BLACKROCK EDUCATIONAL ACADEMY

ESG: Trends, opportunities and solutions

On-demand sessions curated for endowments and foundations

There is increasing awareness that material environmental, social and governance (ESG) factors can be tied to a company’s long-term performance. Mounting evidence shows incorporation of sustainability into investment decisions can help identify investment risks, generate excess return, and create more resilient portfolios. For endowments and foundations that need to grow intergenerational equity, taking an ESG approach could prove crucial to weathering market downturns, while capitalizing on the transition to a more sustainable world. We’ve collected BlackRock resources to help our endowment partners navigate the complexities of ESG integration and sustainable investing.

MALE 1:  We found that our focus on sustainable investing in a relatively simple two-part investment thesis and that investment thesis is one, that the risks and opportunities from sustainability aren’t being fully priced into the market today and we believe they will be over time. You can put those risks and opportunities into three broad categories, at least I do. One is the physical risk due to climate change. You see that in extreme weather events. You see that in changes in productivity. You see that in the impacts of rising sea levels. Second are the impacts from a transition to a low-carbon economy. That manifests itself in a number of different ways including the demand for fossil fuels, the rise of electric vehicles as well as regulatory implications, carbon taxes or other constraints on business operations. And thirdly is a broad set of positive and negative externalities exhibited by issuers in the broader stakeholder communities in which they operate. So, if you will, the non-climate impacts of sustainability. And our view is that these things have been frankly poorly understood by the market and as they become better understood will be priced into asset prices and that will affect returns. The second part of the investment thesis really stands apart from the first. Even if you don’t believe anything I just told you in the first part, the second part of our investment thesis is that there is a substantial and material reallocation of capital going on from strategies and issuers with negative sustainability characteristics towards issuers with positive sustainability characteristics and that reallocation of capital will impact asset prices over the long term. So, our focus on sustainability has not been about BlackRock’s values. It hasn’t been about our views on moral issues. What it has been found in is a very specific investment belief that these would drive returns going forward and that is really important and really important to understand. Now, at the end, I’ll talk about choice and we certainly will give our clients the opportunities and the tools to reflect their own personal beliefs in their portfolios, but our own actions as a fiduciary is based on that view of financial materiality and investment returns. One of the really important changes that I think is critical for the continued development of the sustainable investing market is the mindset change away from the notion that sustainability is about exclusions. It’s about what you give up, what you exclude from your portfolio to a much deeper focus on what are the opportunities that are coming from this transition to a new world of sustainability. You’re going to hear from one of my colleagues a little later, Jean Boivin, talking about our climate aware capital market assumptions. If you will, long-term estimates of risk and return for different asset classes. What we’ll talk about is over the last several months we’ve implemented a new set of climate aware CMAs. So, taking into account the impact of climate. I’m going to let him go into all the details on that. But what I think is probably most impactful isn’t just the way it’s affecting our portfolios, it’s that what it does is it brings to very sharp relief that sustainability isn’t just about cost. That is the cost of doing nothing is very significant that if we do nothing about climate, returns will be expected to be lower than if we do something and that’s just one example that talks about the significant opportunity, I think, that we have is investors when we incorporate sustainable investing into our strategies.

[00:05:14]

