SSF Reporting Recommendations on Portfolio ESG Transparency - Based on existing frameworks and good market practice
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Research and Development Partner SSF Reporting Recommendations on Portfolio ESG Transparency Based on existing frameworks and good market practice
Preface by SSF CEO
and Workgroup Leaders
In the past year, the call for more ESG transparency for invest-
ments has become louder – and rightly so. Both private and
institutional investors increasingly want to know if, and how,
their investments influence the world. Regulators around the
globe are starting to introduce requirements for more ESG
investment transparency, be it based on complex taxonomies
of economic activities, or sophisticated methods to measure
the alignment of portfolios with the Paris goals.
Yet, for both asset managers and asset owners, it is diffi-
cult to prepare a simple and concise system of reporting that
allows for aggregation across portfolios and provides compa-
rable information to investors. Lack of agreement on relevant
qualitative information and quantitative key performance
indicators (KPIs), as well as missing data, are factors that hin-
der investors in preparing such information. These obstacles
form the starting point for this project, as many SSF (Swiss
Sustainable Finance) membershave called for support in pro-
viding lean, yet meaningful ESG portfolio reporting.
But what is the objective of greater investment transpar-
ency? For asset managers, transparent reporting helps them
build trust with their clients about how ESG factors are dealt
with in portfolio management. Furthermore, the definition of
KPIs allows them to set targets to improve ESG performance
and illustrate their progress. For investors, standardised
reporting makes it easier to compare the sustainability perfor-
mance of different portfolios, while the use of specific KPIs
enables the selection of portfolios based on sustainability
preferences.
Current reporting appears in varied formats and includes
a variety of different sets of KPIs, making meaningful compar-
isons difficult. With this project, SSF aims to contribute to an
agreement on relevant reporting items that allow investors to
judge the ESG performance of assets and, where necessary,
aggregate this for numerous portfolios. For SSF, it was also key
to simultaneously consider the perspective of asset managers,
who gather and aggregate data from single issuers, as well as
that of asset owners, who often use the services of many asset
managers and hence have to combine data received from dif-
ferent providers. The goal of the project was to recommend a
set of key data points that provide a concise overview of the
ESG performance of a portfolio, while not putting unneces-
sary reporting burdens on asset managers. By combining the
input of both our asset management and asset owner work-
groups, we hope to have built a bridge between them and pro-
duced a tool that improves the ability of financial market
actors to aggregate data across diversified portfolios.
In Europe, the new Sustainable Finance Disclosure Regulation
(SFDR) calls for transparency on risk management processes,
compensation schemes, attribution to green activities as well
as violation of sustainability norms. Yet, we think it fails to
agree on how a client should gain a holistic picture of the
overall ESG performance of a portfolio. With these recom-
mendations, we aim to fill this gap and suggest concrete
reporting items that provide transparency on the sustainabil-
ity characteristics of a product. As market participants are not
all equally advanced in ESG integration and reporting, we for-
mulate our proposals on two levels: Foundational-level
reporting for beginners, and Advanced-level reporting for
more experienced investors. While the recommendations will
not immediately affect data availability on the issuer level, we
make proposals about meaningful data points, in the hope Ulla Enne
that this will influence company reporting over time. Workgroup Leader of SSF Institutional
Asset Owner Workgroup, Head
The SSF Reporting Recommendations on Portfolio ESG Investment Operations & Responsible
Transparency are a starting point on the path to more sustain- Investing, Nest Collective Foundation
ability transparency of Swiss investors. They will have to be
tested by different investors and developed further, based on
feedback. In addition, we are acting in a constantly changing
regulatory environment, and developments in Switzerland,
the EU and internationally will have to be considered when
further developing the recommendations. International
alignment is key in this process and SSF welcomes Switzer-
land’s membership of the “International Platform on Sustain-
able Finance”, where such discussions are held. We look for-
ward to discussing these recommendations within such
platforms and with key stakeholders in Switzerland and
beyond. We continue to push forward and aim to contribute Andreas Knörzer
to increasing and meaningful transparency on the sustaina- Co-Workgroup Leader of SSF Wealth &
Asset Management Workgroup,
bility of all investments – for the benefit of investors and soci- Vice Chairman, Vontobel Asset
ety at large. Management
Sabine Döbeli
CEO Swiss Sustainable Finance
01 02
Summary Building on
and Key Framework
Take-Aways Comparison,
Good Practice,
and SSF
Workgroup
Suggestions
1.1 Executive Summary — p. 2 2.1 Main Commonalities Between Established
1.2 The Challenge: Key Frameworks and Frameworks and Standards — p. 12
Requirements — p. 4 2.2 Good Practice Examples — p. 19
1.3 The Approach: Study Methodology and 2.3 Participatory Development of Criteria and
Process — p. 8 Requirements — p. 39
1.4 The Result: SSF Recommendations
for Portfolio ESG-Reporting — p. 9
03
Developing Appendix
the SSF
Reporting
Recommen
dations
3.1 Illustrative Samples of Entity-level A1 Double materiality — p. 58
Content — p. 46 A2 Why and how was TCFD considered as a
3.2 Metrics at the Portfolio Asset Level — p. 49 key inspiration for this study? — p. 59
3.3 Facilitating Reporting Aggregation across A3 Selecting priorities on governance,
Entities and Portfolios — p. 55 strategy, risk management and targets
to include — p. 62
A4 Note on asset class coverage — p. 64
01 Summary and Key Take-Aways SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 1
1.1 Executive Summary
This report summarises the goals, Aiming at concise reporting recommendations
processes and results of a study on in line with “next-generation” approaches
This study provides a modern yet concise or “parsimonious3”
meaningful ESG reporting for portfolios1. reporting framework, by which we mean a framework that is
Swiss Sustainable Finance (SSF) focused on the essential information for the desired transpar-
commissioned Sustainserv to conduct ency and does not add any more than really necessary to the
already hefty reporting burden of the investment industry.
