Thinking about ESG holistically

Actions for Risk and Compliance functions

Actions for Risk and Compliance functions

Thinking about ESG holistically

While this paper focuses on climate considerations, there are more funds which promote or target ESG characteristics than solely climate characteristics⁴⁰. In addition, many regulatory requirements or supervisory expectations which apply to investment managers include broader environmental or ESG considerations in their scope. Therefore, investment managers will need to think about ESG holistically.

Nature and biodiversity loss are inextricably linked to climate change. Solutions to address nature and biodiversity loss can help to mitigate climate change, but solutions to mitigate climate change can also have negative implications for nature and biodiversity (e.g., not choosing suitable tree species or locations when planting trees for carbon capture). As the Taskforce on Nature-related Financial Disclosures (TNFD) develops its work, regulatory focus on nature will only increase.

Investment managers should start thinking now about how to integrate nature considerations into their product range, risk management, and investment research tools to support the transition.

As Governments, corporates and financial services firms deliver on their net zero plans, there will be implications for different groups in society, raising social or “S” risks. Portfolio managers will need to consider how investee companies’ transition plans might raise risks to society and how they treat related trade-offs between E, S and G in their funds which promote or target ESG characteristics.

Actions for Risk and/or Compliance

Consider how to integrate nature considerations into the risk management framework, product range, and investment decision-making processes.

Ensure that fund documentation and client disclosures are clear on how they will treat trade-offs between “E”, “S” and “G”.