A pioneer in including ESG (environmental, social and governance) criteria in their portfolios, BlackRock wants to help accelerate the movement.
“In recent years, ESG has become the subject of everyone and every industry,” explains Gisèle Duenas Leiva, the company’s sales director Belgium & head of retail Luxembourg. She welcomes the “fundamental” structural trend of rising financial industry and investor demand for durable assets. Not just for regulatory reasons, of course, but also because of the commitment of an increasing number of players.
In this niche, BlackRock claims a pioneering role. The investment company has been conducting studies on ESG risk factors for years to understand their impact on investment processes. And since 2009, CEO Larry Fink has used his annual letter to raise awareness among his peers on the subject of sustainability. In his last message, he reaffirmed that climate risk was an investment risk to be taken into account.
How? “We implement ESG criteria in our products and in the investment process in several ways.” There is, of course, exclusion. This is historically the first step. “The exclusion is simple, easy to understand, and suitable for a large investor base.” But Gisèle Duenas Leiva believes that it is not enough to navigate safely by quickly summarising “an exercise based on value judgments” when we should go further. This involves providing portfolio managers with tools and information to identify the risks and opportunities associated with portfolios; the constant improvement of investment processes and making investment decisions based on ESG information having a financial impact.
BlackRock has many index funds, its specialty. Implementing qualitative criteria intoindex management is not straightforward. “We use all sources of ESG data in order to take an active risk compared to the benchmark to optimise the portfolio’s exposure to companies that have a higher ESG rating while keeping characteristics that are very close to the benchmark in terms of ‘expectations of returns and risks.’ An approach that we are returning to active management.
“The key is the data that makes it possible to objectively and materially measure the impact of ESG criteria. The quality of this data and its access are a real challenge. But there is a tendency to move towards quality data based on regulatory or professional standards that allow comparison and measurement.”
There is another line of action: that of shareholder engagement. “Our strategy is clearly to encourage the climate transition after companies in which our customers are shareholders.” In this scenario, BlackRock insists on the need to have access to as much data as possible and encourages the companies in which it has invested to publish more and more relevant data. As for example the possible plan to achieve the objectives of combating climate change. “An independent team of management teams also establishes a direct dialogue with companies,” she explains. A team that in 2020 met 440 companies listed worldwide and hopes to reach 1,000 by 2021.
While it prefers to speak of engagement rather than activism, in the event of a company’s lack of progress in sustainability, BlackRock intends to present its point of view to directors and managers of companies using its right to vote and supporting shareholder resolutions as needed. “Or no longer invest or underweight these stocks in discretionary management portfolios.”
The pandemic has brought a new argument to the debate as to whether ESG portfolios perform better or worse than traditional portfolios. A real war of religion. “What we have seen with the crisis is that there is a certain resilience in ESG portfolios.” This will lead to an acceleration in the reallocation of capital towards more sustainable assets and portfolios. “This transition that we predicted is now going faster than expected. It’s a surprise. We thought the pandemic would put all these considerations aside and focus on the markets. It was not the case. It has raised awareness even more that climate change can have a big effect on our lives and faster than we could have anticipated. Sustainability has truly become a new standard for investing.” A figure? “From January to November 2020, we saw that fund and ETF investors invested $288bn in sustainable assets globally. This is an increase from the previous year of over 96%.”
This article was originally published in French on Paperjam.lu and has been translated and edited for Delano.