this study in collaboration with its The study builds on the current reporting processes for asset
Institutional Asset Owner and its Wealth owners and asset management firms in Switzerland and
& Asset Management workgroups. internationally, and the applied methodology includes the
following three elements:
– investigate good reporting practices,
Responding to increasing requirements – gather and consolidate expectations of SSF members
and dynamic market practice for reporting approaches,
Asset owners and asset managers2 increasingly face pressure – and align good practices and expectations of reporting
from their stakeholders, including beneficiaries, clients, reg- parties with the numerous requirements for interna-
ulators, and civil society representatives, to provide transpar- tional reporting and transparency frameworks.
ency on the sustainability credentials of their portfolios.
Expectations include reporting on ESG performance and in The result of this process is an economical and balanced
particular, climate-related risks and opportunities of invest- reporting recommendations framework that allows asset
ments, such as those reflected in the recommendations of the owners and asset managers to prepare meaningful reports on
Task Force on Climate-Related Financial Disclosures (TCFD). the sustainability performance of their portfolios. It differen-
In addition, current EU regulatory acts, notably the Sustaina- tiates between experienced reporting parties that aim to adopt
ble Finance Disclosure Regulation (SFDR) with its far-reach- a common best-practice standard and beginners looking for a
ing ambitions for ESG integration in investment and retail sufficiently granular entry level to reporting with moderate
products, will increasingly require asset managers and asset effort.
owners to integrate ESG factors into investment processes and
report on these activities with full transparency.
With many regulations currently being introduced or
refined, ESG transparency for portfolios is quickly gaining
international traction, including in the Swiss financial centre.
As the Swiss Federal Council has articulated its expectation
that the financial industry will develop adequate solutions,
the reporting recommendations outlined by SSF in this paper
represent a concrete contribution to meeting this expectation.
1 This report has a clear focus on the asset classes of listed equities and
corporate bonds. While the framework can be applied to other asset classes,
e.g. commercial real estate, with minor effort, more assessments would need
to be conducted to apply such a framework to the more complex asset
classes such as sovereign bonds and alternative investments.
2 For better legibility, we refer to asset managers and asset owners who want to
prepare and publish reports on the ESG performance of their portfolios as
“reporting parties”. They are the target group for applying this reporting
framework.
3 ‘Parsimonious’ is a term popularly used in the financial reporting and
accounting profession to characterise reports that are oriented toward what
is just necessary.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 2
The TCFD framework was used as a prototype of “next-gener- Summarising the SSF Reporting Recommendations and
ation” frameworks4 that approach ESG disclosure from a sys- outlining next steps
temic, comprehensive view and embed numeric key perfor- Section 1.4 presents a compact overview of these two levels of
mance indicators (KPIs) in a context that allows meaningful reporting recommendations that can be used as a checklist or
interpretation through the inclusion of aspects such as strat- simple template for a report. Additional information on the
egy and risk management. To identify commonalities, nine research and development work that led to these recommen-
major frameworks that encompass a cross-section of finan- dations is presented in Sections 2 and 3 of this report.
cial sector requirements have been evaluated on aspects of The next steps foreseen in the development and imple-
governance, strategy, risk management, and scenario build- mentation of the “SSF Reporting Recommendations on ESG
ing, as well as on targets and metrics. Transparency” include pilot testing and, as needed, refining
the recommendations to make them fully suitable for broad
Building on framework comparison, good practice market application in Switzerland and beyond.
and SSF workgroup input
The identified commonalities and corresponding good prac-
tice examples were discussed in workshops conducted with
the SSF Institutional Asset Owner and the Wealth & Asset
Management workgroups. Based on this assessment, SSF
Reporting Recommendations for ESG Transparency of Portfo-
lios were systematically developed through an in-depth
research process and discussed with the SSF workgroups.
Based on this research and participation process, the
project team together with the workgroups developed the “SSF
Reporting Recommendations for ESG Transparency of Portfo-
lios” containing a Foundational-level and an Advanced-level
reporting option. In both options, entity-level information
about the asset owner or the asset manager is provided
upfront, in order to set the context for the asset-level disclo-
sures of the portfolios these organisations hold or manage.
4 “Next-generation” is a phrase that the project team has coined in line with the
suggestion of the TCFD’s authors that the TCFD blueprint might serve as a
template for sustainability disclosure on other topics and aspects in a
manner that relates data to governance, strategy, and risk management.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 3
1.2 The Challenge:
Key Frameworks and Requirements
The SSF workgroups “Institutional Asset Owners” (IAO) and Not only are there varying and diverging expectations and
“Wealth and Asset Management” (W&AM) raised the question requirements for ESG and, in particular, climate-related dis-
of how to meaningfully report on the ESG performance and closures at the portfolio level today: fulfilling expectations
climate risks of portfolios. This is seen as a challenge, espe- and requirements is expected to become even more difficult
cially against the background of mounting requirements and in the near future. For example, PRI signatories have to report
expectations. on TCFD criteria to remain compliant with PRI requirements.
