Quantifying the sustainability of investments is not easy

Like most banks, investment firms, insurance companies and other institutional investors, you probably already have a sustainability policy in place. Or maybe you are committed to the United Nations Sustainable Development Goals (SDGs). For financial institutions, it is smart to incorporate environmental, social and governance (ESG) factors in their decision-making alongside financial factors. But how do you find the data, methods and tools to monitor the environmental and social performance of your investment? Often, that information is missing, incomplete or not transparent.

As an investor, you depend on company reports which usually only include ESG information about the company itself. It is the company’s supply chain, however, which contains the biggest environmental impacts and social risks. These risks are typically not included in annual reports, leading investors to underestimate the impact and social risks of investments.

There are two main risks:

• The value of an investment is at risk if the investment is not sustainable in the long term. For instance investments in economic activities that deplete water, biodiversity or material resources they depend on.
• The reputation of your financial institution is at risk if you insufficiently monitor, report and improve on your sustainability goals or commitments you have made to the SDGs.

Measure, monitor, improve and reduce your risks

Together with our partner Finch & Beak, a fellow consultancy agency, PRé developed a solution that provides investors with relevant environmental and social information. This allows you to calculate the impact of an investment or an investment portfolio, including its entire supply chain.

The solution uses a so-called environmentally extended input-output database to include the environmental or social impact that can be expected from a company’s supply chain. Once the environmental emissions, water use and material use from the supply chain are calculated, we can use an environmental impact assessment method to calculate the carbon footprint, water footprint or resource scarcity footprint of your investment. Social impacts can also be included in the assessment.

In addition, Finch & Beak can perform a materiality assessment to see which environmental or social issues are most important for your portfolio. This tailors your results to what matters most.

Achieve your sustainability targets

With the materiality assessment to provide focus and direction, you can report on the most relevant issues. Because the entire supply chain of a company is modeled, investors can see which investments have a high environmental impact per invested euro or high risk in terms of social issues. Because the results are quantified, you can easily incorporate them into a decision-making model that also includes financial factors. The assessment also allows you to measure your performance against the SDGs, since environmental and social impacts easily be linked to them.

Would you like to know more about doing a sustainability assessment on existing or potential investments? Feel free to contact us for more information. We can answer any questions you may have and create a tailored solution to assess the impact of your investments.

_{* Source: https://www.dnb.nl/en/news/news-and-archive/DNBulletin2019/dnb381614.jsp}