Navigating sustainability with data

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At BlackRock, we like data. The firm was founded based on a conviction that better data was a vital ingredient for better investing, and we’ve lived that philosophy for more than thirty years.

So it makes sense that we apply the same philosophy to environmental, social, and governance (ESG) considerations. Our investment conviction is that ESG research and analysis can potentially identify investment risks and generate excess returns. Yet a common criticism of ESG investing as a concept is its subjectivity. What does a “good” company look like, and who gets to decide? Rigorous use of sensible data might not fully answer the question of “good”, but it does at least help us to think about “better”. A company with plenty of independent board directors probably shows “better” governance than one with entrenched management. A business with a long record of cutting carbon emissions is probably “better” at managing its environmental impact than one that has made no progress. A government presiding over rising per capita GDP is probably “better” at managing its economy than one mired in permanent recession. Reliable data on these metrics helps point us towards better companies, and ultimately better portfolios for our clients.

But data can’t answer all the important questions, and badly used it can be hugely destructive. Maybe those supposedly independent directors play golf with the Chief Executive every weekend. Maybe the company cut carbon emissions by outsourcing production to somebody even more polluting. Maybe the GDP grew because of corrupt government spending. It's important to understand all the facets of the data and constantly seek to improve the quality. That is why we engage with data providers and pursue stewardship initiatives, and it is also why we see great value in incorporating a fundamental active element to ESG investing to uncover insights beyond the data. ESG metrics tend to be point-in-time and backward looking, thereby creating opportunities for active managers to identify discrepancies between the data and their own conclusions.

For example, one approach is to specifically target companies whose ESG scores today are mediocre, but whose management teams have committed to significant improvement. This approach could include engaging with the companies’ management, and then supporting them in those transformations with stewardship engagement. In other words, the insight from fundamental investors goes beyond a single data point or score and looks for the ESG potential of the business.

The mapping app on my phone gives me excellent data on where I am and suggests routes for how I might go somewhere else. But it cannot tell me where I should ultimately try to go. ESG fund managers need to begin with a clear sense of where they want to lead their portfolio – a sense of direction through clear and transparent values. Only once you’ve set that course can the data help guide you on the best route to get there.

Conan McKenzie, CFA
Portfolio Manager, ESG Multi-Asset Fund
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