In addition, the Swiss Federal Council decided in December
Proliferation of reporting requirements and expectations 20205 that the authorities are to prepare for the binding imple-
There is broad external demand for transparency – such as mentation of the TCFD recommendations by Swiss companies
from NGOs, industry initiatives (e.g. PCAF or TCFD), or from in all sectors of the economy. The Federal Council is further
regulators in many jurisdictions (also see p. 5 for notes on these advising companies to already start applying the TCFD recom-
abbreviations) as for instance pieces of regulation that stem mendations. Interpreting these requirements as merely relat-
from the EU Action Plan on Sustainable Finance. Many asset ing to reporting would be an oversimplification. TCFD
management firms and asset owners are struggling to navigate requires asset managers and asset owners to not only inte-
this rapidly changing landscape. In addition to compliance grate climate change – and increasingly also topics such as
with regulation, asset management firms and asset owners are biodiversity or water protection in the future – into their man-
motivated to make requirements from regulation an integral agement and governance, but also to respond to it strategi-
part of their business offerings. cally and incorporate it in their risk management. TCFD is
fundamentally a management programme with a commit-
ment to transparency, and by no means just a reporting pro-
gramme.
Some key questions guiding the development of the
reporting recommendations: What is the lowest common
denominator of the various reporting requirements? What is
the economical minimum of disclosure at the level of an
investment portfolio that still meets the requirements of the
various stakeholders, initiatives, and legislators? And finally,
what would SSF recommended guidance for members regard-
ing meaningful reporting look like?
5 The Federal Council, 11.12.2020, press release: https://www.admin.ch/gov/
en/start/documentation/media-releases/media-releases-federal-council.
msg-id-81571.html
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 4
Searching for a common denominator
To answer these questions, existing reporting requirements — TCFD (Task Force for Climate-Related Financial
that offer options to practitioners but also pose challenges Disclosures)
have to be evaluated in detail. In the context of increasing — SFDR/PASI (EU regulation 2019/2088 of the
expectations and requirements for ESG transparency, a large European Parliament on sustainability-related
number of frameworks and guidelines have been established disclosures in the financial services sector
and more are emerging continuously. It is not possible to dis- and Draft RTS (Regulatory Technical Standard)
cuss all of them in detail in this report. The following existing by EBA, ESMA, and EIOPA)
frameworks, which according to the Partnership for Carbon — NGFS (Network for the Greening of the Financial
Accounting Financials (PCAF) can be categorised into more System)
commitment-oriented and more performance-oriented — PRI (Principles for Responsible Investing)
approaches, were selected to assess the main features they — SBTFI (Science-Based Targets for Financial
share in the research and development project presented in Institutions)
this report. They impose significant, and to a certain extent — PACTA (Paris Agreement Capital Transition
similar, transparency requirements on asset management Assessment)
firms and asset owners. — CDP (formerly Carbon Disclosure Project)
— UN Net Zero (UN-convened Net-Zero Asset
Owner Alliance)
— PCAF (Partnership for Carbon Accounting Financials)
Some frameworks, such as SASB (Sustainable Accounting
Standards Board) and GRI (previously the Global Reporting
Initiative), are deliberately omitted from this list as they are
not specifically targeted at portfolio performance measure-
ment. Figure 1 provides an overview of the above frameworks
and outlines which main content elements are addressed.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 5Framework TCFD SFDR (PASI) NGFS PRI SBTFI PACTA CDP UN NET zero PCAF
Type B B B A B B B A B
High-level commitment
Governance
Strategy
Risk Management
Scenario building
Target setting
Metrics & performance
Reporting requirements
The six areas of climate actions
for financial institutions
Type A
Commitment Scenario
Compliance analysis
High-level
Type B commitment
Measuring to act
Performance
Measuring
Target
Reporting financed
setting
emissions
Climate
action
Figure 1: Overview of frameworks considered, with main content
elements addressed. The left-hand graph depicts different functions
of Type A (Commitment) vs. Type B (Performance) frameworks; lines
highlight the key functions of the two types of frameworks.
Source: PCAF, Sustainserv.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 6Materiality – a tale of two perspectives Beyond ESG information, where the financial impacts on the
There are two ways in which relevant or “material” ESG fac- company are clear and recent enough to already be reflected
tors for companies, and thus for the portfolios, need to be in financial statements (Circle 1 in Figure 2), one direction of
considered. This two-sided approach can be called double ESG impacts is the influence of sustainability matters on
materiality (see also Appendix A1) or nested materiality (see enterprise value (Circle 2 in Figure 2). The other direction is
Figure 2). the impacts the company has on sustainability or on the
future prospects of people, the environment, and the econ-
omy (CircleW 3 in Figure 2). The ESG performance of compa-
nies can be understood to encompass both directions, and
like many of the frameworks assessed in this study, meaning-
ful reporting recommendations will need to contain and con-
solidate elements of both perspectives.
Reporting on all sustainability To various users with various objectives,
matters that reflect significant positive
who want to understand the enterprise’s positive and
or negative impacts on people,
the environment and the economy. negative contributions to sustainable
development.
Filter
Reporting on those
sustainability matters
that create or erode
enterprise value
Filter
To users with specific interest in understanding
Already enterprise value.
represented
as monetary
amounts recognised
in the financial
statements
Figure 2: Comprehensive Corporate Reporting.
Source: Reporting on enterprise value. Published by CDP,
CDSB, GRI, , SASB.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 71.3 The Approach:
Study Methodology and Process
1
Identifying common
elements in
major frameworks.
4
Condensing findings
into meaningful
reporting requirements
3 2
Engaging with
Summarizing
SSF Workgroups and
good practice
Management
Figure 3: Visualisation of study methodology and process.
Source: Sustainserv
Three input sources characterise the research and develop- dations and are also presented in this report, as they
ment method applied in this study (see Figure 3): can act as inspiration for reporting parties.