Second point I wanted to make is about how the data is getting much better and the analytical tools and analytical frameworks that we have to look at sustainability is changing very, very dramatically. I reference the work that what we did back in 2015, which frankly, I was really proud of at the time and considered really cutting edge as did a lot of other people. Today, we’re are taking that to an entirely different level. One of the things BlackRock committed to at the beginning of this year was publishing a temperature alignment metric for all of our portfolios in public assets by the end of this year. I think that will be a very important step. By the way, we will discover over time that those metrics will change and they will adapt and they will get better but the notion of really trying to understand to what climate scenario our portfolios are aligned is going to be incredibly useful for our clients as well as our portfolio managers and I think it will do a few things. One, I think people will be surprised and perhaps a little disappointed when they first see the alignment of metrics of our portfolios, of your portfolios. Why? They’re going to be higher. They’re not going to be aligned to a one and a half degree or even a two-degree world. That will help people I think to understand the scope and size of the problem that we all face. At the same time, what it will also enable us to do is to see the transition, to see the difference between the stock and the flow, see the difference between sustainable-oriented portfolios and non-sustainable oriented portfolios, to see the difference between index strategies and active strategies and as we get better data and better tools, we can use them. And frankly, we can also stop using tools that we discover and there have been several that just aren’t financially relevant. In good faith, investors around the world thought that these were important measures and we use them and over time, we recognize that some are incredibly valuable and insightful and others just simply aren’t. Just to emphasize that this isn’t only about climate sustainability is not only about climate and we have to take into account a much broader set of analytics. Frankly, climate science has been around for hundreds of years. We have hundreds of years of data, which makes it really valuable and quite frankly easy to look at and the climate change I believe is one of the seminal challenges facing society. That said, there is a much broader universe that is really important for us to look at and incorporate in our investment. As we get better, as we bring more rigor to the non-climate measures of sustainability, I think you’ll see that playing a larger and larger role in portfolios. Frankly, that’s one of the areas that I’m particularly excited about the work that BlackRock is doing where we can bring some of that analytic framework to non-climate-oriented things in both the environmental as well as the non-environmental space and begin driving that into our portfolios. Before I wrap up, we recognize that there is a wide spectrum of views on sustainability. One of the things that we’re absolutely committed to is giving clients choice. If you want your portfolios to reflect your views, your ethical views, your market views, we have the tools that can help you do that and can help measure the impact and frankly, the challenges that some of those things cause in your portfolio construction process. At the same time, when we’re using it in kind of unconstrained portfolios, we’re doing it because we believe that sustainability is going to drive better long-term risk adjusted returns for our clients.

[00:10:52]

MALE 1:  We found that our focus on sustainable investing in a relatively simple two-part investment thesis and that investment thesis is one, that the risks and opportunities from sustainability aren’t being fully priced into the market today and we believe they will be over time. You can put those risks and opportunities into three broad categories, at least I do. One is the physical risk due to climate change. You see that in extreme weather events. You see that in changes in productivity. You see that in the impacts of rising sea levels. Second are the impacts from a transition to a low-carbon economy. That manifests itself in a number of different ways including the demand for fossil fuels, the rise of electric vehicles as well as regulatory implications, carbon taxes or other constraints on business operations. And thirdly is a broad set of positive and negative externalities exhibited by issuers in the broader stakeholder communities in which they operate. So, if you will, the non-climate impacts of sustainability. And our view is that these things have been frankly poorly understood by the market and as they become better understood will be priced into asset prices and that will affect returns. The second part of the investment thesis really stands apart from the first. Even if you don’t believe anything I just told you in the first part, the second part of our investment thesis is that there is a substantial and material reallocation of capital going on from strategies and issuers with negative sustainability characteristics towards issuers with positive sustainability characteristics and that reallocation of capital will impact asset prices over the long term. So, our focus on sustainability has not been about BlackRock’s values. It hasn’t been about our views on moral issues. What it has been found in is a very specific investment belief that these would drive returns going forward and that is really important and really important to understand. Now, at the end, I’ll talk about choice and we certainly will give our clients the opportunities and the tools to reflect their own personal beliefs in their portfolios, but our own actions as a fiduciary is based on that view of financial materiality and investment returns. One of the really important changes that I think is critical for the continued development of the sustainable investing market is the mindset change away from the notion that sustainability is about exclusions. It’s about what you give up, what you exclude from your portfolio to a much deeper focus on what are the opportunities that are coming from this transition to a new world of sustainability. You’re going to hear from one of my colleagues a little later, Jean Boivin, talking about our climate aware capital market assumptions. If you will, long-term estimates of risk and return for different asset classes. What we’ll talk about is over the last several months we’ve implemented a new set of climate aware CMAs. So, taking into account the impact of climate. I’m going to let him go into all the details on that. But what I think is probably most impactful isn’t just the way it’s affecting our portfolios, it’s that what it does is it brings to very sharp relief that sustainability isn’t just about cost. That is the cost of doing nothing is very significant that if we do nothing about climate, returns will be expected to be lower than if we do something and that’s just one example that talks about the significant opportunity, I think, that we have is investors when we incorporate sustainable investing into our strategies.

