The evolution of sustainable investing for family offices

Sustainable investing is reaching an inflection point for family offices. Four out of five family offices are engaged in some form of sustainable investing, according to BlackRock's recent Global Family Office Survey. This figure represents tremendous growth over the past several years, during which time family offices have moved from learning about sustainable investing to actively incorporating it.

They are embracing two strategies in particular: climate strategies and impact strategies. Climate strategies focus on avoiding climate related risks and investing in companies positioned to capture opportunities related to the transition to a net zero economy. Impact strategies have the dual objective of delivering financial returns and creating measurable positive environmental or social outcomes.

As part of a recent webcast series in partnership with BDO United States, Alexandra Hirsch, a Director on the BlackRock Sustainable Investing team, spoke about these strategies with Jessica Huang, Head of Sustainable Investment Solutions for Americas and Japan. Following is a summary of their conversation.

Why is climate change such an area of interest for family offices?

Climate change is becoming impossible for investors to ignore. The U.S. alone in 2020 had 22 climate-related weather disaster events that exceeded USD$1billion of damages.1 So, individuals are starting to see the effects of climate change in their day-to-day lives.

Meanwhile, 127 governments from the U.S. to China are moving toward net-zero economies, meaning they will balance emissions produced with emissions removed from the atmosphere. And combatting climate change is a primary concern not just for governments but for private companies: Over 1,100 companies have committed to or are considering net-zero targets.

The transition to net zero presents an amazing opportunity for investors to reallocate capital to companies and sectors that are poised to benefit. We don't believe that the markets are fully pricing in information about sustainability. We have updated our capital market assumptions to fully incorporate climate considerations, which will allow us to more accurately estimate the long-term prices of assets and better position our clients' portfolios.

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The transition to net zero presents an amazing opportunity for investors to reallocate capital to companies and sectors that are poised to benefit.

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At BlackRock, we're also developing a heightened scrutiny model across our active investment portfolios to look at our environmental, social and governance (ESG) integration efforts, and we're embedding climate into our broader sustainability platform. All new sustainable strategies will include a climate objective like reduced carbon emissions intensity or increased exposure to companies capturing climate-related opportunities. We're also building innovative new investment solutions that are aligned with the specific temperature goals of the Paris Climate Agreement.

What part of impact investing is of most interest to family offices?

What is ESG versus impact investing? One of the best explanations is that ESG is what happens within the walls of a company, and impact is what happens outside the walls of a company. At BlackRock, we offer ESG strategies that invest in companies that perform better on operational issues related to environmental, social and governance. And we also offer impact strategies that are designed with the intention to generate positive, measurable social or environmental impact alongside financial returns.

With family office clients, we're seeing a lot of interest in impact investing with regard to both climate and social issues. On the climate side, the focus is very much on renewable energy. At BlackRock, we're already one of the world's largest investors in renewables, but historically our platform has focused on OECD countries. As we think about the global transition to a net zero economy, we also need to support emerging markets. So, we've partnered with the governments of France and Germany as well as a multitude of foundations to create an innovative, blended finance solution that will invest in renewable energy infrastructure across emerging markets.

On the social side, we're seeing particular interest in racial and diversity issues. The events of the past summer increased interest in investing to address the racial equity gap in America. There weren't that many strategies that focused on this issue, so we decided to develop an impact strategy that provides funding for minority-owned businesses and communities that historically have been undercapitalized.

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The events of the past summer increased interest in investing to address the racial equity gap in America.

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Are sustainable strategies delivering returns commensurate with traditional strategies?

This is a question we get all the time. Looking back ten-plus years ago, most investors in sustainable products were thinking mainly about moral and ethical considerations, which meant they avoided or screened certain issuers or industries. The space has evolved so much. Now sustainable strategies are focusing on using environmental, social and governance data to identify better-run companies—companies that are addressing the needs of all their stakeholders and also thinking about their environmental footprint.

And so, when you look at the analysis coming out of the industry more recently, most most of it is showing that there's no difference in performance between sustainable and traditional strategies. In fact, sometimes there's actually an edge for sustainable strategies.

