A systematic approach to sustainability

Three Qs for Debbie McCoy

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How do you account for sustainability in your portfolios?

We believe environmental, social and governance (ESG) issues can have a significant bearing on a company’s long-term performance, so these are important considerations in our investment process.

A host of external companies provide ESG scores or ratings to asset managers. To date, however, the information used to arrive at these scores has been largely based on data provided by companies. The question is, are these disclosures simply a box-checking exercise for companies or are they truly aimed at influencing company results? Our research has actually revealed that firms with more ESG policies in place don’t necessarily have fewer controversial ESG incidents (regulatory investigations, employee complaints, poor environmental record, among other concerns). These third-party scores may not be providing sufficient insight if they are only looking at the individual policies companies are putting in place.

Risk. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. 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.

Why this disconnect?

The mistake many investors make, in our view, is to assume that the mere existence of an ESG policy is a good thing. The company is applauded for having an ESG-related policy, distracting from its successes or failures on actual, substantial ESG issues. In fact, it may be that firms with more policies are in a sensitive environment and/or have experienced an ESG controversy, which prompted the introduction of additional ESG policies. The result of this is that firms with worse sustainability outcomes may have more ESG policies as a result. Ultimately, relying on third-party scores alone may position an investment portfolio toward more controversial firms — the opposite of what’s intended.

How do you address this challenge?

We do not oppose scoring. To the contrary, we know a systematic approach demands it. But we understand that what you measure matters. We take multiple issues into consideration when assessing sustainability, including indirect indicators that may adversely affect companies’ ESG profiles. Everything we consider must be able to tell us something about a company’s performance, not just the headline ESG issues. We insist that our research deliver objective, accurate and meaningful information that can help us to forecast and be predictive about likely outcomes, even as we describe and assess the current moment. This eagerness to measure what matters often brings us to a view that differs from that of the market. And if we’re right in our assessment, that can mean a potential source of returns for our clients.

 

Debbie McCoy
Debbie McCoy
Managing Director and Head of Sustainable Investing within the Systematic Active division of BlackRock’s Active Equities Group

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. The opinions expressed are as of May 2020 and may change as subsequent conditions vary