Why should investment organizations care: Investment decisions that consider not only risk but also recovery tend to be healthier long-term choices. In essence, the higher the chance of recovery from volatility, the better the investment.

Here’s the catch: A strong focus on recovery is still missing from risk management functions that typically take a loss-based or volatility-based view of risk. “Here’s where ESG factors come in — ESG considerations are crucial in driving an asset or organization’s ability to adapt and transform in the face of risk,” states Ashby Monk, Executive Director, Global Projects Center, Stanford University.

This situation is further compounded by the fact that ESG and risk management work in disconnected silos in most investment organizations. As a result, the data and technology are often disjointed as well. Here are the three pillars panel of experts highlighted for investment portfolios and organizations to be set up for success:

1. Differentiate between resilience and robustness
Resilience isn’t a new concept in the finance world — the term may even seem ubiquitous post-pandemic. But today resilience in investment has little to do with adaptation; it typically points towards a sense of insensitivity to risks, shocks, and change events. However, this is not resilience in a true sense; it is a kind of “all-weather” robustness. Resilience instead is about shock absorption and recovery to a stronger and more relevant form. Thinking about resilience in this way automatically forces organizations to incorporate ESG factors into their risk management functions. When integrated properly, ESG factors can give organizations the right signals around risk and change.


2. Embrace the DARLing framework
Stanford University has created a new framework for investment organizations to move towards more resilient portfolios — DARLing is an acronym for Detection, Absorption, Recovery, and Learning. According to Monk, “As more ESG shocks continue to impact asset values, resilience will become the ultimate goal for investment organizations.”

The DARLing framework breaks down that goal into actionable components that bring together ESG and risk management teams. Here’s a bit more about these four components of resilience:

  • Detect - Spot events in near real-time and also scenario plan while monitoring for changes in the ESG landscape. Over time, these simulations will enable organizations to be more prepared in the face of crisis.
  • Absorb - Optimize resilience over the short term by absorbing the initial impacts of ESG events and quickly adapting by identifying the best response possible to a shock.
  • Recover - Focus on the ability to recover from any initial impacts of ESG events (along with any later, indirect consequences from such events). This is the most critical part of building resilience that can lead to transformation.
  • Learn - Develop new strategies from lessons learned through ESG trends in order to optimize portfolio resilience in the long run. Take it further by implementing a feedback loop to drive future innovation.

3. Accelerate sustainability transformation
ESG is no longer just a nice-to-have. It is mandatory in more ways than one, and investment organizations get this! However, without the right technology and data fueling transformation across the portfolio, efforts can fall flat. Powering the DARLing framework with data makes it easier to integrate ESG and risk management, and ultimately drive towards resilience.

  • Go beyond simply tracking metrics
    Yes, tracking carbon emissions across your portfolio or water usage at a particular facility is fundamental. But how about understanding the climate risks associated with investing in a company that has its core manufacturing facility close to potential forest fires? Or, as an investor, you may be interested in understanding if a mining company can become a carbon capture-and-storage provider.

ESG data today needs to provide insight into potential pitfalls and opportunities, and help your team scenario plan. The key here is not just to think of the current state but actively plan for future investments.