During the first quarter of last year, when the Dow Jones dropped about 10,000 points, 94 percent of sustainable indices outperformed their parent benchmark. And over 80 percent of them maintained that outperformance throughout 2020.4 Beyond that, we've found that ESG funds generally provide downside risk protection over even longer periods, such as three, five or ten years.

At BlackRock, we design impact strategies that meet the same bar of competitive market rate returns, in addition to contributing to measurable positive environmental or social outcomes. The reason we're able to do this is because our impact companies actually had twice the sales growth of the companies in the broader global equity universe. That's because these are companies that are solving the world's greatest problems, issues such as affordable housing, health care, education, and financial inclusion, and so they're exposed to huge structural growth tailwinds.

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Now sustainable strategies are focusing on using environmental, social and governance data to identify better-run companies.

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What is the future of sustainable investing?

There are two main takeaways:

  1. Sustainable investing is on the rise
  2. There’s a lot of room for innovation

The first is that we're seeing real dollar flows. In 2020, we saw USD$280 billion move into sustainable ETFs and mutual funds globally.2

But we're still in the early stages of sustainable investing. In a recent survey, of 425 investors around the globe, representing USD$25 trillion of assets, said they expect to double their sustainable allocations over the next five years. And this trend was echoed in our family office survey, which found that 75 percent of family offices expect to increase their exposure to sustainable strategies in the coming year.

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We're still in the early stages of sustainable investing.

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The second takeaway is that there's a lot of room for innovation when it comes to sustainable strategies. As we get better data and better technology, as we get smarter about measuring environmental and social issues, we're going to be able to develop more advanced solutions.

At BlackRock, we're trying hard to keep up with client demand. In 2020, our platform doubled in assets under management, and we almost doubled the number of strategies on our sustainable platform.3 As we look toward 2021 and beyond, we're going to continue to innovate in that space.

Alex Hirsch: Good morning everyone. Welcome and thank you to all of you for joining our third webcast in the series of conversations for family offices. This series was created in partnership with BDO to provide expert insights tailored specifically for family offices to stay informed on priorities and trends that are top of mind for investors. I am Alex Hirsch a Director on the BlackRock Sustainable Investing Team and I’m focused on engaging with family office clients on sustainability and look forward to working with you in the future. Today we are joined by Jessica Wong, BlackRock's Head of Sustainable Investment Solutions for the Americas in Japan. Jess and I are excited to speak with you today on sustainability and impact investing. Before we start, I wanted to highlight two programming details. First is we will have live polls throughout the session you can engage with and see how your peers are responding. These polling questions and results will appear on the side of your screen. And second is if you would like to review any of the reports or publications that are mentioned today, you can access them in the event resources section of your screen. Okay Jess let's start with some questions. In our recent Global Family Office Survey, we noticed that 80 percent of family offices are engaged in some form of sustainable investing and that the trend is set to continue driven by the next generation. In your conversations with family office clients regarding sustainable investing, what are the top two themes that have emerged over the past few years?

Jessica Wong: Thanks Alex, and thanks to everybody for joining our webcast today. So, before I jump into the top two themes, I do just want to pause on that 80 percent number because that is a really incredible number when we think that four out of five family offices today are engaged in some form of sustainable investing. So really a great number to just show how much the space has really grown over the past few years. And I really do believe that we are at this inflection point where after years and years of family offices really just evaluating and learning about sustainable investing, we're actually starting to see family offices move from ideation and conversation to actually implementation. So, the two areas where I am seeing family office clients actually take action today are really in the climate space as well as in impact strategies. So, climate strategies really those strategies that are focusing on the E of the ESG. Family offices are really interested in investing with the lens of mitigating climate risks and capturing climate opportunities. The second area impact strategies: these are the solutions that have that dual objective of delivering financial returns in addition to that intentional and measurable positive environmental or social outcome. And I just say that impact strategies have really resonated within the family office space because of that tangible outcome that can be delivered. Investors are really able to understand that positive influence that your dollars are having and in particular I would say that this has been a particular interest to the younger generation.

