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We have moved from a “why?” to a “why not?” moment in sustainable investing. Drawing on the insights of BlackRock’s investment professionals, we show why we believe it is feasible to create sustainable portfolios that do not compromise return goals and may even enhance risk-adjusted returns in the long run.
Strong ESG performers tend to exhibit operational excellence — and are more resilient to perils ranging from ethical lapses to climate risks. ESG data are still incomplete, largely self-reported and not always comparable — and we advocate for greater consistency and transparency. Yet breadth and quality have improved enough to make ESG analysis an integral part of the investment process.
Do equity investors need to choose between returns and ESG? Our answer: No. We looked at traditional equity indexes alongside ESG-focused versions. Highlights are outlined in the No sacrifice required? table. Annualized returns since 2012 matched or exceeded the standard index in both developed and emerging markets, with comparable volatility. EMs were the standout.
New ESG indexes in EM debt — a collaboration between J.P. Morgan and BlackRock — could prompt greater capital allocation to more ESG-friendly issuers over time, we believe. The Sustainable sovereigns chart shows country weights in the new JESG EMBI Global Index versus its standard counterpart. Gaps in ESG performance across countries lead to meaningful shifts in index weights — and perhaps investment flows. Example: A large drop in China’s country weight could lead to selling of its bonds as investors adopt the new index.
Subsets of ESG metrics can point to revealing trends. Take self-reported carbon emissions. We find global companies that have reduced their carbon footprints (annual carbon emissions divided by sales) the most every year have outperformed the carbon laggards. See the orange line in the Carbon efficiency chart. Why? Companies that find ways to make more with less tend to be more efficient.