Helping our clients invest sustainably

How we are helping our clients achieve their sustainability objectives

May 2020

In recent months, the world has experienced perhaps the most severe crisis of our lifetimes. The pandemic has wrought extraordinary financial, economic, and human turmoil, and it has highlighted the importance of resilience amid uncertainty. During the past few months, we have seen that regardless of industry, strong sustainability characteristics have been essential to helping companies weather the crisis, and investors have increasingly sought out sustainable investment strategies. We continue to partner with our clients to achieve their sustainability objectives.

In January 2020, we outlined a series of initiatives to make sustainability integral to the way that BlackRock manages risk, constructs portfolios, designs products, and engages with companies on behalf of our clients. At the centre of these commitments is our investment view that sustainability-integrated portfolios can provide clients better long-term risk-adjusted returns. This view is grounded in two core convictions drawn from BlackRock research and investment insight: first, companies that better manage sustainability-related issues will be more resilient over the long-term; and second, we are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period.

Although the market disruption experienced in the first quarter of 2020 is a short timeframe, and therefore not determinative, it is consistent with the resilience of sustainable strategies that has been observed in past downturns, as detailed in new research, Sustainable investing: Resilience amid uncertainty, from BlackRock Sustainable Investing. During the recent downturn, we have observed two important trends during the crisis:

• Sustainable investment strategies globally proved resilient amid the market volatility of Q1 2020. Our own and third-party research demonstrated that sustainable indexes tended to outperform their parent benchmarks during Q1  (Morningstar reported 51 out of 57 of their sustainable indices outperformed their broad market counterparts, for example.¹) Importantly, while some of the funds corresponding to these indexes have benefited from structural underweights to energy and utilities, we find that the greater resilience of sustainable strategies as compared to conventional index funds during this period was not principally the result of less exposure to energy.² The environmental, social, and governance (ESG) scores of companies within sectors shows that ESG scores were material in differentiating between leaders and laggards across global markets – including the energy sector and energy sub-sectors such as oil and gas – during this period of severe volatility.³

• Investor interest in sustainable investing strategies accelerated during this period of crisis.  In February, BlackRock published research outlining our view that there would be a persistent and long-lasting shift toward sustainable assets that is not yet fully reflected in market prices.  While some market commentators have speculated that the current crisis would slow this trend, during the first quarter of 2020, we actually saw an acceleration of this shift across the industry. Global sustainable mutual fund and ETF flows across the industry totalled US$40.5b in the first quarter of this year, with the U.S. seeing record inflows in sustainable strategies of US$7.4b.³ This is a trend that we expect to see through the current pandemic, the recovery, and long after.

In the near term, we anticipate that some companies will need to reallocate resources from sustainability initiatives and reporting to address immediate priorities created by the pandemic and related economic fallout.  Over time, however, we expect that, particularly among market leaders, companies will continue to enhance their focus on material sustainability management and reporting – and that this will be a key driver of long-term returns.  

During the past few months, BlackRock has been intensely focused on supporting our people and communities during the pandemic and helping our clients navigate the related market turmoil. During this time, interest in sustainable investing strategies among BlackRock clients has continued to grow, and BlackRock has seen US$15.5 billion in flows into sustainable strategies in the first quarter – our largest quarter on record for sustainable flows.  With continued client interest in sustainability and sustainability’s growing importance as a factor in delivering investment returns, we have continued to advance the initiatives that we detailed for clients in January to make sustainability our standard for investing.

Below is a summary of our progress in each of those areas since January

1) Building sustainable, resilient and transparent portfolios

We have been working to integrate sustainability into all aspects of portfolio construction.

Sustainability in our portfolio solutions – In January, we said we intend to make sustainable funds the standard building blocks in the investment solutions we offer our clients wherever possible, consistent with client preferences and applicable regulations. Since January, client interest has been even higher than anticipated, and we have made significant progress in the past three months.

• Flagship models: Today, we have ESG model ranges available as key components of our lineup both in the U.S. and Europe, and we are actively building new ranges in Australia and Asia that we expect to be launched by the end of 2020.
  
  We have also integrated ESG offerings into our flagship Target Allocation and Managed Index Portfolios in the U.S. and Europe, respectively. 

• Asset allocation solutions: We are pursuing asset allocation solutions to provide investors with a diversified, multi-asset sustainable portfolio in a single product.

• Retirement solutions: We’re taking the necessary steps and expect to launch a series of sustainable target date strategies in the U.S.  These will be the industry’s first-ever set of index-based target-date products that seek to provide investors with an all-in-one, sustainable retirement solution – and consistent with our January commitment to develop a sustainable target date strategy.

• Cash management: In 2019, BlackRock created the industry’s first environmental sustainability-focused cash management strategy. Since then, we have continued to expand our ESG cash management offerings, converting an existing registered money market fund for US individual investors into the LEAF strategy and adding an investment option for Canadian institutional investors. Since its launch, assets across our full sustainable cash management product suite now total over US$12 billion.⁴

Strengthening sustainability integration into the active investment processes – In January, we detailed several steps to strengthen the integration of sustainability into our active investment processes.

