Over the past 24 months asset owners have been resorting to a six-pillar approach when evaluating how well asset managers are integrating sustainability into their portfolios.
The six-pillar approach, which is best exemplified by the World Wildlife Fund (WWF) in its Sustainable Finance Report 2021, includes a framework that covers the following six areas of an asset manager’s sustainability integration focus – purpose, policies, processes, people, products and portfolio.
In Asia, other asset owners, particularly Japan’s Government Pension Investment Fund, are using similar frameworks with varying degrees of differences customized to the specific requirements of their institutions.
In terms of approach, the WWF RESPOND framework leverages the more popularly-known Task Force on Climate-related Financial Disclosures (TCFD) framework, but it is not exactly the same. First, the WWF framework is more focused on looking into investment and risk management data points as they relate to asset managers. Second, the TCFD framework covers a broader set of data points that apply not only to asset managers but to corporates and other types of organizations and entities.
At this point, more entities that are in the process of undergoing sustainability integration are looking to the TCFD framework because of its broader coverage. However, the huge volume of data points covered by the TCFD framework, as well as other factors, can be intimidating to smaller and medium-sized organizations.
Compared to the TCFD, the WWF framework is simpler although it is more focused and restricted to investments. On the other hand, it is broad enough to be a starting point for entities, other than asset managers, beginning the process of environmental, social and governance (ESG) integration.
In terms of purpose, for example, the framework includes 13 data points that cover the relevance of sustainability in an organization’s strategy and investment beliefs, as well as industry collaboration and participation. In terms of policies, the framework includes 29 data points that cover responsible investment and other issue-specific policies.
In terms of processes, the framework includes 18 data points that cover research, stock selection and monitoring, and active ownership. In terms of people, the framework covers 14 data points on governance, skills and incentives.
In terms of products, the framework includes four data points that cover product availability and client engagement. In terms of portfolio, the framework includes 17 data points on subjects like risk assessment, metrics and targets, and disclosure.
The response framework has been tested by the WWF as part of its sustainable finance report entitled “Respond – Resilient and Sustainable Portfolios, 2021 Review of Responsible Investment Practices”. The report was designed to review the sustainability practices of Asian and European asset managers used by WWF for managing its portfolio.
In 2020, faced with the Covid-19 pandemic, WWF adapted quickly to deliver on conservation goals and increased its spending on conservation programmes by 17% compared with the previous year. WWF raised US$276 million in FY20, 13% more than in FY19, according to its annual report.
The WWF framework is also the basis of an online interactive tool developed by WWF-Singapore to help asset managers improve portfolio resilience and alignment with a low-carbon and sustainable future through the application of science-based approaches to responsible investment (RI).
Known as the RESPOND (Resilient and Sustainable Portfolios that Protect Nature and Drive Decarbonization), the interactive online tool houses detailed findings from the RESPOND analysis and allows users to explore how asset managers are implementing RI and to understand the opportunities for further leadership in this area.
“Covid-19 is a manifestation of the risks associated with the destruction of natural capital, which is vital to our collective social and economic well-being,” says Keith Lee, senior vice-president, Asia sustainable finance, WFF. “As we know, nature loss is intrinsically intertwined with climate change and asset managers will need to address both challenges by adopting robust, science-based criteria in their investments and expectations of Asia’s corporate sector. This will enable them to improve their competitiveness and the resilience of their portfolios, while scaling up their contribution to sustainable development.”