1. Identifying common elements in major frame- 3. Engaging with SSF Workgroups and Management.
works. Common elements, relevant for ESG The project team gathered requirements and
transparency within portfolios, were identified in suggestions for reporting principles and engaged
various major established frameworks. These in discourse and iterations with SSF Institutional
elements were considered when shaping the SSF Asset Owner and Wealth & Asset Management
recommendations, in order to ease the work of workgroups and SSF Management.
reporting parties that would additionally apply the
SSF reporting recommendations. 4. Finally, combining the above-mentioned sources,
Sustainserv was able to condense findings into
2. Summarising good practice. The project team meaningful reporting requirements. The project
identified and summarised good ESG portfolio-re- team drafted these requirements in the sense of a
porting practice examples from asset management concise reporting framework that provides guid-
firms, asset owners, banks, and insurance compa- ance for ESG reporting for portfolios owned and/or
nies. These insights were helpful for drafting the managed by SSF members and other reporting
concrete elements of the SSF reporting recommen- parties.
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 81.4 The Result:
SSF Recommendations for Portfolio
ESG-Reporting
The tables below summarise the SSF ESG-Reporting Recom- ager’s I) governance, II) strategy, III) risk management, and IV)
mendations developed in this project, with Table 1 providing an target setting. Section B provides the frame for disclosing met-
overview on Foundational-level reporting and Table 2 on rics for I) E, II) S, and III) G, on all portfolio assets (where feasi-
Advanced-level reporting. The framework consists of two levels ble). More information on the development and content of the
of reporting. Both levels begin with Section A, which provides recommendations, as well as definitions of the terms used, can
disclosure of information about the asset owner’s or asset man- be found in Sections 2 and 3 of this report.
Table 1: Foundational-level Reporting Recommendations
A) Information on the Asset Owner/Manager Entity B) KPIs for Portfolio Assets
I) Governance I) Environment
Qualitative disclosures Climate
– Is a general corporate sustainability policy in place6? – Total portfolio scope 1&2 carbon emissions
– Is such an ESG policy endorsed by portfolio managers, and if so, – Carbon tracking error (qualitative)
is endorsement mandatory?
– Do ESG policies exist for specific asset classes?
Which of these conditions are fulfilled? (if applicable, please describe. II) Social
For example statements, see Section 3.1.1)
Quantitative disclosure Human Rights
– Percentage of portfolios aligned with policy – Recognition of human rights by investee companies through dedicated
policies
Employee Matters
– Employee turnover and/or absenteeism
II) Strategy
Qualitative disclosures
– Is a clear process in place at the senior management level to determine III) Corporate Governance
which major ESG developments are considered strategically relevant?
– Is this process consensus-based and qualitative or is it already evidence-/ Proactive Positioning
science-based and quantitative? – Board gender diversity
Which of these conditions are fulfilled? (if applicable, please describe. Compliance
For example statements, see Section 3.1.2) – Exposure to controversial weapons
Quantitative disclosure
– Percentage of portfolios aligned with ESG strategy.
III) Risk Management
Qualitative disclosures
– Is risk estimated in monetary terms based on strategic assumptions,
or is it arrived at by consensus?
Is this condition fulfilled? (If yes, please describe. For example statements,
see Section 3.1.3)
Quantitative disclosure
– (None)
IV) T
argets (For Foundational-level reporting, targets would
not necessarily be set.)
In addition to the elements described in Table 1 for Founda- Advanced-level reporting. On the advanced level, you see that
tional-level reporting, organisations wishing to provide fur- many of the entity-level additional elements are based on sce-
ther information also aligned with the analysed frameworks nario-level analysis. On the portfolio level, a limited number
may wish to provide the details described in Table 2 under of additional KPIs are selected.
6 This is in line with recommendations from SFAMA and SSF (2020, p. 4)
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 9Table 2: Advanced-level Reporting Recommendations
A) Information on the Asset Owner/Manager Entity B) KPIs for Portfolio Assets
I) Governance I) Environment
Qualitative disclosures Climate
– Do checks and balances exist between an oversight body (e.g. ESG Board), – Total portfolio scope 1&2 carbon emissions
Management and portfolio management concerning ESG issues? – Weighted average scope 3 carbon emissions
– Is such a process employed for outside-in and inside-out topics7? – Carbon tracking error (quantitative)
– Is the portfolio governance (e.g. investment committee) aligned with the Energy
entity’s governance process? – Total portfolio energy consumption
Which of these conditions are fulfilled? (if applicable, please describe. Water
For example statements, see Section 3.1.1) – Total portfolio water consumption
Quantitative disclosure
– Percentage of portfolios aligned with policy.
– Percentage of assets under management subject to ESG governance
(including institutional mandates). II) Social
Human Rights
– Recognition of human rights by investee companies through
dedicated policies
II) Strategy – Number of severe human rights incidents
Qualitative disclosures Employee Matters
– Are scenarios utilised which provide quantified, evidential assumptions – Employee turnover and/or absenteeism
about consequences for the business? – Accidents and fatality rate
– Are these scenarios used to identify strategic items through interpretation
or mathematical calculation?
Which of these conditions are fulfilled? (if applicable, please describe. III) Corporate Governance
For example statements, see Section 3.1.2)
Quantitative disclosure Proactive Positioning
– Percentage of portfolios that are aligned with ESG strategy. – Board gender diversity (PWOMAN)
– Percentage of portfolios whose strategies are directly linked to scenarios Compliance
or scenario-based goals. – Exposure to controversial weapons
– Recognition of obligation to fight bribery and corruption through
anti-bribery and anti-corruption policies
Financial and Governance Foundations
III) Risk Management – Remuneration policy in place and public
Qualitative disclosures
– Are scenario-based models and calculations integrated into all relevant
risk categories across the entire organisation and all portfolios?
