Demand for sustainable investment solutions has grown substantially in recent years, with more investors embracing ESG strategies to meet their sustainability goals. BlackRock iShares’ Armit Bhambra and MSCI’s Mark Guirey explain how they work together to speed this process along.
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Last year, BlackRock launched more than 100 sustainability investment funds, according to the firm’s own figures to December 31. This reflects the tipping point for ESG investing that many observed in 2020.
Regulations, Covid-19 and a growing body of research that demonstrates how ESG investing is beneficial for risk-adjusted returns help to explain its popularity. But there is still something of a two-speed approach to adoption. Geographical location and the size of an asset owner are key factors in determining adoption rates, says Mark Guirey, Head of EMEA Insurance Segment and UK Asset Owner Client Coverage at MSCI.
“From a regional perspective, EMEA has been leading the way, but while some large pension schemes and insurance companies have made significant headway with the integration of ESG and consideration of climate risk, there’s still a ‘long tail’ of smaller pension schemes in the region who are yet to make a start,” says Guirey.
As ESG’s momentum builds, Armit Bhambra, Director, BlackRock, iShares Head of UK Asset Owners, says investment industry players should act more in tandem to help asset owners of all sizes, and from all regions, implement ESG investing.
“What we’re seeing is that stakeholders, whether investment consultants, asset managers, index providers, regulators or government, are all now moving in a common direction, and I think it’s our collective responsibility to help asset owners on that journey,” he says.
For some asset owners low on the spectrum of ESG implementation, there’s a challenge around “trying to introduce a new way of thinking into a very established way of doing things”, says Bhambra. But the evidence for embracing sustainability is compelling. The empirical data is clear and objective: there is no evidence that investing sustainably requires a performance sacrifice – in fact, the opposite appears to be true, according to BlackRock as of December 31, 2020. This has been a persuasive proof-point for some asset owners.
Bhambra adds: “As an asset manager, we need to have the right data in place to help asset owners undertake portfolio construction. For a long time, finding the right ESG data was a challenge, but index providers and data providers like MSCI have played a really important part in improving this.”
So, what actions are BlackRock and MSCI taking to help investors achieve their ESG objectives? “In our initial discussions with the asset owner community, we focus on identifying what ESG means to them,” says MSCI’s Guirey. “Then we work with them extensively, to evaluate their portfolio, using our data, tools and analytical services. This can include helping evaluate the carbon intensity and/or the ESG profile of their portfolio, or it could be to assess the impact of the transition to a low-carbon economy, evaluating both the transitional and physical risks and opportunities of climate change and enabling them to fulfil their regulatory reporting obligations such as the Task Force on Climate-Related Financial Disclosures (TCFD).”
Bhambra adds: “To give an example, we look at what happens to risk, return and a portfolio’s ESG score if we remove part of the portfolio and replace it with an ESG equivalent strategy. We might use an MSCI ESG score rating, to see how the portfolio scores out of ten. The client wants to see that scoring is going upwards.”
BlackRock has further developed its Aladdin investment management system to create Aladdin Climate, a software application to help investors analyse climate risk in their portfolios. This sets out the actions an investor can take to reduce their exposure to risks such as extreme weather, or rising sea levels, according to BlackRock CEO Larry Fink’s 2021 letter to clients.
BlackRock in 2020 achieved 100% ESG integration across active and advisory portfolios – a “proud milestone”, says Bhambra – as well as the 100 new sustainable funds, according to BlackRock CEO Larry Fink’s 2021 client letter.
For its part, MSCI is seeking to beat the governmental deadline of 2050 for net zero. “We have made a commitment to reduce our emissions throughout global operations before 2040, through our carbon-reduction initiatives and by engaging with our suppliers to achieve common and shared net-zero goals,” says Guirey.
MSCI is also publishing the MSCI ACWI IMI Net-Zero Tracker, which will enable investors to look at aggregate temperature alignment based on achieving 1.5 degrees – the figure required by the Paris Agreement by 2050. This will highlight each quarter the companies and sectors that have made most progress towards net zero. It will also highlight the laggards.
A role for ETFs?
ETFs have a significant role in the ESG journey. As Bhambra says: “ETFs provide an efficient way for the investor to get low-cost, transparent exposure to a benchmark and in the context of ESG investment, that’s a refreshing contrast to what can otherwise be a complicated subject. Furthermore, ETFs have always offered a great deal of granularity to investors. They’ve enabled them to be more precise in their exposure because they allow you to be specific on a country, region, theme or sector, as is also the case with ESG.”
The combination of ETFs and ESG has been highly popular. Global sustainable ETFs had a record year in 2020, with $86 billion of inflows – nearly three times those of 2019. Already in 2021, there have been $42 billion of inflows, according to BlackRock’s sustainable ETP flows.
The ESG trend looks likely to continue, says Bhambra. “We don’t expect this growth to slow down for some time,” he adds. “We think sustainable assets under management will grow to around a trillion dollars by 2030 − a fivefold increase in the assets that are currently managed under the heading of sustainable strategies.”
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