Environmental, social and governance, or ESG, factors are increasingly being embedded firmly into the investment process as awareness around sustainability from consumers and organisations grows. In a webinar hosted by Funds Europe, James Gloak of BlackRock and Guido Giese of MSCI discuss the evolution of enquiries in this growing area of demand.
Climate change is now a front and centre issue for consumers, organisations and governments spurred on, in part, by the 2015 Paris Agreement. One example is Article 173, a 2016 French law credited by the Principles for Responsible Investment (PRI) for strengthening mandatory carbon disclosure requirements for listed companies and introducing carbon reporting for institutional investors.
These types of requirements have led to an increase in raw data of client and company activity, which in turn is helping to drive sustainable data, says Gloak, an iShares EMEA sustainable investing strategist at BlackRock.
“With the increase in sustainable data, you now have the ability to understand the risks and returns that might be affected by sustainable criteria,” explains Gloak. “Evidence is coming to the fore that you can invest sustainably without harming your risk and return,” he adds.
As investors seek to address climate or corporate-specific risks or opportunities, ESG provides a risk management toolbox. Approaches towards ESG have evolved to range from simple exclusion to best-in-class products – and BlackRock is eyeing the spacious room in between to get products out there that can allow clients to have a core replacement, but not move too far away in terms of risk and return.
In terms of flows, the EMEA market has seen $6 billion of new net business (NNB) in the first six months of 2019. In 2018 the ESG segment totalled $4.5 billion – a $1.5 billion rise on the previous year. “We are seeing a continued drive into ESG investing with ETFs in particular,” says Gloak. “With regards to new flows is it is centred around SRI [socially responsible investment] strategy, which is a best-in-class strategy – it only takes the top ESG performers.”
Europe’s sustainable ETF industry has surpassed $16 billion in assets under management and the global figures stands at $26 billion. BlackRock expects an almost steroid-like growth, projecting ESG ETF assets to stand at $400 billion by 2028 – but what will the propellers be?
Drivers of the anticipated growth include the attraction of improving sustainability credentials whilst decreasing the intensity of carbon emissions leading to further “why not” moments, a more sustainable outlook by the younger generation and more pension companies coming on board amid growing regulation and client pressure.
One of the main drivers for growth in ESG solutions has been the evolution of ESG data. “When we started our MSCI ESG ratings in 2007, we were only covering, roughly speaking, the MSCI world universe, which is large and mid-cap in developed markets,” says Giese, executive director for applied equity research at MSCI.
“Now we cover developed and emerging markets and small cap, so we increased our coverage to over 8,000 companies. There has been a growth in terms of the breadth of data, but also in terms of the types of screens available.”
While significant strides have been made, one particular client concern is around the short history of ESG data in comparison to seven decades of factor investing data. “Now that we are at 10 years of life track, we see that investors getting more comfortable that they are not losing performance,” highlights Giese.
Avoiding high-profile ESG disasters has been a huge boost. “Our ESG indexes in life track were not invested in Volkswagen, BP, Petrobras, PGE and Facebook – and that has helped investors,” says Giese.
Why ETFs for ESG?
According to a Greenwich Associates 2018 survey of 127 institutional investors, 44% of participants overall and half the investment managers said they are using ETFs as a main vehicle to address ESG – up from one third in 2017. So why ETFs for accessing ESG?
“ETFs are used because of their greater transparency, they can have lower costs, ease of access,” explains Gloak. ETFs have also moved quickly and provided a choice of different strategies that institutional investors and wealth managers can access.”
The main objective of institutional investors is to provide returns. The key challenge, Gloak outlines, is whether managers can provide them with a strategy or solution that allows them to continue meeting that main objective whilst improving their sustainability credentials and reducing their carbon emissions intensity and doing it as close to the same cost as previously done.
The webinar also looked at whether sustainability can really be achieved through passive strategies. The starting point is understanding what the client is seeking – are they looking to adopt a best-in-class approach, maximise their ESG score or cut out a significant amount of controversial activities?
“By understanding that we can remove those from their products and the proliferation in choice of product out there means that whatever the sustainable goal of the client, at the moment the industry is providing a product that can meet their need,” says Gloak.
“New sustainable goals are coming out all the time and I have to emphasize that we are at the beginning of this process, this industry is only going to get larger. We feel that those who aren’t involved in this process haven’t missed the boat yet – we see a wave building behind sustainability, but it hasn’t broken yet,” he adds.
When the wave does break, it will be imperative to ensure that people make the transition from standard to sustainable and that managers have the products to meet their requirements – notably through ETFs. “We believe we can meet sustainability goals through ETFs and react reasonably quickly to those new demands that are coming out all the time,” says Gloak.
James Gloak and Guido Giese took part in a Funds Europe webinar in July, sponsored by BlackRock. The recorded ‘ETFs: A primary vehicle for ESG investing’ webinar is available at www.funds-europe.com/webinars-channel.
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