– Do full risk measures (e.g. maximum ESG drawdown, etc.) exist for a
significant proportion of assets under management or of portfolios?”
Are these conditions fulfilled? (If yes, please describe. For example statements,
see Section 3.1.3)
Quantitative disclosure
– Percentage of assets under management, or number of portfolios,
for which quantitative risk measurement exists (e.g. maximum ESG
drawdown, etc.).
IV) Targets
Qualitative disclosures
– Are scenario-based models and calculations integrated into relevant ESG
categories across the entire organisation and all portfolios?
– Are targets (absolute or relative) defined for select metrics? Are these
targets included in the report?
Which of these conditions are fulfilled? (If applicable, please describe.
For example statements, see Section 3.1.4)
Quantitative disclosure
– Which targets are set in absolute values?
– Which targets are set in relative values?
7 In corporate communication, outside-in is often referred to as issues
management (i.e. which ESG issues exist outside the organisation and require/
allow action by the organisation), while inside-out topics are referred to as
agenda setting (i.e. which ESG issues do we consider important/do we want to
use for positioning our company).
SSF Reporting Guidelines on Portfolio ESG Transparency Summary and Key Take-Aways 1002 Building on Framework Comparison, Good Practice, and SSF Workgroup Suggestions SSF Reporting Guidelines on Portfolio ESG Transparency Building on external and workgroup inputs 11
2.1 Main Commonalities Between Established
Frameworks and Standards
Key inputs into the development work of The goal was not to integrate all requirements contained in
the SSF Reporting Recommendations these frameworks into the SSF recommendations, but rather to
take inspiration from what most often is mentioned in those
were commonalities between major frameworks in order to build upon the knowledge of meaning-
established frameworks relevant for ESG ful and feasible disclosures. Also, it can be expected that some
transparency of portfolios. This section reporting parties that want to apply the SSF Reporting Recom-
mendations also want (or need) to apply some of these other
lists key features of such frameworks and frameworks. Aligning the SSF recommendations with these to
defines key take-aways that shape the a certain degree will therefore ease the reporting burden.
development of the SSF recommendations. This section presents common features between the
frameworks listed in Section 1.2 with respect to requirements
the project team considered characteristic of next-generation
reporting, namely:
— governance, (Table 3)
— strategy, (Table 4)
— risk management, including scenario building,
(Table 5 & 6)
— and target setting. (Table 7)
Key commonalities found are summarised at the end of this
section and were used as inspiration for entity-level reporting
recommendations.
In addition, major frameworks were analysed for their
asset-level based KPI content, with the results summarised in
Appendix A5. This overview of commonly considered ESG
metrics was then used as input and inspiration for the portfo-
lio-level related metrics in the SSF Reporting Recommenda-
tions discussed in Section 3.2.
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 122.1.1 Governance
Table 3: Key aspects on governance in the frameworks from Figure 1
Framework TCFD SFDR (PASI)* NGFS PRI
Purpose of inclusion of – Understand the role an – Assessment of good – Climate-related risks as a Understand an
–
governance-related organization’s board governance practices source of financial risk organization’s
aspects in reporting plays in overseeing forms an integral part of call on central banks and overarching approach to
climate-related issues as financial products falling supervisors to start responsible investment
well as management’s under Article 8 or Article 9 integrating climate- (i.e. governance,
role in assessing and of that Regulation and related risks into responsible investment
managing those issues. should be considered as a micro-supervision and policy, objectives and
Aim: support evaluations prerequisite for financial stability targets, resources
of whether material promoting environmen- monitoring. allocated to responsible
climate-related issues tal or social characteris- investment, and
receive appropriate tics, or for pursuing a approach to collabora-
board and management sustainable investment tion on responsible
attention; provide context objective. investment and public
for the financial and policy-related issues) and
operational results the incorporation of ESG
achieved. issues into asset
allocation.
Main disclosures outlined – Board: Describe the – A short description of the – Disclose integration of Board Oversight
by frameworks board’s oversight of policy to assess good climate-related risks (same as TCFD)
climate-related risks and governance practices of into prudential
opportunities, including the investee companies. supervision when engag- Management roles
processes and frequency ing with companies to: and responsibilities
of information about – Disclose adverse (same as TCFD)
climate-related issues, sustainability impacts on · ensure that climate- – Internal and/or external
whether climate-related entity level and provide related risks are roles used by the
issues are considered information on related understood and organization, and how
when reviewing strategy, policies (remuneration, discussed at board responsibilities are
policies, etc., setting integration of sustainabil- level, considered in risk executed with regards to
performance objectives, ity risk, engagement etc.). management and RI or climate-related
and how the board investment decisions, issues.
oversees progress against – Describe the policies of and embedded into
goals and targets. the financial market firms’ strategy; and Policies
participant regarding the – Outline how the
– Management: Describe assessment process to · ensure the identification, organization sets out to
management’s role in identify and prioritize analysis, and, as achieve its mission.
assessing and managing principal adverse impacts applicable, manage- – Investment principles &
climate-related issues on sustainability factors, ment and reporting strategy, interpretation of
including e.g. whether the of the indicators used, of climate-related fiduciary duties (or
organization has and of how those policies financial risks. equivalent), and
assigned climate-related are maintained and consideration of ESG
responsibilities to applied, including date of factors and real economy
management-level approval, allocation of impact
positions or committees responsibility for the
and the reporting line, the implementation of Remuneration
associated organizational policies, a description of – Indicate whether the
structure, processes by methodologies etc. organization’s perfor-
which management is mance management
informed and monitors and/or personal
climate-related issues development processes
have responsible
investment elements.
