Earth Day and sustainable investing: from why to why not?

Today, global investors – ranging from large institutional investors to individual asset owners – are adopting a variety of sustainable investing strategies to achieve their long-term investment goals.

John McKinley
John McKinley
Director, BlackRock Sustainable Investing Team
April 2018

Capital at Risk: All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

As millions of people assemble around the world to mark the 48th annual Earth Day on 22 April, we explore one of the most popular questions raised by investors today: is it possible to do well by doing good?

At BlackRock, we believe sustainability-related issues – ranging from board composition and human capital management to climate change – can and often do have real and quantifiable financial impacts. As Larry Fink recently wrote in his letter to CEOs around the world, “A company’s ability to manage environmental, social, and governance (ESG) matters demonstrates the leadership and good governance that is so essential to sustainable growth.”

Sustainable investing is not a niche or peripheral strategy – it’s about recognizing that the companies addressing humanity’s biggest challenges are often those that are well-positioned to grow.

Brian Deese, Global Head of Sustainable Investing at BlackRock

Simply put, we have found companies that effectively manage ESG factors that are material to the operation of their businesses are more likely to create long-term value than those that do not.

And it makes sense – companies with strong ESG practices tend to quickly adapt to changing environmental and social trends, use resources efficiently, have engaged (and, therefore, productive) employees, and face lower risks of regulatory fines or reputational damage.

It’s no longer a question of why investors should look to sustainability issues; it’s quickly becoming a question of why not.

Source: All information from The History of Earth Day, Earth Day Network, accessed 22 March 2018.

What is Sustainable Investing?

Sustainable investing combines traditional investment approaches with environmental, social and governance insights to help manage risk and enhance long term return.

Today, investors can use a variety of approaches to implement sustainable strategies across their portfolios. These include:

Screens: remove specific sectors or companies that are not aligned with investors’ goals or values.

ESG: uses a scoring system that aggregates data on environmental, social and governance issues at the security or asset level that is used to overweight an investment solution with stronger ESG performance.

Thematic: focuses on a particular E, S or G issue, for example carbon emissions or the diversity of a company’s workforce. These issues are weighted in a thematic sustainable investment solution.

Impact: involves targeting a specific social or environmental outcome as a goal of the investment solution, alongside financial return, and provides dedicated reporting on progress toward that outcome as part of the investment solution.

Climate change poses risks and opportunities for all Investors

To help bring this to life, we can look at a global challenge that will impact all of us – climate change. No investor can ignore the wave of climate-related regulations and the growing number of physical and technological disruptions effecting the industry and their portfolios – rather, the best investors are paying close attention.

As technology improves our ability to collect and analyse data on climate risk, we can more effectively deploy climate-related investment strategies that help manage risk and enhance long-term return.

And what we’ve found is that investors can have a big impact with even small tweaks in their portfolios. One such approach is to optimize benchmarks for climate factors. This means overweighting green companies and underweighting climate offenders, while keeping a portfolio’s return profile as close to the benchmark as possible.

As shown below, it is possible, for example, to cut a portfolio’s carbon footprint by over 70% while keeping the tracking error within 0.3%. Tracking error is a measure of the standard deviation of the difference in performance between a fund or portfolio and its benchmark over a given period.

Small difference, big impact

Carbon emissions of optimized global equity portfolio, 2015

Sources: BlackRock Investment Institute and MSCI, July 2016. Notes: The above is a simulation that aims to minimize a hypothetical portfolio's carbon footprint. In constructing the hypothetical portfolio, BlackRock takes all companies in the MSCI World Index and MSCI emissions data and performs a standard mean variance optimization for each given tracking error. Emissions data are measured in metric tons per million U.S. dollars in total capital (total equity and debt). The forward-looking tracking error is an estimation that uses the BlackRock Fundamental Risk for Equity model. This does not represent an actual portfolio, fund managed by BlackRock or investable product, nor is it a recommendation to adopt any particular investment strategy.


Index Name Currency 01/04/2013-
MSCI World Index USD 26.68 -0.87 6.64 22.4 -1.28

All data sourced from Bloomberg, correct as at 04 April 2018. Performance is based on US dollars and expressed on a total return basis with net income reinvested. The table shows a 5-year record of discrete annual returns.  Index performance is for illustrative purposes only and does not reflect any management fees, transaction costs or expenses. Past performance is not a reliable indicator of current or future performance and should not be the sole consideration when choosing an investment.

Greater carbon efficiency may signal operational excellence. It may also help protect companies from physical and regulatory risks. Recent environmental catastrophes such as the Fukushima nuclear disaster and the ‘Dieselgate’ fuel emissions scandal can serve as a drastic reminder of the dangers posed by unsustainable business practices.

Investing in a Sustainable Future

As we celebrate the 48th anniversary of Earth Day, it’s important for investors to recognise there are both risks and opportunities arising from with the transition to a low carbon economy as well as broader sustainability and social issues that can and often do impact portfolios.

It’s also important to realize there are more opportunities to take action, moving from the idea of sustainable investing to effective implementation.

At BlackRock, we are passionate about providing our clients with a clearer picture of the relationship between sustainability issues, risk and long-term financial performance, enabling more investors to act today.

BlackRock’s responsibility

BlackRock is committed to sustainable outcomes and long-term value for our firm and our clients. Our intention is to maintain and act upon a long-term view in the way we conduct our business, invest, serve our clients and give back to the communities in which we and our clients live and work.

First and foremost, our job is to help grow our clients’ assets. In doing so, our unique investment platform, technology, and risk analytics enable us to identify and offer exposure to attractive sustainable investment opportunities, helping investors identify long-term investing opportunities to accomplish more with their dollars.