Assessing sustainability risk profiling methodologies used by financial services
In this synthesis report written for ISEAL (the global membership organisation for ambitious, collaborative and transparent sustainability systems), Efeca and Federica Chiappe provided insights from a range of financial sector players in order to strengthen ISEAL members’ understanding of and approaches to sustainability risks.
Sustainability is becoming a mainstream consideration by all financial players. However, as there is no common definition of sustainability adopted by the financial sector as a whole, there is no aligned approach to sustainability risk assessment. Safeguarding human rights, preserving forests landscapes and protecting biodiversity are some of the critical sustainability issues that should be monitored and evaluated.
In the report, the data sources and tools used for sustainability risk assessments by the financial sector are outlined, ranging from publicly (and freely) available data sources, the use of information acquired from external data providers, to the collection of internally gathered data – or a combination of any of the above.
We look at various risk assessment methodologies and strategies, including negative and positive screening, and different categories of investment and operations including Avoidance (where regulations and policies in addition to ESG screening are mostly considered), Benefit (where alignment with the 17 SDGs is key) and Contribution (taking the alignment of SDGs one step further towards impact investing).
Sustainability risks are increasingly considered as material credit risks (rather than reputational risks as previously) and are thus progressively integrated into credit assessments, due diligence processes and ultimately into decision-making processes. This is also due to a shift in governance, with sustainability functions being integrated within various teams, rather than being seen as a standalone team/process.
Key learnings include:
- Need for standardisation due to the high degree of fragmentation in the broad sustainability sector.
- A useful way to structure sustainable financing that can be applicable to certification schemes is through the ‘A-B-C’ approach – Avoid (A), Benefit (B) and Contribute (C)
- There are two priorities for the financial sector: carbon / GHG footprint and governance. The creation of a ‘universal language’ could strengthen links between standards and supply chain actors.
- Larger commercial banks and insurance companies have led the way in integrating sustainability in their due diligence
- Organisations are already using a wide variety of tools and methods for identifying sustainability issues among suppliers and certificate holders, often quantifying the risks; and
- Certifications need to be rigorous to be recognised for sustainability risk assessments
Please find the full report here: Developing Risk Profile Methodologies.