ESG Integration

What is ESG integration?

Environmental, social and governance (ESG) integration is the practice of incorporating material ESG information into the investment process with the objective of improving the long-term financial outcomes of our clients’ portfolios. There is no one-size-fits-all approach, but at BlackRock we see it as being about making research, data and insights available to our portfolio managers and working with them to identify potential process enhancements across investment activities.

This focus on using financially material ESG data as a new lens to identify previously unpriced risk and opportunity is consistent with approaches taken by leading industry groups including the Principles for Responsible Investment (“PRI”). These organizations describe ESG integration respectively as “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions” and an effort “to enhance a fund’s financial performance by analyzing material ESG considerations along with other material risks.”

Environmental (E)
Environmental (E)
Covers themes such as climate risks, natural resource scarcity, pollution and waste and environmental opportunities
Social (S)
Social (S)
Includes labor issues and product liability, risks such as data security and stakeholder opposition
Governance (G)
Governance (G)
Encompasses items relating to corporate governance and behavior, such as board quality and effectiveness

The ESG considerations that are material will vary by investment style, sector/industry, market trends, and client objectives. ESG integration is about using research, data and insights to inform investment decisions.

This graphic depicts what ESG integration is and is not.

Source: BlackRock Sustainable Investing and BlackRock Investment Institute, December 2018. Note: The table is for illustrative purposes only.

Why BlackRock for ESG?

At BlackRock, we have always focused on helping our clients try to reach their long-term investment goals through resilient and well-constructed portfolios. Our investment conviction is that ESG-integrated portfolios can provide better risk-adjusted returns to investors over the long-term, and that ESG-related data provides an increasingly important set of tools to identify unpriced risks and opportunities within portfolios.

BlackRock has a framework for ESG integration that permits a diversity of approaches across different investment teams and strategies and is part of both our active investment process and index investment processes. As the materiality of ESG considerations varies by client objectives, investment style, sector, and macro considerations, our ESG integration framework needs to allow for flexibility across investment teams. BlackRock’s active investors are responsible for integrating material ESG-related insights, consistent with their existing investment process, with the objective of improving long-term risk-adjusted returns. Depending on the investment approach, ESG measures may help inform the due diligence, portfolio construction, and/or monitoring processes of our active and alternatives platforms, as well as our approach to risk management. In index portfolios where the objective is to replicate a predetermined market benchmark, we engage with investee companies on ESG issues to enhance long-term value for our clients.

Our ESG integration framework is built upon our history as a firm founded on the principle of thorough and thoughtful risk management. Aladdin™, our core risk management and investment technology platform, allows investors to leverage material ESG data as well as the combined experience of our investment teams to effectively identify investment opportunities and investment risks. Our heritage in risk management combined with the strength of the Aladdin platform enables BlackRock’s approach to ESG integration.