[00:05:14]

Second point I wanted to make is about how the data is getting much better and the analytical tools and analytical frameworks that we have to look at sustainability is changing very, very dramatically. I reference the work that what we did back in 2015, which frankly, I was really proud of at the time and considered really cutting edge as did a lot of other people. Today, we’re are taking that to an entirely different level. One of the things BlackRock committed to at the beginning of this year was publishing a temperature alignment metric for all of our portfolios in public assets by the end of this year. I think that will be a very important step. By the way, we will discover over time that those metrics will change and they will adapt and they will get better but the notion of really trying to understand to what climate scenario our portfolios are aligned is going to be incredibly useful for our clients as well as our portfolio managers and I think it will do a few things. One, I think people will be surprised and perhaps a little disappointed when they first see the alignment of metrics of our portfolios, of your portfolios. Why? They’re going to be higher. They’re not going to be aligned to a one and a half degree or even a two-degree world. That will help people I think to understand the scope and size of the problem that we all face. At the same time, what it will also enable us to do is to see the transition, to see the difference between the stock and the flow, see the difference between sustainable-oriented portfolios and non-sustainable oriented portfolios, to see the difference between index strategies and active strategies and as we get better data and better tools, we can use them. And frankly, we can also stop using tools that we discover and there have been several that just aren’t financially relevant. In good faith, investors around the world thought that these were important measures and we use them and over time, we recognize that some are incredibly valuable and insightful and others just simply aren’t. Just to emphasize that this isn’t only about climate sustainability is not only about climate and we have to take into account a much broader set of analytics. Frankly, climate science has been around for hundreds of years. We have hundreds of years of data, which makes it really valuable and quite frankly easy to look at and the climate change I believe is one of the seminal challenges facing society. That said, there is a much broader universe that is really important for us to look at and incorporate in our investment. As we get better, as we bring more rigor to the non-climate measures of sustainability, I think you’ll see that playing a larger and larger role in portfolios. Frankly, that’s one of the areas that I’m particularly excited about the work that BlackRock is doing where we can bring some of that analytic framework to non-climate-oriented things in both the environmental as well as the non-environmental space and begin driving that into our portfolios. Before I wrap up, we recognize that there is a wide spectrum of views on sustainability. One of the things that we’re absolutely committed to is giving clients choice. If you want your portfolios to reflect your views, your ethical views, your market views, we have the tools that can help you do that and can help measure the impact and frankly, the challenges that some of those things cause in your portfolio construction process. At the same time, when we’re using it in kind of unconstrained portfolios, we’re doing it because we believe that sustainability is going to drive better long-term risk adjusted returns for our clients.

[00:10:52]

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Zach Buchwald: Welcome to the BlackRock Future Forum Sustainability edition.

BlackRock created the Future Forum as a means for exploring the big topics that underpin investment decision making and that impacts all of our financial futures.

Bill Gates: The same thing that allowed the dream of a personal computer to become real, now we've got to apply that to these climate problems.

Larry Fink: Climate risk and transition risk is something that's going to impact every portfolio.

Mary Barra: I've been at General Motors for 40 years, and I truly believe this is one of the most exciting times in the auto industry because of the transformation.

RJ Scaringe: I think we're going to start to see some variety of product offerings from a number of different manufacturers, and that's awesome because we have to figure out how to electrify a hundred million cars a year.”

Mark McCombe: Infrastructure is something that is so critical to getting the world shifting towards an EV focus.

Teresa O’Flynn: I believe that private capital has a unique role to play in the transition to a more sustainable economy.

Eric Rice: The reality is that the net zero transition and its investment opportunity won't just about a few industries. I'll be about the whole interconnected economy.

Kirsty Jenkinson: This concept of transition readiness, which is a term that we use and which I know is one that BlackRock uses as well, is really critical and actually very foundational to how we think about investing in the future.

MC Lader: If we want investors to incorporate climate risk as an investment risk, we have to put it in terms that are familiar.

Paul Bodnar: Right now, I believe that the most vital steps that need to be taken on sustainability, especially climate change, are actually in the financial sector.

Zach Buchwald: If it feels like the whole world is waking up to the climate crisis at the same moment, it's because we are.

At BlackRock, we look forward to working together with all of you to create a more sustainable future.

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Sustainability: The path to net zero

In April, we explored the future of sustainability in business and investing, convening four of the most influential leaders in the corporate and finance worlds and five leading investors with deep experience in sustainable strategies.

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