Source: Sustainserv
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 132.1.2 Strategy
Table 4: Key aspects on strategy in the frameworks from Figure 1
Framework TCFD SFDR (PASI) NGFS PRI CDP
Purpose of – Understand how – Show how products – Establish a fundamen- – Embed comprehensive – Understand the impact
inclusion of climate-related issues meet characteristics or tal strategy based on consideration of all of climate-related risks
strategy-related affect the strategy and objectives and how motivation and a long-term trends and opportunities and
aspects in financial planning over the investment strategy rationale to develop affecting the portfolios the resilience of
reporting the short, medium, is implemented in the sustainability policies and understand how the business strategy.
and long term to investment process and implementation to operate as efficiently
inform expectations on a continuous basis measures accordingly, as possible for the → R
efers to TCFD
about the future to increase transpar- as well as to build the benefit of the
performance. ency for end-inves- basis to evaluate and stakeholders as well
tors. report on progress as to build the basis
toward achieving the for investment
objectives. decisions.
Main disclosures Identification – describe Impact and Integration Impact and Integration Impact and Impact and
outlined by Integration – describe Integration – describe
frameworks climate-related risks
– – A description of the – Disclose integration of
and opportunities type of investment climate-related risks – Key elements, – I mpact of climate-
identified over the strategy used to into prudential variations, or related risks and
short, medium, and attain the environ- supervision when exceptions to the opportunities on the
long term and the mental or social engaging with compa- investment policy that business, strategy,
process to determine characteristics nies to: covers the responsible and financial
those risks. promoted by the investment approach; planning, and how this
financial product, the · ensure that climate- strategy aspects ESG impact has influenced
Impact and binding elements of related risks are factors, real economy the strategy (e.g.
integration – describe that strategy to select understood and influence, time products and services).
the investments to discussed at board horizon, integration of
– i mpact of climate- attain each of those level, considered in sustainability – Why and how
related risks and characteristics, and risk management preferences of climate-related
opportunities on the how the strategy is and investment beneficiaries and scenarios inform
business, strategy, implemented in the decisions, and clients. strategy.
and financial planning investment process on embedded into firms’
(incl. products and a continuous basis. strategy; and – Describe how and over – How climate-related
services, supply chain, what time frame the issues are considered
adaptation and mitiga- – Indicate the reduction · ensure the management of in the policy
tion activities, of the scope of identification, climate-related risks framework and in
investment in R&D, and investments due to the analysis, and, as and opportunities is which policies such
operations.) application of the applicable, incorporated into the issues are integrated
– How climate-related strategy. management and strategy (including
risks and opportuni- reporting of evaluating impact of Exclusion policies
–
ties and the transition climate-related climate-related risks). related to industries
to lower-carbon financial risks. and/or activities
economy are factored – Describe of a climate exposed or contribut-
into relevant – Disclose investing change sensitive or ing to climate-related
investment strategies strategy (negative climate change risks.
or products. screening, best-in- integrated asset
class, ESG integration, allocation strategy. – To what extent
Resilience – describe impact investing, climate-related issues
voting and engage- are considered in the
Resilience of the
– ment). external asset
strategy, taking into manager selection
consideration process.
different climate-
related scenarios,
(2°C or lower scenario,
where strategies
may be affected by
climate-related risks/
opportunities,
the climate-related
scenarios and
associated time
horizon(s) considered.)
Source: Sustainserv
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 142.1.3 Risk Management (including scenario building)
Table 5: Key aspects on risk-management in the frameworks from Figure 1
Framework TCFD SFDR (PASI) PRI (refers to TCFD) CDP (refers to TCFD)
Recommended – Describe processes for – Disclose how all relevant – Describe of the processes – Disclose how the short-,
information on identifying and assessing sustainability risks (seen in used for assessing the medium- and long-term time
identification and climate-related risks incl. PASI as including climate potential size and scope of horizons are defined.
assessment of risks determining the relative change, resource depletion, identified climate-related – Describe how substantive
significance of climate- environmental degradation, risks. financial or strategic
related risks in relation to and social issues) that – Disclose investment risks and impacts are defined.
other risks and considering might have a relevant opportunities that arise as – Describe which risk types are
regulatory requirements negative material impact a result of long-term trends. considered in the climate-
related to climate change. on the financial return – Indicate whether transition related risk assessments (e.g.
are being assessed. and physical climate-related regulation, physical, etc.).
risks and opportunities are – Disclose how the portfolio’s
identified and factored into exposure to climate-related
the investment strategies risks and opportunities
and products, within the is assessed.
organization’s investment – Disclose how the portfolio’s
time horizon. exposure to water-related
risks and opportunities is
assessed.
– Disclose how the portfolio’s
exposure to forests-related
risks and opportunities is
assessed.
– Describe the risks and
opportunities identified with
the potential to have a
substantive financial or
strategic impact on the
business.
Information on risk – Describe processes for – Disclose activities and tools – Describe how climate-
management managing climate-related to manage climate-related related information from
risks, including how to make risks and opportunities. clients/investees are
decisions to mitigate, transfer, – Disclose how decisions to requested as part of the due
accept, or control and mitigate, transfer, accept, diligence and/or risk
prioritize climate-related risk. and/or control climate- assessment practices.
– Disclose how the positioning related risks are made in
of the total portfolio is managing processes.
considered with respect to the – Disclose the construction
transition to a lower-carbon of portfolios due to ESG
energy supply, production, integration, i.e. underweight-
and use, as well as how ing or overweighting certain
material climate-related risks sectors due to ESG risk.
are managed for each
product or investment
strategy.
– Disclose engagement
activity with investee
companies to encourage
better disclosure and
practices related to
climate-related risks to
improve data and the ability
to assess climate-related
risks including how they
identify and assess material
climate-related risks for
each product or investment
strategy, as well as the
resources and tools used in
the process.
