Incorporating sustainable frameworks into the investment process

  • BlackRock

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 month marks my 15th year working in the asset management industry and my fifth year covering UK Asset Managers at BlackRock. This year, more than any other in recent memory, promises to be one of transformation.

For some, change can be debilitating, but frankly I find it exciting to work in an industry that’s in the midst of reinventing itself. Some of the key trends which stand out to me, include: greater client focus on Alternatives, Emerging Markets, and the acceleration of technology when delivering solutions.

However, the theme that stands on the shoulders of all of those, is a genuine shift towards sustainable investing.

Across the EMEA ETF landscape we have seen the percentage of yearly flows that have been allocated to sustainability focused ETPs leap from 15% in 2019 to nearly 45% YTD with little sign of slowing.1

Clients are trying to incorporate sustainable frameworks into their investment process. They are looking for both top-down and bottom-up approaches to help meet varying sustainable objectives whether it be transitioning investments to those which align with the objectives of the Paris Agreement or selecting funds which focus on the UN’s Sustainable Development Goals (UN SDG’s).

How are we helping?

1) Thought Leadership – Climate-aware CMAs

Following many months of extensive research, the BlackRock Investment Institute (BII) launched their new Climate-Aware Capital Market Assumptions framework in February 2021. They introduced a three-point framework for looking at long-term macroeconomic policies, repricing of assets, and profitability. Their long-term risk and return expectations - the building blocks of our strategic asset allocation - now reflect the impact of climate change on the investing landscape. Overall, they estimate up to a 7% annualised return differential over 5 years between the sector winners and losers of this green transition along with specific geographic winners like China standing to benefit in a big way2.

2) Insights and Analysis – BlackRock Portfolio Analysis and Solutions (BPAS)

For years, one of the most talked about industry trends has been how technology is advancing our ability to offer customized insights and solutions.  One example of this is the newfound ability of our BPAS team to identify portfolio allocation trends across hundreds of client portfolios in a matter of weeks, instead of the months and even years it used to take. This is helping us discover how our clients are adjusting their portfolios to reflect their ESG ambitions and where there is room to do more.

This past January, we held our first-ever UK Multi-Asset Peer Review event, where the BPAS team analysed publicly available holdings data from Morningstar representing $185bn AUM from 43 firms across 132 funds in the UK/Ireland Multi-Asset space.3

Our analysis suggested that our UK AM cohort on average allocated only 6% of their holdings to sustainable building blocks. This was well below the 12% we saw in Switzerland or 20% in the Netherlands. Meanwhile, the average MSCI ESG score for the UK portfolios was 6.24 which was slightly worse than the equivalent EMEA average of 6.4, which suggests to me that there is so much more we can be doing in this space.

The feedback we received from clients was overwhelmingly positive and they asked if we could take our analysis a step further. Could we create a bespoke report which showed how their portfolio ranks against their top 10 peers more specifically? The short answer is ‘yes’, and we were happy to oblige.

Outside of this ESG Peer Analysis report, others have enjoyed receiving the more standard BPAS service, which runs their portfolio through the risk-lens of BlackRock’s proprietary risk-system, Aladdin. This ‘what-if’ analysis helps them understand how adding or switching to more Sustainable building blocks could affect their overall portfolio characteristics. The analysis also helps test the new hypothetical portfolio against some historical as well as theoretical ‘black swan’ market scenarios.

Risk management: While the investment approach described herein seeks to control risk, risk cannot be eliminated.

3) Building Blocks – Active, Passive, Thematics, Alternatives, Cash

One of the major turning points this year came on March 10th when the EU’s Sustainable Finance Disclosure Regulation (SFDR) came into force. We believe that SFDR is a key catalyst to help advance sustainable investing in Europe. We see the standardisation of definitions and concepts as crucial for advancing sustainable investing, with investors seeking increased transparency and data on sustainable risks and opportunities.

As a response, many of our clients are wrestling not only with how to categorize their own fund ranges, but how to move forward with incorporating Article 8 and Article 9 building blocks into their portfolios.

With over 50 Sustainable UCITS ETFs available and a number of active, alternative, and money market funds already available, we offer clients different options depending on their sustainable investing objectives. Going forward, we anticipate that 70% of our future fund launches and repositionings this year will qualify for Article 8 or 9 and we anticipate that this sustainable product development activity will continue to increase over time.5

As we move forward into summer and look ahead to 2022, we look forward to working with clients to help them build more resilient portfolios and achieve their desired investment outcomes.

1 BlackRock and IHS Markit, 8 June 2021
2 BlackRock CMAs, February 2021
3 BlackRock, November 2020
4 MSCI, November 2020
5 BlackRock SFDR, 31 December 2021

Joe Bello
Head of UK Asset Management Sales