INVESTORS’ TOP 5 SUSTAINABLE CHALLENGES

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

We are in the midst of a tectonic shift towards sustainable investing and this fundamental reallocation of capital towards sustainable assets is gaining momentum. In 2020, global sustainable assets under management were at USD 3.5T, in 2021 assets grew by almost USD 1T to USD 4.3T.¹

We recognise there are complexities with sustainable investing and know there is no one-size-fits-all approach. After conducting over 100 client interviews,² we identified 5 challenges and investor needs.

• PORTFOLIO CONSTRUCTION: Building a sustainable portfolio tailored to specific requirements can be time-consuming and without significant data and analytics, the relation to investment returns can be unclear. Investors need a partner to aid in this transition.
• ESG DATA: ESG data, metrics and calculations vary per provider and how this data is interpretated in the context of an investment decision can differ. Investors need to quantify the measurable sustainable characteristics of their investments.
• PRODUCT SELECTION: 48 sustainable ETFs were launched industry wide in Europe alone in 2021 with myriad methodologies.³ Investors want an easier way of navigating sustainable product ranges.
• INCORPORATING CLIMATE: Climate considerations continue to be a focus. Investors want help incorporating climate considerations into their sustainable portfolios.
• COMPANY ENGAGEMENT: When investing sustainably investors want a fund provider with strong stewardship capabilities to have long-term engagement with companies.

Whether you are looking to evaluate, evolve or start building a sustainable portfolio, when you invest with iShares, BlackRock can help. From providing investment strategy and consultations on portfolio construction to offering model portfolio solutions, trading strategies and transition management.

Throughout spring 2022, BlackRock’s Portfolio Consulting team partnered with ~170 wealth and institutional investors in EMEA for an annual review of their portfolio construction and asset allocation practices relating to sustainability.⁴ Over the last 12 months, our team has partnered with clients to restructure over 1,000 portfolios; sustainability was a key factor in ~ 80% of portfolio changes.⁵

• EVALUATE your portfolio’s holistic sustainability profile using ESG data to show your ESG Quality Score, Carbon Emissions Intensity, Low Carbon Transition metrics and exposure to Business Involvement areas. Get a panoramic view of your portfolio’s risk drivers and sustainable characteristics backed by BlackRock’s risk and portfolio management platform Aladdin®;
• EVOLVE your portfolio’s ESG metrics with product substitutions, using alpha-seeking, factor and index sustainable funds. Compare the resulting sustainable portfolio with your original allocations in terms of sustainability metrics, risk drivers, historical performance and costs. Based on your specific risk, return and sustainability requirements, you can transform your existing strategic asset allocation to improve its sustainable features; and
• BUILD a sustainable proposition, based on your sustainability objectives. Design your strategic asset allocation with the help of BlackRock’s climate-aware capital market assumptions and various portfolio implementation options across alpha-seeking, factor and index strategies. Replicate a non-sustainable benchmark or fund with sustainable building blocks.

Our BlackRock Multi-Asset Portfolio ESG ETFs seek to invest at least 80% of their assets in ETFs tracking indices that meet certain ESG criteria. We have products across Conservative, Moderate and Growth risk profiles, all built with iShares ETF building blocks. These funds are diversified, risk-managed and cost-effective and use BlackRock’s climate-aware capital market assumptions to help inform the portfolio construction process.

The funds can hold ETFs from iShares’ ESG Screened, ESG Enhanced and SRI product ranges. Under the hood, these products are managed by our Model Portfolio Solutions team who can leverage BlackRock’s scale and expertise to make asset allocation decisions based on considered assumptions of risk and return. Our portfolio managers are also consistently tracking the availability of new approaches to sustainable and building blocks, including impact, thematic and Paris-Aligned Benchmark (PAB) indices.

Risk: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Risk: The Fund may invest in a variety of investment strategies and instruments while aiming to be highly diversified in terms of risk and returns. The Fund is therefore directly and indirectly, through its investments, subject to the risks each of these investment strategies and instruments are subject to.

BlackRock’s Model Portfolio Solutions team also offer model portfolios and also tailored solutions – find out more here.

When you have determined the sustainable approach that works for you, BlackRock’s Transition Management team (TRIM)  can help manage the implementation of your transition to a sustainable portfolio.

All these options can incorporate iShares ETFs, building blocks that bring transparency, liquidity and lower costs with instant access to sustainable investing.

Aladdin®, our risk and portfolio management system, now integrates over 8,500 ESG metrics from a range of third-party data providers and has established data partnerships with Sustainalytics, Refinitiv and Rhodium to understand ESG and physical climate risks.⁶ This data feeds into both our risk management platform and our full investment process - from research, to portfolio construction, modelling and risk management and reporting. Our Risk and Quantitative Analysis team can use Aladdin® ESG data to monitor indexed funds relative to their benchmarks from an ESG perspective.

Risk: While proprietary technology platforms may help manage risk, risk cannot be eliminated.

We are committed to providing transparency, so you can find aggregated ESG data for each fund in our iShares sustainable ETF range on iShares.com and compare our ETFs on this basis.

BlackRock’s portfolio management team use ESG data in Aladdin® to assess holdings in our sustainable products at the issuer level, monitoring how this has changed and anticipating future evolutions to the indices we track. Aladdin® also allows us to interpret this ESG data and the historical contribution to the performance of iShares ETFs alongside traditional risk/return drivers. We can show historically how an iShares sustainable fund performs against both investment and sustainable goals.