Alex Hirsch: Great thanks, Jess. Let's first chat about climate: why do you think that's been such an area of interest?

Jessica Wong:  So, I should say that at BlackRock we have been saying for quite some time now that climate risk is investment risk, and this is something that Larry even stated in his letter to CEOs last year at the beginning of 2020. And I do think that we've just gotten to a point where this philosophy is becoming widely adopted. At some point last year in June of last year we did conduct this global survey with 425 investors that represented $25 trillion dollars of assets under management. And 88 of those investors said that they were focused on the E of the ESG, so the environment is just becoming that central theme. And I would say it's because that climate is just becoming impossible for investors to ignore. The world is moving towards a net zero economy and when we talk about net zero, we're talking about the ability to balance emissions produced with emissions removed. And so, in order to actually achieve this means we're going to have to drastically reduce and cut our emissions today. When you look at governments the us under the Biden administration has already resigned the Paris Climate Agreement and then even countries like China have committed to net zero. So, combating climate change is becoming a primary concern and focus and it's not just for governments but also for private companies. We're seeing about 1100 companies today commit to or are considering setting net zero targets. And then I would say beyond that macro change that we're seeing I would say as individuals we're also seeing the effects of climate change actually impact our day-to-day lives. And this is where I’m talking about physical climate risks, events like hurricanes and wildfires. And this is just going to continue to happen as the earth gets warmer and warmer. We're just going to be exposed to more extreme weather events. In 2020 the us alone had 22 related weather disaster events that actually exceeded $1 billion dollars of damages. So, we're definitely seeing real impacts on people's livelihoods already. And then when you look at our letters this year, our letters to our clients. Larry's letter to CEOs I would say we're really reframing the conversation now. So, we're not just talking about risks anymore but we're actually leaning into the opportunities and talking about the fact that this transition to a net zero

Economy is actually an amazing investment opportunity for investors and our clients. It's really an opportunity for our investors to reallocate capital to companies and sectors that are just better prepared and just better poised to benefit from a low carbon or no emission world.

Alex Hirsch:  And so, we understand that climate is becoming more of a focus for investors. How is BlackRock incorporating the risks of climate change into his investment decisions?

Jessica Wong: Sure, and at BlackRock I would say we are embedding climate considerations into everything that we do but I’ll just specifically highlight three of the main areas. So, first is very soon this month we're going to be publishing our updated capital market assumptions to really incorporate climate considerations. So, this is going to impact our long-term estimate of risk and return, and therefore, it's going to impact our strategic asset allocation. And we don't really believe that the markets are pricing in sustainability and climate information. Because history has shown that the markets are really slow and really bad at pricing in information that just seems to be far off. And I’m not going to go into the details of our CMAs today, our capital market assumptions, but I would say updating our capital market assumptions to really incorporate climate at both the macro and the micro level will allow us to more accurately estimate the long-term prices of assets. And it's just going to better position our clients’ portfolios. The second area is really from our ESG integration efforts, so this is where we're developing a heightened scrutiny model across our active investment portfolios. So, there are a lot of companies that are preparing their businesses for the net zero economy but at the same time there are still a lot of companies out there that aren't transitioning or adapting their businesses. So, we're really building a focused universe of holdings that present significant climate related risks. And then the third area is that we're really embedding climate into our broader sustainable product platform. So, we're adding climate objectives to all new sustainable products so that they'll include objectives such as a reduced carbon emission or an objective to have more exposure. Increased exposure to companies that are capturing climate related opportunities. And then in addition to that we're also building innovative new investment solutions that are going to have specific temperature goals; so, strategies that will have a 1.5 degree or a Paris aligned.

Alex Hirsch: And so, speaking of products and sustainable investing returns have historically been a questionable outcome. So, are sustainable strategies delivering traditional returns or how has that changed?

