Sustainable Investing: enduring through COVID-19 and beyond

Thomas Fekete |28-Apr-2020

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.

 


Investor demand for sustainable investing is growing. From identifying and implementing clean sources of energy to emission friendly transportation and medical needs, vast swathes of industry are adapting to meet growing consumer demand from both individual and professional investors.

Indeed, as an investment practice, the past twelve months has seen an unprecedented and exponential growth in global demand for Sustainable Investment solutions. ‘Climate change has become a defining factor in companies’ long-term prospects’ wrote BlackRock CEO Larry Fink in his annual letter at the start of 2020. [1] Evidence is building that the addition of Sustainable investment is one of necessity with the style acting as a powerful risk management framework to portfolios, a notion increasingly supported and reinforced by regulators. Nowhere is this more pertinent than for UK pensions schemes where Regulation, member pressure and investment options are driving the shift to Sustainable Investing. [2] The universe of dedicated sustainable investment funds continues to swell. Last year saw a combined total of $20.6 billion in European and U.S. mutual funds and exchange-traded funds (ETFs), up from $5.5 billion in 2018. [3] In the first quarter of 2020 alone, $14.0 billion of assets have allocated to Sustainable funds, already surpassing well over half of last year’s total.[4] The increasing breadth of product offerings in both open-ended funds and ETFs has been crucial in allowing investors affordable access, where previous integration of ESG had historically been associated with higher costs.[5]

Investors rightly deem resilience to be a critical component to their late cycle portfolio construction, a premise now accelerated more than ever as we enter a period of unprecedented global economic uncertainty. The COVID-19 pandemic, itself a medical, social and monetary goliath, is playing out in damaging tandem with a global reduction in oil pricing, which saw world-wide asset value reduction dramatically in Q1. But in this regard, we believe reducing exposure to companies who cannot adapt their business models to a low carbon environment has helped protect ESG performance in the short term. The average ESG fund has fallen 12% year to date, but this is just half the decrease in the S&P500 Index over the same period.[6] Whilst ESG funds have indeed suffered, they are faring better than their conventional fund competitors and are overrepresented in the top quartiles of their peer groups, in terms of their performance.[7] This period marks the first and sternest downturn the sustainable market has faced and thus far, it has largely passed.

Our view is that strong performance on key sustainability metrics is often viewed as a proxy for operational excellence. Companies with high ESG scores tend to have a lower cost of capital, higher profitability and lower exposure to tail risks.[8] We believe the breadth and quality of ESG data have improved enough to make ESG analysis an integral part of the investment process. Capturing, analysing and actioning this level of demand requires significant investment in people, infrastructure and data. At BlackRock, the Sustainable Investing team (BSI) is focused on identifying drivers of long-term return associated with environmental, social and governance issues, integrating them throughout Blackrock's investment processes, and creating solutions for our clients to achieve sustainable investment returns.

We continue to build and embed sustainability into our investment process to meet the needs of our clients, enabling them to navigate periods of uncertainty and protecting their financial future. Whilst the current economic uncertainty looks set to continue in the near term, we believe sustainability will endure to form an integral tenant of our long-term investment approach.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of April 2020 and may change as subsequent conditions vary.

[1] A fundamental Reshaping of Finance Larry Fink Letter CEO, BlackRock, Jan 2020

[2] The Role of ESG in UK Pension Schemes, BlackRock, July 2019

[3] Money moving into environmental funds shatters previous record, CNBC, January 2020

[4] ESG packed on the Assets in Q1, ETF Trends, April 2020

[5] BlackRock Investment Institute Sustainable Investing, BlackRock, May 2018

[6] Older ESG Funds Outperform Their Newer Rivals in Market Tumult, Bloomberg, March 2020

[7] Sustainable Equity Funds Are Outperforming in Bear Market, Morningstar, March 2020 

[8] The Journal of Portfolio Management, MSCI, July 2019