The BID

Sustainability is our new standard

This week featuring Rich Kushel, Head of Multi-Asset Strategies and Global Fixed Income at BlackRock

Climate change will have a lasting impact on global economic growth – fundamentally reshaping finance and investment management. BlackRock has announced a series of changes that make sustainability our new standard for investing, including exiting sectors that present high environmental, social and governance risks, such as thermal coal producers; launching new products that screen fossil fuels; and increasing transparency in our investment stewardship activities.

That's why we're launching a new mini-series, “Sustainability. Our new standard.” In the first episode, Rich Kushel, Head of Multi-Asset Strategies and Global Fixed Income, talks about why sustainability is at a tipping point, what it means for investors and the changes that BlackRock has made with regard to sustainability.

Throughout 2020, we’ll continue to explore the ways sustainability – and climate change in particular – are poised to transform investing.

Subscribe on iTunes

Listen on Spotify

  • Mary-Catherine Lader: Climate change will impact more than just the environment. It’s also going to have a lasting impact on global economic growth and prosperity, particularly as more and more investors around the world demand more of the companies they invest in and take action like moving money into sustainable assets. 

    The bottom line? We believe it’s going to reshape finance and investment management. That’s why we’re starting a new podcast mini-series, “Sustainability. Our new standard.” We’ll explore the ways that sustainability – and climate change in particular – are poised to transform investing, and how BlackRock is preparing for that transformation.

    Today, we’re kicking off this mini-series with some significant initiatives that we at Blackrock have announced around sustainability, putting it at the center of our investment approach. In our active business, which represents 1.8 trillion dollars, we’re exiting businesses that present high risks across ESG – environmental, social and governance risk – such as thermal coal producers. We’re launching new investment products that screen out fossil fuels; and we’re increasing transparency in our investment stewardship activities.

    A few days ago, I sat down with Rich Kushel, BlackRock’s Head of Multi-Asset Strategies and Global Fixed Income, to talk about these changes. We talked about why sustainability is at a tipping point and what it all means for investors. I’m your host, Mary-Catherine Lader. We hope you enjoy the first episode of this mini-series, “Sustainability. Our new standard.”

    Rich, thank you so much for joining us today.

    Rich Kushel: Thanks for having me.

    Mary-Catherine Lader: So we’re talking about sustainability today and one of the primary messages is that we, BlackRock, are discussing, is that climate risk is investment risk. What exactly do we mean by that?

    Rich Kushel: We believe that the focus on climate risk and the focus on broader sustainability issues is really having a profound impact on the financial markets. And we’re seeing that in two principle ways. One, is that we believe there are a lot of mispriced risks in the market. Investors are fundamentally not taking into account some of the risks associated with sustainability in general and climate change specifically. You see that in physical risks, such as the impact of fires or rising temperatures or lower crop yields on different parts of the economy. You’re also seeing that in the form of underappreciated impacts from a transition to a low carbon world. And that’s having positive impacts on parts of the market that are focused on providing low carbon services and products; think electric vehicles. And negative impacts on those in carbon-intensive industries. Secondly, there is a large-scale reallocation of capital going on in the markets today, away from broad market exposures to indexes and other things focused on sustainability. That’s going to have a profound impact on valuations, negatively impacting companies and issuers that exhibit negative externalities and positively impacting those that are seen to have positive externalities in the market.

    Mary-Catherine Lader: So you oversee many of our investment teams, what does this mean for them?

    Rich Kushel: Well, we’re seeing them really do a couple of things. One, over the last several years, we’ve had a pretty intense focus on integrating environmental, social, governance, ESG if you will, risk factors into our portfolios, of really making certain that that is an integral part of our investment process and that we’re evaluating those risks. Second, there’s been a large focus on making certain that we are providing choice to our clients. That those who want to build sustainability into their portfolios in a very explicit way, that we can give them the tools and techniques and services to be able to do that. And then lastly, we’ve seen some very large changes, even very recently in valuations and risks, coming in many respects from climate change but also from other sustainability factors that our portfolio managers are now reflecting in their portfolios. We just announced that as part of this we are moving out of our thermal coal investments. When we look at what the risks associated with thermal coal production are, we’ve just concluded that it’s not a good risk-return profile for our clients. By the middle of this year, we will have eliminated those exposures in our active debt and equity positions across the firm. 

    Mary-Catherine Lader: So a lot of this was laid out in two letters, one from Larry Fink, our CEO, and the other to clients with this message, climate risk is investment risk, with the intentions for how the investment teams are going to change what they’re focused on and how they think about ESG. What else are we going to do? So I’m thinking particularly of how we engage with companies around their climate practices and their ESG practices.

