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From risk management to real impact

In theory, it makes sense if the impact of your portfolio on the real world is in line with your investment policy. This means, for example, that CO2 emissions are not only reduced in our own portfolio, but that these are also reduced real life. We are talking about real-world impact.

However, the VBDO benchmarks regarding sustainable investment among insurance companies and pension funds show that this is hardly the case so far. And that is not entirely surprising, given the enormous challenges that lie ahead to achieve this.

Still, this is the path we have to follow. Considering the stark reality of climate change (which we are be able to see again this summer) and associated societal challenges, it is essential that investors take a closer look at their impact on the world and make it measurable.

Achieve real impact

The question is no longer ‘should we do this?’, but ‘how should we do this?’ There is need for a mental shift. The entire strategy has to be adapted for this cause.

The most concrete example is the alignment of the portfolio with the objectives of the Paris climate agreement. This example also immediately shows where the challenges lie. The responsible investment policy usually focuses on portfolio exposure but reducing the CO2 footprint in one’s own portfolio does not necessarily have an effect on the real world. It is not the risks for the portfolio that should be taken as a starting point, but the impact of the portfolio on the actual reduction of CO2 emissions.

To align your portfolio with the Paris agreement, science-based targets are needed and these must then be made measurable with impact indicators. The European Commission has developed a Paris Aligned Benchmark that uses absolute measures to align with 1.5°C rather than just a relative reduction.

This is essential, because in theory a relative reduction in CO2 emissions can mean an absolute increase. For example, when companies measure CO2 emissions on the basis of their revenue, and the revenue rises faster than the CO2 emissions, there is a relative reduction and an absolute increase. This benchmark uses a concrete step-by-step plan of rigorous exclusion in combination with engagement with remaining companies. The first pension funds are currently implementing this.

CO2 emissions offer a very concrete example, but there are countless other focus areas. And as has been shown time and again, the S in ESG remains an underexposed and an even more difficult part to measure.

Get to work

This is not a column that raises the finger, because achieving a portfolio in which real-world impact is aligned with responsible investment policy is not an easy task. Frankly, it is about following a path that has not been traveled before, where risks must be taken and not all the information is available to get the route clear.

What we are asking is to start by making something measurable that is not always measurable. This difficulty should not be an excuse for not starting this, because the urgency is clear. To move from risk management to real impact, we need to look at sustainable investing in a different way. The real impact on the real world is at the heart of sustainable investing.


This article has already been published by Financial Investigator.

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“The question is no longer 'should we do this?' but 'how should we do this?'. There is need for a mental shift. The entire strategy has to be adapted for this cause. ”