Measuring the sustainability of investment funds: A critical review of methods and frameworks in sustainable finance

• Published in: Journal of cleaner production 2021-09, Vol.314, p.128016, Article 128016
• Main Authors: Popescu, Ioana-Stefania, Hitaj, Claudia, Benetto, Enrico
• Format: Article
• Language: English
• Subjects: Impact assessment; Mutual funds; Responsible investing; Socially responsible investment; Sustainability; Sustainable finance
• ISSN: 0959-6526; 1879-1786
• DOI: 10.1016/j.jclepro.2021.128016

Investors increasingly demand that asset managers measure the non-financial performance of their investment portfolios. Amidst concerns of greenwashing, reliable sustainability assessment methods are needed to ensure that funds are channeled towards priority sectors for the transition to a low-carbon and more inclusive economy. This critical review provides a classification, analysis and evaluation of current sustainability measurement methods for investment funds from both industry and academia. The evaluation is based on a seven-criteria matrix, developed based on gaps identified in seminal academic works and in reports from international organizations. Following the evaluation, we find that carbon footprints and exposure metrics and environmental, social and governance (ESG) ratings, while widely used, have several shortcomings, failing to capture the real-world sustainability impact of investments. We suggest that open-source, science-based and sustainability-driven assessment methods are prioritized going forward. Methods can be upgraded by incorporating measurement of positive impact creation and by adopting a life cycle perspective. Given the need to anchor sustainability assessments in the reality, the compatibility of investment products with science-based targets for sustainable development should become a central element of reporting requirements. Finally, methods incorporating a forward-looking perspective, as well as an assessment of investor's additionality are scarce and should be given priority in future research. •12 implementation tools from academia and 25 from industry are evaluated.•Seven criteria for ideal sustainability assessment of funds are proposed.•Existing methods fall short on double materiality and life cycle considerations.•Investor's additionality and a forward-looking perspective should be incorporated.•No state-of-the-art tool answers the complexity of sustainability assessment.