Sustainability: a lockdown lesson we all need to learn

Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies. The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

When I first entered the investment world, sustainable investing was a niche affair. One for those who wore socks with sandals and made their own bread.

But just as baking and questionable footwear have gone mainstream during lockdown, so too have environmental, social and governance (ESG) factors.

Indeed, sustainability is one of the few investment winners from 2020 so far. Like sourdough, it’s on the rise.

Sustainable investment funds have weathered recent storms far better than their peers. They have fallen 12% year to date, half the decrease of the S&P 500 for the same period.1

Larry Fink, BlackRock’s CEO, said in his annual letter to CEOs in January that “climate change has become a defining factor in companies’ long-term prospects”.

This belief underpins everything we do at BlackRock. BlackRock’s Sustainable Investment Institute and Public Policy Team are delivering thought leadership around how trustees can adopt ESG tilts into their investment principles and help them design and manage a sustainable investment strategy.

Why sustainable companies thrive

Sustainability isn’t just for the short term. Our investment conviction is that sustainability-integrated portfolios may provide better risk-adjusted returns to investors.2

Our research shows a correlation between sustainability and traditional factors such as quality and low volatility. These factors suggest resilience in downturns. That is exactly what we’ve been seeing over the past few months – and over the longer term, too.

Risk: There is no guarantee that research capabilities will contribute to a positive investment outcome.

In the first quarter of 2020, BlackRock has observed better risk-adjusted performance across sustainable products, with 94% of a globally representative selection of widely analysed sustainable indices outperforming their parent benchmarks.2

Figures from global research agency Morningstar back this up. The group's researchers compared 745 sustainable funds against 4,150 of their traditional rivals. In all categories – in the UK and abroad – sustainable funds matched or beat returns from traditional ones over 10 years.3

Morningstar found the average annual return for a sustainable fund invested in large global companies was 6.9% a year in the past decade, while a traditionally invested fund made 6.3%.3

The forces driving sustainable investment

There are several reasons why we believe sustainable investing should be our standard approach and could be a critical foundation for our client portfolios now and in the future.

  • Sustainable spending will rise. Whether it’s airlines promising to become carbon neutral or multinationals seeking better ways to operate, investment in sustainable solutions and consumer preference for sustainable products will continue as we move towards a post-coronavirus normal.
  • Sustainable companies are more resilient. We have observed that companies with strong ESG strategies have complementary strengths including good customer relations, more effective boards and high employee job satisfaction – all of which could lead to outperformance and resilience.2
  • Investors are changing their stance on ESG. There’s increasing evidence that more investors want to buy sustainable funds, especially during this volatile period.2 The coronavirus has accelerated this shift in preferences, which in turn makes sustainable funds even more resilient.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

Meeting your ESG obligations

Trustees must be mindful of their obligations on sustainability. Since October 2019, they’ve had to include ESG issues in the list of financially material considerations in their statement of investment principles.

From October 2020, they must do more. Schemes will be asked to include information on how asset managers’ performance and remuneration align with trustees’ ESG policies.

The good news is there are many more options for trustees wanting a sustainable portfolio, with more ESG-focused funds and ETFs than ever in the market.

The bad news? This means more choices to make, more metrics to understand and yet another responsibility for hard-pressed trustees.

It’s one reason why many people delegate this responsibility to a fiduciary manager.

At BlackRock, we’ve been building tools to help us measure sustainability, including a Carbon Beta Tool to stress-test portfolios for carbon-pricing scenarios. We’re trialling another to analyse sustainability-related company characteristics and one to analyse physical climate risks.

Deploying these tools, a team of global experts and our knowledge of ESG, we aim to align our decisions with clients’ investment objectives without losing sight of the importance of sustainability.

From ‘nice to have’ to ‘new normal’

Along with many others, we’re mulling over what might constitute the ‘new normal’. Sustainability must and will play a bigger part in what investment solutions look like in the future.

Pension funds need to decide how they do that.

We might ditch the sandals. We might bin the sourdough. We might even manage a day without a video call.

The importance of ESG factors, however, is a lockdown lesson we all need to learn.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy.

1 Older ESG Funds Outperform Their Newer Rivals in Market Tumult, Bloomberg, March 2020.
2Sustainable investing: Resilience amid uncertainty, BlackRock, June 2020.
3Do Sustainable Funds Beat their Rivals, Morningstar, June 2020.