Since joining BlackRock last fall, I’ve gotten a number of questions about sustainable investing. A common thread linking these questions – and rightfully so – is what sustainable investing means for investors’ portfolios. And in many of these conversations, people are surprised when I emphasize the potential linkages between sustainable investing and long-term financial performance.
But I am not alone. Investors increasingly recognize how a clearer understanding of environmental, social, and governance issues can help them manage risk and enhance long-term return. As Larry Fink recently wrote in his letter to CEOs around the world, “A company’s ability to manage environmental, social, and governance matters demonstrates the leadership and good governance that is so essential to sustainable growth.”
Yesterday, I spoke at a UN-hosted investor summit, where I discussed BlackRock’s approach to sustainable investing – and answered some important questions on the topic from investors. And in the coming weeks on the blog, I’ll discuss BlackRock’s approach to sustainable investing in greater depth.
First, what is sustainable investing?
Let me offer a straightforward definition: Sustainable investing combines traditional investment approaches with environmental, social and governance insights to help manage risk and enhance long term return. Sustainable investing is not a peripheral strategy – it’s about recognizing that the companies addressing humanity’s biggest challenges are often those that are well-positioned to grow.
The evidence is mounting that companies that effectively manage sustainability-related issues have exhibited lower risk, that the management of material sustainability considerations has been associated with outperformance over time, and that these factors may play a role in long-term performance as well.1
Take the example of climate change. No investor can ignore the wave of climate-related regulations and the growing number of physical and technological disruptions – rather, the best investors are paying close attention. As technology improves our ability to collect and analyze data on climate risk, we can more effectively deploy climate-related investment strategies that help manage risk and enhance long-term return. As the chart below shows, companies that reduce their carbon footprints the most have historically outperformed peers in the stock market. Greater carbon efficiency may signal operational excellence. It may also help protect companies from physical and regulatory risks.
Second, what is BlackRock’s approach to sustainable investing?
What’s frequently been missing from sustainable investing – and what BlackRock brings to the table – is a rigorous, data-driven approach, supported by our unique financial technology capabilities and the scale and insights that come with being the world’s largest investment manager. Just as the growing scope and availability of data has enabled investors to identify traditional factors that drive investment returns, it’s also enabling us to identify when and how sustainability-related issues help manage risk and enhance long-term return. As a result, an increasing number of clients are requesting that these issues take greater prominence in their investment portfolios.
We’re focused on four areas:
- Developing insights. To be effective sustainable investors, we must deeply understand the ways in which environmental, social and governance issues do and do not affect risk and long-term return. Significant questions remain about causation, timeframe and the availability and consistency of sustainability-related data. We are passionate about answering those questions to deliver the clearest picture to our clients.
- Integrating ESG across investment processes: Across BlackRock, we are leveraging our technology and sophisticated risk management capabilities to build tools, data and structures to enable our investors to consider sustainability-related issues alongside traditional financial considerations. Integrating sustainability-related considerations across our alpha-seeking investment processes is not a one-off exercise, it is an ongoing effort to stay at the front edge of emerging data and insights – and in so doing becoming better investors.
- Building sustainable solutions: Today we offer sustainable solutions across the board. Our opportunity is to build on our platform, not only through product offerings but also by helping clients understand the risks across their portfolios, providing comprehensive solutions that help meet their needs.
- Engage companies to promote sustainable business practices: We believe that companies with sound corporate governance practices, including how they manage the material environmental and social aspects of their operations, have the potential to better manage risk over the long term and offer better risk-adjusted returns . We engage with companies held in index and alpha-seeking portfolios alike to encourage them to adopt the robust business practices consistent with sustainable long-term performance.
Finally, if financial markets are focused on return, how can sustainable investing do good for the world?
At BlackRock, our role is to manage the assets our clients have entrusted to us, most of which are invested for long term goals like retirement. In that context, our responsibility is to provide our clients with the clearest possible picture of the relationship between sustainability issues, risk and long-term financial performance.
When we do that well – when we can bring that picture into clearer focus – then we can deliver sustainable investment solutions at scale that help improve financial outcomes for our clients and accelerate the adoption of sustainable business practices globally.
This is how sustainable investing can become a powerful driver of positive change: not having to trade return for social outcomes, but by scaling solutions that promote better ways of doing business, and creating the momentum to encourage more and more people to opt in to the future we’re working to create.
In coming weeks, we’ll say more about BlackRock’s approach to sustainable investing – diving deeper and continuing the conversation.
Brian Deese is Global Head of Sustainable Investing at BlackRock and the newest contributor to The Blog.
- Dunn, Jeff, Fitzgibbons, Shaun, Pomorski, Lukasz, “Assessing Risk Through Environmental, Social and Governance Exposures,” AQR, February 2017; “Corporate Sustainability: First Evidence on Materiality,” 2015. Khan, Serafeim, Yoon; “Foundations of ESG Investing, Part 1: How ESG affects Equity Valuation, Risk and Performance,” MSCI, November 2017. Giese, Lee, Melas, Nagy, Nishikawa.