Sustainable investing: a “why not” moment

We have moved from a “why?” to a “why not?” moment in sustainable investing. Drawing on the insights of BlackRock’s investment professionals, we show why 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.

Strong ESG performers tend to exhibit operational excellence — and are more resilient to perils ranging from ethical lapses to climate risks. ESG data are still incomplete, largely self-reported and not always comparable — and we advocate for greater consistency and transparency. Yet breadth and quality have improved enough to make ESG analysis an integral part of the investment process.

Sustainable investing summary

  • We find ESG can be implemented across most asset classes without giving up risk-adjusted returns. ESG and existing quality metrics such as strong balance sheets have a lot in common. This implies ESG-friendly portfolios could underperform in “risk-on” periods — but be more resilient in downturns.
  • New benchmarks and products are making ESG investing more accessible across asset classes and regions. Data are improving, but still patchy: This means it is key to go beyond headline ESG scores for insights. Understanding how and why individual score components can affect returns across countries, industries and companies is key. 
  • Early evidence suggests that focusing on ESG may pay the greatest dividends in emerging markets (EMs). Shareholder protections, natural resources management and labor relations can be critical performance differentiators. A new suite of ESG-friendly EM debt indexes could help steer more capital into ESG leaders over time. 
  • BlackRock is engaging with companies on sustainability issues, not to impose our own values, but to advocate for ESG excellence on behalf of clients. We also advocate for more consistent, frequent and standardized reporting of ESG-related metrics with data providers, companies and regulators.

Do equity investors need to choose between returns and ESG? Our answer: No. We looked at traditional equity indexes alongside ESG-focused versions. Highlights are outlined in the No sacrifice required? table. Annualized returns since 2012 matched or exceeded the standard index in both developed and emerging markets, with comparable volatility. EMs were the standout.

Chart: Comparison of traditional and ESG-focused equity benchmarks by region, 2012-2018

New ESG indexes in EM debt — a collaboration between J.P. Morgan and BlackRock — could prompt greater capital allocation to more ESG-friendly issuers over time, we believe. The Sustainable sovereigns chart shows country weights in the new JESG EMBI Global Index versus its standard counterpart. Gaps in ESG performance across countries lead to meaningful shifts in index weights — and perhaps investment flows. Example: A large drop in China’s country weight could lead to selling of its bonds as investors adopt the new index.

Chart: Country weights: ESG vs. standard EMD benchmark, 2018

Subsets of ESG metrics can point to revealing trends. Take self-reported carbon emissions. We find global companies that have reduced their carbon footprints (annual carbon emissions divided by sales) the most every year have outperformed the carbon laggards. See the orange line in the Carbon efficiency chart. Why? Companies that find ways to make more with less tend to be more efficient.

Chart: Equity performance by carbon intensity, 2012-2018