We committed that by the end of 2020, all active portfolios and advisory strategies would be fully ESG integrated in consultation with our clients – meaning that, at the portfolio level, our portfolio managers have accountability for appropriately managing exposure to ESG risks and documenting how those considerations are used in investment decisions.  As of April 30, already more than 70% of the approximate 5,600 active portfolios managed by BlackRock have met both criteria. All of our active portfolios will be fully ESG integrated by the end of Q4 2020. 

Monitoring ESG risk in active strategies – In January, BlackRock’s Risk and Quantitative Analysis Group (RQA) – which is responsible for evaluating all investment, counterparty, and operational risk at the firm – began evaluating ESG risk during its regular reviews with portfolio managers. This process will ensure that BlackRock’s core investment risk review procedures consider ESG risk alongside how we monitor traditional risk measures such as credit and liquidity risk.

Today, each of our active investment strategies has an ESG integration framework used to govern how and when in the investment process material sustainability-related issues are considered.  These integration frameworks serve as a benchmark for portfolio risk reviews and will be used alongside Sustainability Risk Exposure Dashboards, standardised dashboards, which analyse exposure to ESG risk and scores of portfolio holdings, in regular portfolio reviews between active portfolio managers and RQA. 

In addition to the regular portfolio reviews with RQA, portfolio managers across our active investment products, together with those groups’ Chief Investment Officers and RQA counterparties, conduct quarterly portfolio reviews to oversee performance and risk outcomes across active strategies. In Q1, these sessions began to include evaluation and documentation of ESG risk exposure and performance, as well as discussion of ESG considerations material to a fund’s investment objective. We anticipate that by Q2 this formal process will be in place across 100% of actively managed strategies.

In heightening our scrutiny of ESG issues, we are continuously evaluating the risk-return profile and negative externalities posed by specific highest risk sectors and holdings as we seek to minimise risk and maximise long-term return for our clients. As a result of this scrutiny, we have no exposure today in the actively managed public debt or equity portfolios where we have investment discretion to certain sectors with heightened ESG risk, such as controversial weapons systems manufacturers or companies that generate more than 25% of their revenues from thermal coal production.

Strengthening our ESG data and analytics – BlackRock has been a leader in developing proprietary measurement tools to deepen our understanding of material sustainability risks.

• Earlier in May we announced a strategic partnership with Rhodium Group, a leading independent climate research firm, to combine their data and our risk modelling to develop physical climate risk analytics for multiple asset classes globally.
• Our existing Carbon Beta tool, developed last year to stress test issuers and portfolios for carbon pricing scenarios, was used by 28 distinct clients in Q1 2020, more than any other quarter before.

In ESG analytics, we are expanding the depth and breadth of ESG data in Aladdin, delivering exponentially more data points.

• We are developing an ESG intelligence platform for the Aladdin Community to simply integrate ESG and understand related financial impacts.
• In April, we announced a partnership with Microsoft to catalyse innovation in data and technology that fosters sustainable corporate behaviours.

Enhancing transparency of sustainable characteristics of investment products – To help investors clearly see the sustainability risks of their investments, we began last year displaying an ESG score and the carbon footprint, among other metrics, for the majority of iShares funds we offer globally. Subsequently, we have begun displaying sustainability characteristics not just for index funds, but for every retail fund, both index and active, that BlackRock offers across Europe, where available. By the end of 2020 we expect all BlackRock retail funds globally, both index and active, will feature these sustainable characteristics. We believe that this raises the bar for transparency across the industry.

2) Increasing access to sustainable investing

Doubling our offerings of ESG ETFs – We committed in January to doubling (to 150) our offerings of ESG ETFs globally over the next few years so that clients have more choices to build their portfolios.

Since January, we have launched 16 new ESG ETFs across Europe, the U.S. and Canada. We are also taking the necessary steps and expect to launch an additional 11 ESG ETFs in the months ahead in Europe, the U.S. and Latin America. Together these 27 new funds will increase our sustainable offerings to 105 ETFs. More importantly, these new offerings taken together continue to innovate and expand the breadth of ESG products to meet investor needs across a wide range of asset classes (such as fixed income), investment styles (such as minimum volatility) and markets (including new emerging markets like Mexico).

Working with index providers to expand and improve the universe of sustainable indices – We committed in January to engage with major index providers to deliver sustainable versions of their flagship indexes to expand sustainable options for investors. We have delivered on this commitment to engage and expect to launch new sustainable funds based on flagship indexes later this year.  We also recently announced an agreement with an equity index provider, which will help us to continue to grow our sustainable platform.

