Sustainable investing is having a major moment, with the world’s largest asset manager, BlackRock, signalling strong support for the investment approach.
Sustainable investing – or investing which factors in environmental, social and governance (ESG) concerns – now accounts for more than half of all funds under management in Australia, according to the Responsible Investment Association of Australia.
And, according to the CEO of BlackRock, Larry Fink, that trend is only going to grow globally.
“Sustainable investing will be a core component for how everyone invests in the future,” Fink said in a recent interview with the Financial Times. “We are only at the early stages.”
“We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher,” he continued.
In a report earlier this year, BlackRock said the question of sustainable investing had moved from “why” to “why not”, arguing it’s feasible to do good and even enhance returns in the long run.
“Strong ESG performers tend to exhibit operational excellence — and are more resilient to perils ranging from ethical lapses to climate risks,” BlackRock’s investment analysts said.
Fink argued ESG-compliant exchange traded funds (ETFs) in particular will likely grow to hold more than US$400 billion (AU$566 billion) in assets from the current US$25 billion (AU$35 billion), and added that sustainable investing doesn’t have to come at the cost of returns.
In fact, BlackRock recently launched a series of ETFs catering to the ethical investor, and through its iShares ETF arm currently offers some of the biggest and oldest ETFs in the ETF sphere, like the iShares MSCI KLD 400 Social ETF.
BlackRock said its sustainable products are designed to meet the performance characteristics of “traditional investments” while targeting specific objectives, like a smaller carbon footprint.
Why ESG rating is a critical component
As the analysts noted, ESG data is often incomplete, self-reported and difficult for investors to compare.
That’s the point made by the head of US iShares at BlackRock, Martin Small. In an insight piece published today, Small said credible approaches to ratings are critical.
He compared transparent ESG ratings to New York City’s health department which grades all New York City restaurants and requires the restaurants to display their grades on their doors or windows.
“When was the last time you willingly bought lunch at a “C”? Credible grading systems play an equally important role for investors by opening a window into corporate ‘kitchens’.”
ESG ratings providers, like the Dow Jones Sustainability Index (DJSI) and the Bloomberg ESG Data Service, can help investors find out information like how a company would respond to a natural disaster, as well as information on the diversity of companies they’re investing in or with,” Small said.
“ESG ratings providers use sophisticated analytics to measure sustainable corporate behaviour, drawing on data from governments, agencies, company disclosures, social media monitoring and other sources,” he added.
“The data can also reveal opportunities for upside potential: companies investing in green building, faster transitions to low carbon or renewable energy, for example, or addressing educational needs. Research has found that companies with high ESG ratings have a lower cost of capital and lower earnings volatility.”
But, these companies are often hamstrung by the same problems investors face
“Major providers sometimes have different ratings for the same company; measurement frameworks haven’t been standardized; and there can be a good amount of missing data.”
“The body of ESG data is still narrow compared with those of the major credit rating agencies.”
Despite this, ESG index providers like the MSCI are quickly improving their intelligence. MSCI, Small explained, has more than 140 researchers analysing companies on environmental, regulation and demographic grounds.
“Long story short: ESG data aren’t perfect, but they are helpful and they are improving rapidly.”
“As that information becomes more widely available to investors, greater transparency will enable better choices–just as those giant letter grades posted in restaurant windows help improve our dining experiences. ESG ratings aren’t everything yet, but they’ll tell you whether the menu is worth sampling.”
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.