For qualified investors

Sustainable investing gains traction

By Richard Turnill

Key points

  1. Our take on sustainable investing: It’s gaining popularity, does not require sacrificing risk-adjusted returns, and can increase portfolio resilience.
  2. The Federal Reserve and European Central Bank (ECB) each took another step toward normalising their monetary policies.
  3. Major oil-producing countries may agree to ease up somewhat on output cuts, adding some supply back into the crude market.

Sustainable investing gains traction

A long-term strategy can help a portfolio weather inevitable market ups and downs. Sustainable investing — integrating environmental, social and governance (ESG) insights into portfolios — is one such strategy, and can now be implemented across most asset classes without giving up risk-adjusted returns over time, we believe.

Chart of the week

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.

Interest in ESG is growing. The average S&P 500 firm cites ESG-related terms in earnings calls nearly twice as often as a decade ago, our text analysis of transcripts shows. See the chart above. Meanwhile, regulation and investors’ desire to do good, mitigate risk or access niche market opportunities is stoking interest just as new benchmarks and products are making ESG investing more accessible across asset classes and regions. Total assets in ESG-dedicated mutual funds and exchange-traded funds in Europe and the US grew nearly 50% from 2013 to 2017, according to Cerulli Associates. We find flows have picked up further in 2018. As more investors factor ESG considerations into their investment decision-making, there is good reason to believe the relationship between ESG and asset performance could further strengthen. We’ve found early evidence that a strong ESG focus may be linked to equity outperformance over time. See Sustainable investing: a “why not” moment.

No sacrifice required

We believe strong performance on ESG metrics can be a proxy for operational excellence: Companies and issuers that score highly tend to be more efficient in their resource usage — and more resilient to perils ranging from ethical lapses to climate risks. The quality bias in these entities suggests a focus on ESG may offer some cushion during market downturns. We looked at traditional equity benchmark indexes alongside MSCI’s ESG-focused derivatives. Annualised total returns of the ESG indexes since 2012 matched or slightly exceeded the standard index in both developed and emerging markets (EM), with comparable volatility, our study found. Early evidence also suggests that an ESG focus may offer the greatest rewards in EM, where issues such as shareholder protections, natural resources management and labour relations can be important performance differentiators.

In fixed income, credit investors typically need to sacrifice some yield to make their portfolios ESG-focused, since companies that score lowest on ESG metrics tend to carry the highest yields. Yet this tradeoff may be an illusion. Bonds with lower yields but higher ESG ratings have typically generated stronger risk-adjusted returns in the past decade, our analysis of the global high yield market found. We see ESG-friendly portfolios keeping pace with traditional portfolios over a full market cycle — even if they sacrifice a little yield during the most risk-on periods. A new suite of ESG-friendly EM debt indexes — jointly launched by JPMorgan and BlackRock — could help steer more capital into ESG leaders over time — and incentivize laggards to lift their game.

There are challenges. ESG data are still patchy, and are not equally relevant. To seek alpha via ESG strategies, investors need to go beyond headline ESG scores to understand how and why individual score components — such as climate risks, labour issues and shareholder rights — can affect returns. This can differ across regions, industries and companies. Bottom line: We believe it is feasible to create sustainable portfolios that do not compromise return goals — and may even enhance risk-adjusted returns in the long run.


  • The ECB said it would end its bond purchase program by year-end. Its indication that any rate increase won’t happen before the second half of 2019 sent European government bond yields lower and the euro on its biggest daily fall against the US dollar in two years. The Fed raised rates as expected and expressed confidence in the US economy.
  • China’s economic data disappointed. Surprisingly weak credit data highlighted Beijing’s deleveraging campaign, but also raised concerns of its impact on growth. The US announced tariffs on $50 billion worth of Chinese imports; China vowed to respond in kind.
  • US President Donald Trump and North Korean leader Kim Jong Un met in Singapore. The agreement they signed signaled intent to make progress on denuclearisation but lacked details. Market reaction was muted as a result.



  Date: Event
June 18-20 Annual meeting of key central bankers in Sintra, Portugal
June 20 Bank of Japan monetary policy meeting minutes
June 21 Eurozone Consumer Confidence Index; Bank of England monetary policy announcement
June 22 Organization of the Petroleum Exporting Countries (OPEC) meeting; Japan, US, eurozone Purchasing Managers’ Indexes (PMIs)

Some of the world’s major oil exporters may agree to add some supply back into the market at this week’s OPEC meeting. But they are expected to stop short of entirely lifting current production restrictions, which have helped reduce global oil inventories, sending crude oil prices to their highest in three years. Central bankers from the US, eurozone and Japan could provide some context to recent monetary policy decisions at their annual meeting in Sintra, Portugal this week.

Richard Turnill
Managing Director, is Global Chief Investment Strategist for BlackRock
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active ...

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