Jessica Wong: Yeah, this is the perennial question that we get all the time and I think it's really because when you look at the space historically, looking back10 plus years ago, really most of the sustainable products were designed with a values lens; really meaning that investors were really just thinking about moral/ethical considerations which really just meant that they were going to avoid or screen certain issuers or industries. And so, performance of those legacy products they definitely did lie at certain times. However, the space has evolved so much and now strategies are really focusing on using environmental, social and governance data in a way to just identify companies that are better run companies. Companies that are thinking long term addressing the needs of all their stakeholders and really thinking about their environmental footprint. And so, I would say when you look at the performance analysis coming out of the industry more recently, most of those analysis is actually showing that there's no difference in performance. And in fact, sometimes there's actually an edge for sustainable strategies. At BlackRock, we have this hypothesis that sustainable strategies should exhibit resiliency in times of market volatility. Um and duringQ1 of last year when the Dow Jones dropped about 10,000 points the drop of over 30 percent, we actually saw that during that quarter 94 percent of sustainable indices outperformed their parents benchmark. And majority of those sustainable indices over 80 percent actually maintain that outperformance throughout 2020. And then looking beyond just sustainable indices has done a bunch of great research in terms of the performance of sustainable strategies

More broadly incorporating active strategies as well. And they actually found that ESG funds generally provided downside risk protection over even longer periods such as three, five, ten-year periods. And so I know to really get to your question about performance but then also to talk about performance related to impact, I think it's also important to note that at BlackRock when we design sustainable products, we’re not looking to design solutions that are delivering concessionary returns. So, it shouldn't be a sustainable objective at the expense of long-term risk adjusted returns. And I think this framing is specifically important for impact products. Because there are impact products out there in the marketplace that are perfectly designed to have low returns for higher impact. When you really think about the spectrum of investing in the spectrum of returns within the sustainable space, it really ranges all the way from philanthropy where you are expecting zero returns all the way to the market rate returns. And there are some impact products out there in the marketplace that are designed to sit closer to the philanthropy side. However, at BlackRock we design impact products that meet that same bar of competitive market rate returns, in addition to intentionality and contributing to that measurable positive environmental or social outcome. And really I would say the reason why we think it's possible to do this in impact -- and I’ll just give you an example here from our Global Impact Team who did some research around the case for alpha in impact public equities -- they found that impact companies in their defined universe--  these companies actually had twice the sales growth compared with companies in the broader global equities universe. And really that's because when you think about what these impact companies are, these are the companies that are solving the world's greatest problems; these are companies that are that are solving issues such as affordable housing, health care, education, financial inclusion. And so, these companies are really exposed to these structural growth tailwinds because there's real demand for innovative, scalable solutions and there's just not enough companies that are focused on these issues.

Alex Hirsch: Thanks Jess, so as you mentioned impact, I think there's often confusion as to what impact is and what impact isn't. How does BlackRock define impact?

Jessica Wong: Sure, and maybe I’ll just define it first by explaining what is ESG versus impact? Because I think that's one of the main questions that that we get all the time. And I would say one of the best explanations that I’ve heard although slightly oversimplified is that ESG is what happens within the walls of a company and impact is what happens outside the walls of the company. And so, at BlackRock we do offer and develop ESG strategies. And so, these are strategies that are investing in companies that perform better on operational issues related to environmental, social and governance. But then we also offer impact strategies and so these are the solutions that are designed with the intention of generating positive, measurable social or environmental impact alongside financial return. And at BlackRock we are very, very sensitive to the idea of greenwashing. We really want to make sure that our impact strategies are meeting that high bar of impact. And so, the way we do it is really by aligning our definition of impact that I just talked about what's really the framework of the most well-recognized impact-focused industry bodies. So, these are groups such as the GIN, the Global Impact Investing Network, the IFC, the International Finance Corporation, and then the IMP, the Impact Management Project. And then I think another thing that's important to highlight about the way we think about impact at BlackRock is typically impact strategies have really manifested in the private markets. But we think it's important to extend impact into public markets as long as it's done right and as long as it's not really greenwashing. And so, we believe it's important because investing in impact companies in the public equity space allows for that long-term growth of the impact company; so, allows them the ability to move from a private to a public company. And I would say that our public equity global impact team is really thoughtful and intentional about the companies that they invest in. So, these companies need to meet that that additionality criteria meaning that companies, products and services must address a need that isn't being met and fulfilled by another company. So, for instance, it's not enough to just be a solar company focused on creating renewable

Energy but this team would only invest in the solar company that has the cheapest solar batteries because they believe that lower cost is going to drive adoption and push the price down for the entire industry.