Description of – Describe how processes – Disclose specific information – Describe how the processes
integration into for identifying, assessing, on approaches to the for identifying, assessing, and
overall risk and managing climate- integration of sustainability managing climate-
management related risks are integrated risks and the consideration related risks are integrated
into the overall risk of adverse sustainability into overall risk management
management. impact. systems, as well as the
likelihood and impact of those
risks.
– Indicate the integration of
TCFD recommendations
within investment risk
identification and assessment
processes.
– Disclose the significance of
climate-related risks in
relation to other risks
determined and consideration
of regulatory requirements
related to climate change.
Source: Sustainserv
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 15Table 6 Key aspects on scenario building (with links to strategy and risk management) in the frameworks from Figure 1
Framework TCFD NGFS PRI SBTFI PACTA
Description of purpose – Scenario building – Scenarios provide – Scenario building – Enable financial – Help investors
and use of scenario considered as quantitative (part of the PRI institutions to align implement TCFD
building strategic planning climate-related strategy and with low-carbon and comply with
tool (part of the risk analysis to size climate change economy, identify relevant regula-
TCFD strategy the risks across the module) helps and capitalize on tions.
module) to inform financial system. identify where the opportunities,
the organization’s concentrations of mitigate climate – Enable alignment of
strategy and risk are likely to be risks, and increase portfolios with
financial planning. and how they may competitiveness by various climate
affect the gaining insights scenarios and with
performance of into the transfor- the Paris
investment mation. Agreement.
portfolios over time.
– Financial – Measure the
institutions are alignment of
expected to align financial portfolios
their portfolio with 2°C
scope 1+2 decarbonization
temperature score pathways (to see
with a minimum well alignment with a
below 2°C scenario, 2°C trajectory).
and in addition align
their portfolio to a
minimum 2°C
scenario for the
scope 1+2+3 portion
by 2040.
Requirements in – A description of the – Recommend use of – Indication of why – Emission scenario
scenario building resilience of the consistent and and which scenario should be plausible,
organization’s comparable set of analysis is responsible,
strategy, taking into data-driven conducted objective,
account different scenarios (including consistent, and
climate-related encompassing a description of the aligned with a
scenarios, including range of different scenario analysis). specific tempera-
a 2°C or lower plausible future ture goal (1.5°C or
scenario. states of the world well below 2°C of
(‘what-if’ global warming).
methodological
framework).
Recommended tools Guidance and a set
– Model to assess
–
for scenario building of reference 2°C alignment that
scenarios (“orderly” aggregates global
vs. “disorderly” vs. forward-looking
“hot house world”). asset-level data
Climate scenario (physical assets
assumptions such as power
include factors such plants, oil and gas
as atmospheric fields, produced
concentration of cars, coal mines) of
greenhouse gases, (parent) compa-
socioeconomic con- nies.
text, technological
evolution, climate
policies, consumer
preferences, and
climate impacts.
Source: Sustainserv
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 162.1.4 Target Setting
Table 7: Key aspects on targets in the frameworks from Figure 1
Framework TCFD NGFS SBTi CDP PACTA
Role of targets in – Reporting/ – Encourages – Target-setting tool – Reporting/ – No target-setting
respective frame- Disclosure (no financial sector Disclosure tool or reporting
works specific tool) institutions to – Credit points are requirement.
disclose in line with awarded
TCFD (→ see left)
Level of ambition – Not specified – See TCFD – Scope 1+2 target: – Extra points if – Measures the
Well below 2 C or science based alignment of
better (WB2C or 1.5C) financial portfolios
– Scope 1+2+3 target: with 2 C decarboni-
2 C or better zation pathways
(climate compati-
bility test).
Scope of targets – Key climate-related – See TCFD – Scope 1+ 2 +3 – Scope 1, 2, 3 – N/A
targets e.g. – Scope 3: All
– GHG emissions financial institutions
– Water usage must set targets on
– Energy usage their portfolio
(exceeds scope of
scope 3 Standard of
the GHG Protocol
for the “Invest-
ments” category).
Target types – Absolute and – See TCFD – Absolute and – Absolute or intensity – N/A
intensity targets intensity targets. targets
– May include – Targets must cover – Progress to be
efficiency or a minimum of 5 reported
financial goals, years and a
financial loss maximum of 15
tolerances years from
– Also avoided GHG submission.
emissions – Progress must be
– Net revenue goals reported yearly (via
for products and sustainability
services designed report, CDP, or
for a lower-carbon other).
economy.
Includes financial – No additional – See TCFD – All financial Green Finance Target: – N/A
sector specific target guidance for asset institutions must set – Investments in
suggestion/Options owners and asset targets on their green bonds
managers. portfolio. – Amount of green
– Phase-out of coal debt instruments
investments target – Green finance
required. raised and
– Scope 1 and 2: facilitated
Absolute
Contraction or SDA
for buildings.
– RE100 Target
accepted for
scope 2.
– Note, Scope 1 and 2
emissions the FI has
control over must be
included in these
scopes.
Source: Sustainserv
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 172.1.5 Conclusions from framework ESG can pose risks to reputation as well as to assets, customer
comparison relationships, or liquidity. ESG is not a specific type of occur-
rence, but a qualitative aspect of issues that can have signifi-
cant negative or positive impacts in a variety of ways.