Expanding company adoption of sustainable active investment strategies – Our global platform now has over 60 active sustainable products, spanning equity, fixed income and alternatives. New additions have included:

• We’ve launched a new sustainable money market mutual fund in the U.S. and we are taking the necessary steps and expect to launch five additional non-money market funds in the U.S. later this year.  Our solutions include a new Global Equity Impact Fund in Europe that is aligned to the World Bank’s IFC Operating Principles for Impact Management, and we plan to have additional Impact solutions available in the U.S. in the coming months.
• In managing assets for our clients, BlackRock has assisted pension funds as well as other asset owners, such as endowments, transition into sustainable strategies. One such example of this is funding from the University of Illinois System into a new strategy that leverages BlackRock's proprietary sustainable investing framework.
• BlackRock also launched in April the first global unconstrained ESG total return bond fund with our UCITS Luxembourg flagship global fund range. The fund already has more than US$500 million in assets under management (AUM) and is the sister fund to BlackRock’s flagship global unconstrained UCITS fund with US$9.4 billion of AUM.⁵

3) Enhancing engagement, voting, and transparency in stewardship

Investment stewardship is an essential component of our fiduciary responsibility. As we noted in January, we have been engaging for years with companies on sustainability issues as reflected in our annual engagement priorities and stewardship reports. Given the growing materiality of sustainability factors, our investment stewardship team this year has intensified focus and engagement with companies on sustainability-related risks and even more so in light of recent societal and market events.

We believe these are clearly long-term drivers of value and risk. What we have learned in our engagements is that, as management teams and boards of directors grapple with the existential threats to their businesses stemming from the COVID-19 pandemic, they are also cognisant of the fact that their actions today will have a direct impact on their social license to operate in the future. We have heard from companies first-hand how they are seeking to balance the interests of all stakeholders: shareholders, employees, clients, vendors, and their communities.

Engagement priorities and voting guidelines – Consistent with the commitments we outlined in January, we updated our voting guidelines in nine markets to align with our January letter to clients. In addition, when we published our 2020 engagement priorities, we mapped them for the first time to the UN Sustainable Development Goals, such as Gender Equality and Affordable and Clean Energy. For each priority, we also added specific Key Performance Indicators for how we expect to hold boards accountable. We also published new engagement commentaries, detailing how we were engaging with companies on the following key sustainability issues:

• Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB)-aligned reporting
• Climate risk
• Agribusiness companies on sustainable business practices
• Emissions, and Transition to a Low-Carbon Economy

Promoting SASB and TCFD-aligned Reporting – BlackRock was not only a founding member of TCFD, but we have spent the past several years encouraging companies to increase disclosure aligned to TCFD and SASB.  This was a key part of Larry Fink’s letter to CEOs this year. We are pleased that there has been a 180% increase in SASB reporters over 2018 levels, and SASB has reported a significant increase in the number of companies downloading their standards. As of February 2020, more than 1,000 companies, with a total market cap of US$12tn, had endorsed TCFD recommendations including more than 473 financial firms representing US$138.8tn of managed capital. This is an important area of engagement for our investment stewardship team this year, and we are gratified to see companies (such as Netflix and Sanderson Farms⁶) who, after engagement with many of their shareholders, have committed since January to integrate SASB reporting into their disclosures this year.

Enhanced Transparency – Given the growing interest of clients and broader society in our stewardship efforts, we committed in January to set a new standard for the industry in transparency. Since then we’ve taken actions to deliver on these commitments, including publishing:

• Global quarterly stewardship report:  provides case studies on individual engagements and data on the number of companies engaged with globally across a range of E, S and G topics, including COVID-19 related issues.
• Global quarterly engagement activity: a new summary with topic-level detail that includes a list of every company (688) with which we engaged in the quarter, as well as the topics of engagement.
• Quarterly vote disclosures: moved from annual to quarterly voting disclosure in which we provide a rationale for key votes.
• Vote bulletins: detailing our votes and rationale for voting on complex or high-profile votes. As this year’s proxy season has gotten underway, this has already included bulletins on votes for 17⁷ companies.
• Enhanced client reporting: Implemented a new capability through Aladdin to deliver portfolio-specific company engagement reports for our clients.

BlackRock’s role as a fiduciary is the foundation of our business model and culture.  As a fiduciary, we invest on our clients’ behalf, not our own, and manage their money consistent with their preferences.  As a fiduciary, we also have an obligation to share our conviction that all investors – and especially those saving for long-term goals like retirement – should consider sustainability in their investments.

The extraordinary events of 2020 have only reinforced that conviction.

While the current environment has created unprecedented challenges for corporations, we firmly believe that over time a dedicated focus on managing ESG-specific risks will be essential to delivering sustainable long-term returns for long-term investors.

¹ https://www.morningstar.com/insights/2020/04/06/how-did-esg-indexes-fare?utm_source=eloqua&utm_medium=email&utm_campaign=&utm_content=0  
² https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds
³ The data for this analysis are captured from a number of sources by BlackRock, including provider websites, fund prospectuses, provider press releases, provider surveys, Bloomberg, the National Stock Exchange, Strategic Insight Simfund, and Wind. All amounts are reported in US dollars. Flows are derived using daily net asset values and shares outstanding using the most recent data we can capture at month-end. For products with cross-listings, we attribute net flows and assets to the primary listings. Data is as of March 31, 2020.
⁴ As of May 11, 2020
⁵ As of May 11, 2020
⁶ Company references are for illustrative purposes only.  They are not recommendations to buy or sell any security.
⁷ As of May 13, 2020