Across BlackRock, we are dedicated to analysing and interpreting ESG data. We work with data providers to improve these metrics, offering you transparency to access and understand this data, while driving a push for standardisation across the industry. This brings consistency and transparency to all investors.

Risk: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

We know investors need clarity when choosing a sustainable product, so we want to help. Investors can use BlackRock’s Sustainable Investing Platform to determine which iShares ETF and index products best aligns with their investment and sustainable goals. This framework classifies iShares ETFs and index products according to four sustainable approaches.

Want help navigating to a sustainable option?

The iShares product screener maps our ETFs to sustainable options. The product screener  incorporates sustainable characteristics including ESG data metrics and SFDR classifications, so you can filter our range to align to your needs.

iShares gives you choice, we have more sustainable ETFs registered on more European stock exchanges than any other provider. We offer the ability to scale a consistent approach across the whole portfolio with sustainable indexing alternatives in equities and fixed income across all sectors of the market from screened exposures to impact investing. These include 48 Article 8 and 4 Article 9 products.⁸

Investors want quality products, built to evolve with new regulation and the fast-changing sustainable investing landscape. iShares sustainable ETFs are built with the same expertise, rigour and high standards as all our iShares products.

What’s under the hood matters. iShares sustainable ETFs are managed by global teams of over 60 equity and over 70 fixed income BlackRock portfolio managers.⁹ At BlackRock, sustainability has been incorporated into our investment process and our portfolio managers use the power of Aladdin®, BlackRock’s global risk management platform, to analyse funds across many investment risk factors and sustainable considerations.

At iShares, we consistently engage and advocate globally with leading index providers on behalf of our clients. We do this to develop new innovative indices and enhance existing exposures as part of our firmwide commitment. Our sustainable investing approach is dynamic, and we continue to innovate to reflect evolution in sustainable indexing, changing regulations and feedback and insights from our clients.

Looking ahead is imperative. As sustainable investing goes mainstream, iShares is also investing in the sustainable ETF ecosystem We are working with stock exchanges and market makers to develop sustainable ETF options, sustainable indexed futures and the sustainable ETF lending market.

In 2020 alone, natural disasters led to an estimated USD 120B in damages, the highest ever recorded.¹⁰ Reshaping the global economy to meet the climate threat will have major financial ramifications. With 153 countries putting forth new 2030 emissions targets at COP26 and the global pipeline of new coal plants falling by 76% since 2016, we believe this trend is here to stay.¹¹ At BlackRock, we believe that climate risk is investment risk and so iShares is innovating in climate investing. In 2021 we committed to offering our clients a full set of climate-oriented investment options, including ETFs.

For investors who have made a net zero commitment, looking to transition to a low-carbon economy or align their portfolios to the EU’s Paris Aligned Benchmark (PAB) regulation, iShares launched a range of Paris-Aligned Climate ETFs in 2021.

These ETFs offer building blocks to track exposures. PAB indices designed to reduce exposure to transition and physical climate risks and manage climate change opportunities, as well as help investors seeking to align with a decarbonisation trajectory that’s compatible with the Paris Agreement. iShares offers these ETF building blocks across equity and fixed income.

BlackRock ’s Portfolio Consulting team can help you evolve, evaluate and build a climate portfolio to meet your sustainable goals.

BlackRock has one of the largest and most geographically diverse global investment stewardship teams in the industry.¹² We operate across 9 offices globally and engage locally with companies, enabling more frequent and better-informed dialogue, often in local language. BlackRock was founded on the core premise of understanding investment risk and thinking into the future for our clients. We believe climate risk is investment risk and we have built our team to support engagement with companies, big and small and at all stages of their sustainable investing journey, to help ensure the financial resilience of our clients’ long-term investments.

Index investing can drive long term value for investors, with index funds typically remaining invested in a stock for as long as it remains in an underlying index – often many years. With 90% of the listed equities BlackRock manages on behalf of clients in index funds, BlackRock’s Investment Stewardship team is particularly important for our client’s index holdings, in which we are essentially permanent shareholders. We cover almost every corner of the investment universe in our indexing range across the globe.¹³

Risk: The benchmark index only excludes companies engaging in certain activities inconsistent with ESG criteria if such activities exceed the thresholds determined by the index provider. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.

During the 2021-2022 proxy year, BlackRock’s engagements with investee companies hit a new record. We held more than 3,690 unique engagements with over 2,460 companies across 71 country markets. We held over 2,058 engagements on climate, voted against 234 companies on climate risk related concerns, and supported 6% of the environmental shareholder proposals voted.¹⁴

Our Investment Stewardship toolkit

• Engaging with companies: how we build our understanding of a company’s approach to governance and sustainable business models, and how we communicate our views and ensure companies understand our expectations.
• Voting in our clients’ interest: how we signal our support for or raise our concerns over a company’s corporate governance or business operations. Where we have concerns, we may vote against directors or other management proposals, or in support of a shareholder proposal. We employ votes against directors more frequently since that is a globally available signal of concern.
• Transparency in our activities: how stakeholders are informed on our work to advance the long-term economic interests of our clients. We continue to raise the bar on our transparency with the publication of comprehensive reports, our voting record, and through our regularly updated vote bulletin library.

Find out more about BlackRock’s Stewardship team and how the team voted at various shareholder meetings.