

The World Wide Fund for Nature (WWF) report acknowledges that impact assessment tools and methodologies are still in the early stages of development. But, it adds, investors can already begin to compare their own portfolio impacts to benchmarks and other portfolios, to cross-check the sustainability claims of investment funds, and to identify leaders and laggards within portfolios, thus informing rebalancing or engagement priorities.

WWF cites drivers of impact measurement including regulatory pressure on investors to disclose negative material effects of their investments on sustainability factors, a growing acceptance of a ‘double materiality’ approach to ESG risks, and an increasing awareness across the private sector of the need to protect biodiversity.

The report focuses on currently available tools which can help portfolio investors to measure the environmental impact of investment portfolios containing listed assets.

Joanne Lee, Sustainable Finance Specialist at WWF International, said both the report and tools respond to the growing interest of investors in measuring positive and negative sustainability impacts.

“These tools focus on the real world impact that financial portfolios and investment decision-making have on biodiversity, the environment, or delivery on the UN SDGs. Without understanding their current impact and footprints, investors can’t set targets to reduce negative impacts and increase positive impacts through their investment,” she said.

The report identifies seven impact measurement tools, three of which measure biodiversity-specific footprints, three are more holistic tools, and one provides generic environmentally-focused assessments. The WWF also provides case studies for four of the tools based on a sample 10-name portfolio focused on the agri-food sector.

All the tools take a broadly similar approach in that they combine a variety of data sources – including corporate disclosures, estimated data and third-party databases – with internal modelling to calculate relevant outputs for chosen variables, such as specific SDGs.

According to WWF, the holistic tools assess portfolios relative to mainstream benchmarks, such as the MSCI World Index, and use concepts and data sources already familiar to investors, meaning they can be rapidly adopted by mainstream institutions.

The biodiversity impact measurement tools use a wider range of data sets – including raw and processed data from open-source scientific databases – and proprietary modelling to capture the upstream and downstream footprints of portfolio components with scientific rigour. “This typically involves some form of value chain analysis that is cross-linked to the company’s production locations and the various biodiversity pressures involved,” the report explained.

This means metrics are typically absolute measurements rather than relative to a benchmark and are calculated on a company-by-company basis, although portfolio-level aggregation is also possible.

The report acknowledged that impact measurement tools are “in their early stages of development” but recommended developers begin to consider standardising the metrics and languages used to measure and present outputs.

“Early alignment on terminology could help foster more rapid take-up by investors still learning about impact footprints,” it said.

WWF also called on regulators and policymakers to continue to increase disclosure requirements, to require impact disclosure in financial products and to encourage financial institutions to adopt “robust and credible impact assessments”.

It also suggested regulators could use the available impact tools themselves “to monitor claims of SDG- or ESG-aligned funds or biodiversity-themed funds”.

“As better-quality data becomes available, and disclosure of sustainability risks, targets, strategy and governance is integrated into mainstream reporting, including through initiatives like the nascent Taskforce on Nature-related Financial Disclosures, ESG investing must widen the aperture,” said Margaret Kuhlow, Global Finance Practice Lead at WWF International.

 

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