Sustainability at the portfolio level

Climate risk is investment risk and can no longer be ignored by investors. We analyze the impact of allocating to sustainable investments on the return, risk and ESG profile at the whole portfolio level.

Evaluating ESG

We believe that sustainability risk and climate risk are investment risks, and that integrating sustainability can help investors build resilient portfolios and help achieve long-term objectives. That is why we are incorporating sustainability into our portfolio design, as part of a series of actions BlackRock is taking to support the goal of net zero greenhouse gas emissions by 2050 or sooner.

Despite the common belief that one must give up returns with sustainable investments, our analysis saw reallocations to such strategies improved ESG profiles, while maintaining the overall risk-adjusted return profile of the overall portfolio.

Highlights include:
01

Climate risk is investment risk

We believe climate risk is investment risk that cannot be ignored. Yet we also see it is as a historic investment opportunity.

02

Sustainable investing can maintain risk and return profiles

Reallocations preserve similar risk-adjusted return profile from ex-ante and ex-post perspectives.

03

Sustainable investments can improve various ESG outcomes

By reallocating to sustainable investments, MSCI ESG scores can be significantly improved.

Climate risk is investment risk

The commonly held notion that tackling climate change must come at a cost to the global economy is wrong, in our view. If no action is taken to combat climate change, its projected effects would imply a lower path of economic growth. Our capital market assumptions (CMAs) reflect our view that an orderly transition to a low carbon economy, consistent with the Paris Agreement goals, will deliver an improved outlook for growth and risk assets relative to doing nothing.

We see climate change and the green transition as persistent drivers of asset returns, and consequently fundamental to making strategic investment decisions. Climate change and policies to combat it flow through our CMAs via three main channels: the macroeconomic impact, the repricing of assets to reflect climate risks and exposures and the impact on corporate fundamentals.

A meaningful impact

Impact of sustainability on returns

Impact of sustainability on returns.

Source: BlackRock as of Feb 2021 and Morningstar as of Mar 2021. Expected risk and return calculations based on BlackRock’s capital market assumptions (CMA).  There is no guarantee that the CMAs will be achieved, and actual returns could be significantly higher or lower than those shown.

Excess performance calculated over MSCI USA, MSCI World, MSCI EM, MSCI ACWI respectively from 06/2019 – 03/2021.  

Sustainable investments can maintain risk and return profiles

BlackRock analyzed the average US public pension portfolio, and evaluated how the return, risk and sustainability profile may change should the public markets portfolio be reallocated to sustainable investments.

From the analysis, reallocating to sustainable investments preserves the expected return for the average pension portfolio, with slight reduction in risk based on our forward-looking CMAs. From a historical performance perspective, reallocating to sustainable investments may also improve its risk-adjusted return profile.

Building a sustainable public markets portfolio

Reallocating to sustainable investments and its impact on the return and risk profile

Reallocating to sustainable investments and its impact on the return and risk profile

Source: BlackRock as of Feb 2021. Expected risk is defined as annual expected volatility and is calculated using data derived from existing portfolio holdings, using the Aladdin portfolio risk model. This proprietary multi-factor model can be applied across multiple asset classes to analyze the impact of different characteristics of securities on their behaviors in the market place. In analyzing risk factors, the Aladdin portfolio risk model attempts to capture and monitor these attributes that can influence the risk/return behavior of a particular security/asset. Risk: Monthly Constant Weighted (MTC model) with 243 monthly observations; 1 standard deviation; 1yr.

Sustainable investments can improve various ESG outcomes

By reallocating to sustainable investments, the impact on sustainability, as measured by MSCI ESG scores as well as carbon intensity, can be significantly improved. For example, the carbon intensity decreases by over 30%. Over the years, sustainable investing has advanced with evolving market demands to help investors address various impacts and outcomes desired of their portfolios.

Identifying impact

ESG comparison of public markets portfolio

ESG comparison of public markets portfolio

Source: BlackRock, with data provided by MSCI ESG Fund Ratings for funds and MSCI ESG Research for individual companies as of 2/28/21. The MSCI ESG Pillar Scores are the weighted average of the underlying funds’ and companies' scores rated on a scale of 0-10. Pillar scores are comparable across all industries because they are not industry-weighted like the overall MSCI ESG Quality Score. Carbon intensity based on MSCI Weighted Average Carbon Intensity. ‘Coverage’ is defined as the percent of the portfolio’s underlying holdings that have an MSCI ESG Rating. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the readers as research or investment advice regarding the funds or any security in particular. The index shown is the parent index of the index that the fund seeks to track. There may be material differences between the fund's index and the index shown including without limitation index provider, holdings, methodology and performance.

Calvin Yu
Head of the Client Insight Unit
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Sarah Siwinski
Member of the Client Insight Unit
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The tectonic shift to sustainable investing
Three powerful forces are converging to drive a long-term trend in favor of sustainable assets. Investors positioned for the shift stand to benefit.
Iceberg

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