Alex Hirsch: And so, what trends are you seeing? What part of impact investing is of most interest in family office clients?

Jessica Wong: So, I would say that the climate and social are actually the areas that we're seeing a lot of interest. So, on the social side racial and diversity focused issues have definitely been more requested recently. Soon the climate side I would say the focus is very much on renewables. There's a lot of interest in investing in renewable projects/renewable companies. Um and so at BlackRock we're already one of the world's largest investors in renewable energy but historically our platform has really focused on OECD countries. But as we think about this transition to a global transition to a net zero economy, we do need to support emerging markets. This is extremely important because EM countries actually have a greater need for capital to help them transition towards a low-carbon economy. Um and also majority of the missions today are actually coming from non-OECD countries. And so that's why we partnered with the governments of France and Germany as well as a multitude of foundations to really create an innovative, blended finance solution which will invest in renewable energy infrastructure across the emerging markets. And then on the social side, I mentioned that specific interest in racial and diversity data or racial diversity themes you know given the events of the past summer. Um I would say there's been just a lot of interest in investing in solutions to address the racial equity gap specifically in the America. But when we looked out in the landscape, there just there weren't that many strategies out there that really focused on this issue. So, we decided to develop an impact strategy that provides funding for minority owned businesses and communities that have historically been under-capitalized. So just for example this strategy is evaluating companies such as this company that's developing a lease-to-own platform to help lower-income families that are primarily you know ethnic and racial minorities become first-time homeowners. Um because there's studies that show home ownership is highly correlated to wealth creation, and then further giving, these families access to stronger communities with better schools also enables their children to stop the poverty cycle.

Alex Hirsch: Thanks Jess, I think we have time for one last question. What is the future of sustainable investing and what are the key trends you're seeing?

Jessica Wong: So, I think two main takeaways for me. One is that dollars are moving and we're seeing real flows now. In 2020 we saw $280 billion dollars move into sustainable ETFs and mutual funds globally. But that’s all to say that we're still in the early stages of sustainable investing. Um that survey that I mentioned at the beginning of our conversation the survey that had 425 investors across the globe representing $25 trillion of assets, those investors actually said that they expect to double their sustainable allocations over the next five years. And this trend was also echoed in the family office survey that we had where we found that 75 percent of family offices expect to increase their exposure to sustainable strategies in the coming year. So, I would just say that the flows are happening and we're just expecting to see even more flows in the coming future. The second is really that there's a lot of room for innovation when it comes to sustainable products. You know as we get better data, better technology as we get smarter about measuring environmental and social issues, we're going to be able to develop more advanced solutions. Um the space is and has been rapidly evolving. And at BlackRock we're really trying hard to keep up with the client demand. So, our platform has not only doubled really in AUM in 2020 but we basically actually doubled the number of products on our sustainable platform in 2020. And as I look towards 2021 and beyond, I would just say we're going to continue to innovate into space. And specifically, I would say we're going to continue to innovate in the space of climate as well as impact. So those are I would say the two main trends that I’m seeing right now.

Alex Hirsch: Great, thank you so much jess for joining us today and sharing your thoughts. To everyone who's listened in, thank you again for spending time with us and for your ongoing partnership. Please let us know your thoughts on today's call in the feedback survey and please reach out to your BlackRock relationship manager on any topic or questions you have following today’s call. Thank you.

Watch the full conversation on-demand

Alexandra Hirsch and Jessica Huang explore themes and trends in sustainable investing that are top of mind for family offices, with a focus on climate and the resiliency of sustainable strategies.

Alexandra Hirsch
Director, Sustainable Investing
Read biography
Jessica Huang
Head of Sustainable Investment Solutions
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