The evolving landscape of active equity sustainable investing

15-Dec-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.

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 from BlackRock are as of November 2020 and may change as subsequent conditions vary.

The UK Local Government Pension Scheme (LGPS) has been at the forefront of investing in accordance with Environmental, Social and Governance (ESG) considerations. The catalysts for this have stemmed from a variety of sources. Issues such as climate change and human rights have entered the public conscious in recent years whilst these challenges have become policy issues for central and local government. The LGPS sits at the heart of communities by providing retirement provision for local employers and members and remains a public pension scheme. 

We manage relationships with 55 LGPS (Source: BlackRock, December 2020) and have witnessed the evolution of this trend which has moved from being a peripheral concern to being at the centre of investment decision making, but to date investment into these fields has tended to focus on index and private market strategies. For example, in 2018 we launched a Low Carbon Indexation Strategy which seeks to minimise carbon emissions and has attracted significant interest from the LGPS. Similarly, the LGPS have been attracted to our Global Renewable Power Fund III which invests in wind and solar assets.  As an open defined benefit pension scheme, active equity still comprises the majority of LPGS assets, yet, when we engage with our clients however there is view that the opportunities in sustainable active equities have not evolved. 

In late November 2020 we held a roundtable with 13 representatives from the LGPS and Investment Consultants to explore this topic. We discussed the spectrum of sustainable investing and the growth of the opportunity set. Early movers in the active equity space typically invested in strategies which screened out companies or sectors associated with objectionable activities such as controversial weapons or thermal coal.  We view these as baseline screens and they now tend to address the majority of investors’ concerns. But we also discussed the broader range of options investors now have at their disposal. These encompass ESG strategies which can improve the ESG profile of a portfolio vs. the benchmark or may pursue a specific E, S or G concern or United Sustainable Development Goal such as Transition Readiness or social inequality. But opportunities also include Impact Investing which contributes to measurable positive environmental, social or Sustainable Development Goals (SDG) outcomes, alongside financial returns.

ESG Screening 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.

Ease of access and choice for sustainable portfolios

Ease of access and choice for sustainable portfolios

Risk: There is no guarantee that a positive investment outcome will be achieved.

Source: BlackRock Sustainable Investing, June 2020. The above information is for illustrative purposes only and should not be interpreted as investment advice or recommendation. 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 roundtable there was agreement that the LPGS is well positioned to take advantage of this opportunity set, the discussion then moved to assessing strategies and how to implement within existing scheme allocations.  We are now talking with our clients about how to address these considerations with interest in approaches across the sustainable spectrum. To hear more click here.

Gavin Lewis
Managing Director
Gavin Lewis is Managing Director at BlackRock. He is responsible for the strategic direction and growth of the UK Local Government Pension Scheme segment.
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