    Rich Kushel: One of the things that we’ve called for is for companies to report on sustainability measures and specifically, we’re advocating them using the SASB principles, or Sustainability Accounting Standards Board, as a reporting standard, as well as providing reporting along the TCFD standards, or the Task Force on Climate-Related Financial Disclosures, as well. And look, we understand, that’s not an easy thing to do. I would tell you that BlackRock still has work to do along that. But it’s something that we’re asking all the companies that we invest in to report on and I think we’re going to hold people to a pretty high standard on this. It’s an important part of what we do in terms of being stewards of capital, being engaged owners, focusing really on the long term. We’re committing to a real focus on that, we’re committing to a high level of transparency with respect to our voting and our engagements. And specifically, actually, not only listing the companies with whom we are engaging, but also the subjects on which we are engaging them on.

    Mary-Catherine Lader: So SASB, TCFD, these voluntary disclosure regimes have been around for a few years, but they haven’t gotten huge traction. What do we think it’s going to take for more companies to start to do these sorts of voluntary disclosure in addition to just our endorsement and request that they do so?

    Rich Kushel: It’s going back to my earlier comments about the role of sustainability in portfolios. It’s going to be really important for investors to understand how focused management is and how focused companies are on sustainability. One of the ways that we, as investors, are going to be able evaluate that is through these disclosure regimes and unfortunately, if we’re not given that information, we’re going to have to assume that we’re not behaving in a way, and they’re not managing their businesses focused on long-term sustainability. That’s going to have an impact on our view of valuations.

    Mary-Catherine Lader: So not only these regimes been around for a while but we, and you specifically, have been at this for decades, so why now for focusing on sustainability? Why are we calling for these changes at this point in time?

    Rich Kushel: I think we’re at a tipping point in a number of dimensions. One, is that the acuteness of the risks associated with non-sustainable behaviors are becoming very, very apparent. We’re seeing that around the world, and we’re seeing it in the way that people are evaluating companies and allocating capital. Secondly, it’s really important to our clients. Whether you believe that these risks are mispriced or not – and reasonable people can disagree, we have strong reason to believe that they are – but even if you don’t, I think you have to accept that there is a large-scale reallocation of capital towards sustainability that is going on right now and it’s not just in a narrow part of the world; this is global. It is a global phenomenon. Some say it’s associated with younger people now becoming CEOs and CIOs, with a more acute focus. Some say I think it’s just people understanding these things better. But because of that, that reallocation of capital is having a profound impact and we believe it’s going to have a profound impact on valuations. Given what our job is, to produce the best long-term returns for our clients, we have to be focused on it now. 

    Mary-Catherine Lader: And so when you say it’s important to our clients, what are they saying exactly?

    Rich Kushel: Our clients are saying two things. One is they want the best returns that they can have and given that most of our clients are saving for long term goals, like retirement, their time frames are extended out there. You know, there’s been a lot of focus on what’s the impact of a two-degree world. What happens in 2050? 2050 is now 30 years away. 30-year mortgages, 30-year bonds go out to 2050. Then is now. We have to be taking these into account in the investments we’re making today. Secondly, some of our clients want their portfolios to reflect their values. And we’re committed to providing them the tools to be able to do that and the ability to choose to do that in their portfolios. But what’s important is that that is precipitating a significant reallocation of capital. That’s going to affect the flow of funds around the world, not just to private market issuers, corporate issuers, but also to sovereign issuers in public markets. As fiduciaries and as people who are looking to create alpha for our clients in our active portfolios, we have to take that into account and that’s providing a great opportunity for us but it’s also putting risks in the portfolio that we need to be closely attuned to.

    Mary-Catherine Lader: So you’ve talked a lot about how active investing is going change. What are we going to do differently on the passive investing or index investing side?

    Rich Kushel: As an index manager, our duty is to replicate the returns of the indexes that our clients choose to use. And the reality is, those indices reflect the broad markets and have companies that exhibit both sustainable and non-sustainable behaviors. One of the things that we’re committed to doing is creating a series and a full spectrum of sustainability-oriented index exposures. And whether that’s through screening, eliminating exposures to things like fossil fuels or just optimizing around ESG exposures and looking to have a better ESG profile, those are a series of products and strategies that we’re going to be offering to our clients. We talk about that in the letter. What I’m personally excited about is our ability to use those in the solutions that we create for clients. The reality is most of what BlackRock does is as a solutions provider. We put together different capabilities from around the firm, or sometimes outside of the firm, to create the best possible outcome for our clients. We are really advocating that our clients employ sustainable versions of their broad market index exposures in their solutions and we’re going to be creating a series of capabilities for them to do that in a very easy and consumable way.

