The politics of sustainability

Apr 21, 2021
  • Dennis Lee, Market Insights Lead

Let’s first determine the size of the elephant in the room.

According to a BlackRock survey in December 2020, investors representing $25 trillion in assets plan to double sustainable (ESG) assets in five years. There’s mounting evidence that sustainable investing is here to stay.

Back to the elephant. As a financial advisor, how do your conversations about sustainability start with clients? Does sustainability appeal to their personal views? Do they view sustainable investing as a political endeavor?

There’s no “P” in ESG

Of course, opinions fall on either side of the spectrum. Many do feel that sustainability aligns with their worldview, especially when it comes to climate change. Others view it as a misguided attempt to add virtue to investing.

But there’s optimism for unity here. Because both camps, when put to the test, start asking questions about investment performance, and what sustainability investing really is all about.

Surely trying to do good with your investments – whether you agree with its premise or not – could only lead to poor performance? Does sustainable investing hold up against traditional investing?

The good news is, as soon as investors then begin asking questions about the investment case for sustainability, you’re on the right track.

Because as an article in Barron’s quipped, there’s no “P,” or politics, in ESG.

Volkswagen: a story to share with clients 

There’s plenty of literature that shows that sustainability has had competitive investment performance. But for the uninitiated, here’s a story that can help you illustrate what sustainable investing is about:

In 2015, Volkswagen became embroiled in a now infamous scandal. The company admitted that they cheated on emissions tests, violating the U.S. Clean Air Act. The CEO resigned. Its stock plummeted and the company lost almost a quarter of its market value in a single day.

But the interesting part of this story is that investors who owned Volkswagen stock never saw this coming. Company reports, earnings results, and other traditional measures of financial analysis weren’t enough.

Turns out, there were signals that a sustainable lens incorporating environmental, social, and governance (ESG) insights could have potentially flagged. Former executives dominated the supervisory board, with a lack of outside perspective. There were too many significant shareholders on the board. Of those that did not have a financial stake (often called Independent Directors), there were none with industry expertise, nor experts on managing risk. Volkswagen also had a culture where sales teams were under immense pressure to hit their targets and usher in a new era of diesel engines.

Most people remember the Volkswagen scandal as an instance of failure to protect the environment. But investors should view it as a cautionary tale that traditional financial analysis alone may not provide the full picture. 

What a sustainable lens can reveal 

The more you incorporate sustainability as an added investment lens, the more you began to see. For example, BlackRock believes that on average, companies and sectors that are less carbon-intensive are enjoying a premium for their stocks. Whatever their political views, investors are optimistic about those that are preparing for a net-zero world. 

We’re seeing that technology and healthcare may be the biggest beneficiaries given that producing healthcare services or technology requires a less carbon intensive production process (compared to energy, utilities, and materials).

And for what it’s worth, at BlackRock, we’ve incorporated sustainability into our forecasts for every asset class (see our capital market assumptions).

If that’s not enough, there’s a whole lot of social proof that you can share with clients (below). You’d have to be an optimistic person to believe that 70% of institutional investors are incorporating ESG strategies for altruistic purposes.

A growing recognition for sustainability

Sustainable Stats

The bottom line

If you’re a financial advisor, you might still be cohabitating with the elephant in the room – the perceived politics of sustainable investing. Talk through those misconceptions.

Because regardless of their views, it’s likely that many investors are still underappreciating the opportunities that a sustainable investment lens can open up.

When they’re ready for an investment conversation, get started.

Read more about how to incorporate sustainable investing into portfolios and download resources for your clients.