How Portfolio Alignment Tools Implement ESG Strategies For Investors

To meet Paris Climate Agreement objectives and prevent a significant rise in global average temperatures, human society must achieve net-zero emissions of long-lasting greenhouse gases by mid-century. The most common method of measuring climate impact in the global financial industry is calculating financed emissions, which involves adding up the emissions funded by an organization in its lending, investment, or insurance portfolio from all the companies involved.

According to Mckinsey's 2021 report , there are 3 critical challenges related to developing effective climate strategies.

1. To achieve the Paris Agreement goals and prevent temperature increases, institutions should develop a climate strategy considering the total carbon budget instead of just monitoring their financed emissions.
2. Achieving net zero requires different regions and industries to reduce carbon emissions at varying rates.
3. Measuring emissions may deter financial institutions from supporting carbon reduction and responsible disposal efforts, causing them to favor smaller emitters without considering decarbonization efforts.

What are ESG Strategies and their importance to investors?

ESG strategies allow investors to incorporate ESG considerations into their investments. Investing in companies committed to environmental sustainability, social responsibility, and good corporate governance can help make a positive impact on the world.

ESG strategies are also becoming increasingly important for investors because they can help to improve investment performance. Studies have shown that ESG-focused portfolios outperform traditional portfolios over the long term, particularly with respect to downside risk.

Portfolio Alignment Tools for Investors

There are several portfolio alignment tools available to help investors track the result of their ESG strategies. Funds are declaring future goals and targets regarding Net Zero; thematic ESG funds may have targets on Diversity, or UN SGDs. These tools measure the ESG metrics of investors' current portfolios against their targets and track the progress over time.

Some of the most popular portfolio alignment tools include:

• TCFD Reporting: The Task Force on Climate-related Financial Disclosures (TCFD) is an international body that has developed a set of recommendations for companies to disclose their climate-related financial information. Portfolio alignment tools assess how thriving companies are complying with the TCFD recommendations.

• Net Zero Alignment Tracking: This tool tracks how portfolios are aligned with Paris goals in terms of their future emission targets.

• SFDR: The Sustainable Finance Disclosure Regulation (SFDR) is a European Union regulation that requires financial institutions to disclose information about their sustainable investment activities. Portfolio alignment tools assess how well financial institutions comply with the SFDR requirements.

• Scoring Framework and Reports: Some portfolio alignment tools provide investors with a scoring framework that can be used to assess the ESG performance of companies. These tools also typically provide investors with reports summarizing their portfolios' ESG performance.

Benefits of using portfolio alignment tools

There are several benefits to using portfolio alignment tools. These benefits include:

• Identifying companies aligned with ESG goals and values: Portfolio alignment tools identify companies aligned with investors' ESG goals and values. This allows investors to make more informed investment decisions.

• Measuring the ESG metrics of investors' current portfolios: Portfolio alignment tools measure the ESG metrics of investors' existing portfolios. This allows investors to identify areas where their portfolios could be improved.

• Tracking the progress of investors' investments: Portfolio alignment tools track the progress of investors' assets. This allows investors to see how their investments perform against their ESG goals and values.

• Reduced risk: Portfolio alignment tools help investors reduce risk. Investing in companies committed to environmental sustainability, social responsibility, and good corporate governance can help reduce their exposure to ESG risks.

Conclusion

Portfolio alignment tools provided by Decimal Point Analytics will equip investors with robust ESG strategies in 2023. We help you identify companies aligned with investors' ESG goals and values, measure the ESG of investors' current portfolios, track the progress of investors' investments, and reduce risk.

Get in touch with Decimal Point Team today and align your portfolio with ESG values that matter!