The following main key take-aways (KTA) from the Identifying and integrating ESG issues fully into overall
framework comparisons shaped the development of the SSF risk management and using scenarios that can be qualitative
Reporting Recommendations: or data-driven descriptions of plausible future business envi-
KTA No. 1 — Governance: Asset managers’ and asset ronments to test the resilience of strategy and risk manage-
owners’ ESG reports should explain the interaction between ment, make it possible to identify and manage longer-term
how ESG is governed at the entity level and at the level of the ESG risks.
portfolio. We refer to this as “efficiency of ESG governance.” KTA No. 4 — Target Setting: Goals are desired states or
This includes, first, showing how the company is man- results, typically of a qualitative nature. Metrics, most often
aged in relation to ESG issues, what the responsibilities of the performance indicators, quantitatively measure states or pro-
board and senior management are in this regard, and how this gress against goals. Targets, finally, translate qualitative goals
translates into key policies. Secondly, it shows how key poli- into desired achievements in terms of metrics’ values. Goals
cies affect the scope of portfolio management. The latter is are typically set at entity level, targets mostly at the level of
important because governance at the corporate level that is portfolios9. Such targets can be expressed in absolute or rela-
not linked to portfolio management risks being perceived as tive (intensity) terms. And they can take the form of degree of
lacking integrity (saying one thing, doing another). alignment of the organisation’s or the portfolio’s trajectory
KTA No. 2 — Strategy: Essentially, reporting parties with externally defined scenarios or pathways.
should illustrate in their reports the interaction between ESG Commitment to quantitative targets is an important indi-
integration into the firm’s strategy and ESG strategy defini- cation of serious, credible ESG initiatives. Not so much because
tion, execution, and dissemination to the portfolio level. We of the truism that you can only manage what you measure.
dub this “ESG integration efficiency.” Rather, because it is a critical ingredient of a strategyʼs real
Managing an enterprise (entity) vs. managing a portfolio impact within the organisation if it commits to being held
entails different levels of granularity and strategy enforce- accountable to the transparent goals and targets it has set.
ment. Often a corporate ESG strategy is more abstract and less
concrete in its goals than a portfolio strategy. Only if the cor-
porate strategy and the portfolio strategy are in sync, in terms
of direction but also in terms of the degree of concreteness,
can there be real ESG integration. Concrete items to consider
at the entity level include linking ESG considerations to finan-
cial planning, and at the portfolio level to investment strategy,
exclusion, or asset manager selection.
KTA No. 3 — Risk Management and Scenarios: Risk man-
agement links to strategy, which is the function measuring
risk and opportunity against actual performance. ESG risk is
not a risk class of its own; rather, ESG must be reflected in
every risk class that the company tracks and measures.8
8 An example of how ESG needs to be integrated with risk management is the 9 In everyday life, goals and targets are often neither semantically nor
following: “The existing legal requirements, as specified in MaRisk 2, MaGo 3, conceptually clearly distinguished from each other. An example will explain
KAMaRisk 4, for example, must be observed in all cases, i.e. all material risks the concepts: the goal for an asset owner could be to reduce his carbon
must be identified, evaluated, monitored, managed and communicated. footprint, generally and across all portfolios. At the target level, the asset
Sustainability risks affect the known risk types. BaFin expects the supervised owner sets a target of -25% for his own assets under management or for
companies to ensure that sustainability risks are also addressed, and to portfolios outsourced to third parties. The metrics in terms of which the target
document this.” (Guidance Notice on Dealing with Sustainability Risks by the is expressed can be defined as CO2 emissions Scope 1&2.
German BaFin)
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 182.2 Good Practice Examples
The framework comparison described in the previous chapter For these reasons, we have included examples of reports with
is instructive when comparing the key take-aways from that prose-style, tabular and graphical information. These types of
overview to real-life examples. To provide structure to good presentations serve specific purposes, and SSF members seek-
practice examples, we use the formal outline of next-genera- ing to draw conclusions or “inspiration” from the examples
tion frameworks such as TCFD – namely, the building blocks presented are encouraged to mix the different formats to
of governance, strategy, risk management, and metrics and improve legibility and conciseness. Also, we would like to
targets. In addition to TCFD applications, we have found good point out that some of the sample presentations of informa-
practices in the implementation of many reports, as well as tion are helpful instruments for furthering the discussion
examples that offer a high degree of transparency. We have internally. We have added rationales for selecting the specific
looked at various documents and sources in our research. Our examples.
sources included sustainability and ESG reports, TCFD There are many good reporting practices at many com-
reports, websites, research reports, handbooks, and other panies in the financial industry, and this report includes a
documentation. diverse selection from both Switzerland and other countries.
Sustainable investing, and how it translates into an We have also sought a mix of large and mid-sized asset man-
asset owner’s or asset manager’s strategy, is not only a techni- agement companies and asset owners (including insurance
cal issue but also a narrative, a story to be told. Many asset companies). This point is particularly important, because
managers and asset owners that report on ESG portfolio per- exemplary reporting is not exclusively dependent on access to
formance introduce the topic of sustainable investing by dis- resources. The examples of good practices listed below are
cussing why it is considered essential, and how the topic is certainly not an exhaustive list. If a company is not among the
managed within the reporting organisation. In fact, there is a good practice examples, this does not imply its standard of
good case for helping report users, including beneficiaries or reporting is below average.
non-professional, individual investors to understand the
many different ways of thinking about sustainable investing
and the rationale behind the reporter’s strategy. For broad seg-
ments of the population, sustainable investing is an extremely
complex subject area with its own complicated language. We
cannot assume users of reports and similar portfolio disclo-
sures have detailed knowledge of investment forms and the
challenges they pose, even if the reader of the report shares
the conviction in the benefits of sustainable investing. For
example, in the case of the professional investor basic
assumptions, such as, those made in climate scenarios, can-
not always be understood without further explanation.
SSF Reporting Guidelines on Portfolio ESG Transparency Building on External and Workgroup Inputs 19You can also read