    Mary-Catherine Lader: Sustainable often signals the environmental and the climate components of it. How do you think about the other dimensions, whether that’s the S and the G in ESG or other things beyond sort of physical climate risk or the transition to a lower-carbon economy?

    Rich Kushel: Look, I think we’ve always been focused on the G risk, the governance risks. That’s probably the single most important thing in evaluating a company, is how good the management and board are doing about running their business and when you see problems, whether those problems manifest themselves in financial ways or reputational ways, it’s almost always a failure in governance at the root cause. So that’s something we’ve been focused on for a long time. You know, around the social side, it is important. And you’re seeing today, a much higher level of focus around what I call the social license to operate. And the companies that lose that, either because of bad behavior, not demonstrating equality, not respecting their employees or the environment, are getting punished in the market. That’s changing valuations. So there’s a lot of focus around environment and climate, it’s particularly acute and frankly, it’s among the easier to measure. But the S and G are at least as important.

    Mary-Catherine Lader: What is our advice to those companies that are at risk of losing their social license to operate, where we don’t see that kind of behavior? We’re not investing in you, how exactly do we have those conversations with management teams?

    Rich Kushel: Well look, we engage with over 2,000 companies a year through our stewardship team and then, thousands and thousands more where our investment teams are meeting with management. Part of what we’re doing is evaluating those things and really understanding it. But my message, which I think is a pretty simple one, is that these are important things that people need to be focused on. We’ve seen that in the markets. And, if the markets aren’t telling you that, your employees probably are. So I think people are focused on it.

    Mary-Catherine Lader: So as you think about risk, we have frameworks, we have formulas that investors use to think about risk, this is an emerging area. Is there a consensus, do we have standards yet, how important is that for our investors as they’re thinking about how to take this into account in their investment process?

    Rich Kushel: Well, MC, I think one of the most important that we need to be doing as investors is getting better information and better data. And one of the things that has changed over the last couple of years, is we’ve progressively gotten better and better and better about analyzing sustainability risks and really understanding which ones are relevant to which issuers. So one of my hopes, over the next couple of years, is that we continue to improve the quality and the relevance of the data that we have. And so, no, today there isn’t a really great set of standards. There are a number of providers out there who do a good job. But I’m always surprised at how little correlation there is on some of their analytics. That’s why one of the things that we’re really committed to at BlackRock is doing our own research and developing our own thoughts on these matters. But looking forward, I think you will see more standardization. I hope that BlackRock will be a leader in that way. What I think clients can expect from us are one, us integrating these things into our investment processes in an even greater extent and two, I think clients are going to appreciate this, is being able to report back to them how to measure, how to monitor, how to think about these sustainability-oriented exposures in their portfolio.

    Mary-Catherine Lader: So that they can understand on an ongoing basis where they stand on these different metrics.

    Rich Kushel: Absolutely, and look, there’s no easy answer, it’s not like there’s a single number that’s going to do that and for different types of instruments in different industries, you’re going to have different things that are relevant. But importantly, the ability to report to our clients and that’s one of the things we talked about in the letter, is really a commitment around sustainability-oriented reporting that I’m very excited about.

    Mary-Catherine Lader: So you say that’s one thing you hope will change in sustainable investing in the next sort of 5-10 years, what else do you hope will be different five years from now, ten years from now?

    Rich Kushel: You know, really, I don’t think it’s going to be in five years, but in ten years, maybe we’ll just be talking about investing and that all investing will be sustainable. We won’t need the adjective. I’d like to think that becomes the standard. You know markets change overtime, and so, I’d like to think in ten years there really isn’t any focus on sustainable investing, it’s just investing.

    Mary-Catherine Lader: So, finally, sustainable investing – fad or here to stay?

    Rich Kushel: Oh, MC, I think this is a, this isn’t a fad. This is about, if you will, the ultimate in long term risk and returns. And to the extent that most of our clients are focused on saving for long-term goals, sustainability is something that’s going to be around for a long, long time.

    Mary-Catherine Lader: Thanks so much Rich for joining today.

    Rich Kushel: Thanks for having me.

    Mary-Catherine Lader: That was my conversation with Rich Kushel on how sustainability is changing our investment approach at BlackRock. And just a reminder, throughout 2020, we’ll continue to focus on sustainability on The Bid through our mini-series, “Sustainability. Our new standard.” We’ll talk about how sustainability is evolving and how it manifests in countries and investment opportunities around the world. So stay tuned throughout the year for more.