Sustainable Portfolio Management

Definition

Sustainable Portfolio Management (SPM) is the set of principles, tools, processes and management roles that pursue the management of a portfolio (meaning a collection) of financial positions (assets, contracts) while recognizing and integrating some or all of the Sustainable Development Goals or other related Sustainability frameworks. SPM is an emerging field in particular in the context of Sustainable Finance.

Similar to more general Portfolio Management practices and tools, sustainable portfolio management approaches may vary depending on:

• the nature of the portfolio and its constituent instruments (e.g. credit portfolios, securities, derivatives etc.)
• the business model of the Portfolio Manager (trading, buy-and-hold investor etc.)
• the business values, objectives and constraints of the portfolio manager (e.g., financial return, impact investor, etc.)

Elements of Sustainable Portfolio Management

Common elements of portfolio management practices are:

• Organizational Aspects
• Data Infrastructure
• Analytics / Measurement Tools and Models
• Policies and Other Management Tools

In more detail:

Organizational Aspects

• Identifying the roles and high level objectives of sustainable portfolio managers and the interaction with other stakeholders
• Defining the scope of activities (including which portfolios, asset classes) and which sustainability dimensions

Data Infrastructure

• Position / Financial Data
• Environmental and Social Impact Data
• Historical Data

Analytics / Measurement Tools and Models

• Risk Analytics
• Scenario Analysis, Stress Testing
• Risk-based Measures and Portfolio Valuation
• Model Validation

Policies and other Management Tools

• Portfolio Strategy
  • Portfolio Steering Targets
  • Portfolio Limits
• Concentration Risk Measurement
• Stress Testing Exercises
• Capital Allocation
• Portfolio Optimization

Issue and Challenges

• Sustainable Portfolio Management is an emerging and rapidly evolving field and suffers from many of the data quality, definitional ambiguities, poorly articulated objectives etc. of much of current sustainable finance

See Also

• Paris Agreement Capital Transition Assessment