Sustainable investing was once viewed as a trade-off between value and “values.” Yet today, it’s something investors can no longer afford to ignore. What has changed? More granular data, more sophisticated analysis and shifting societal understanding of sustainability as well as growing awareness that certain factors — often characterized as environmental, social and governance, or ESG — can be tied to a company’s long-term growth potential.

BlackRock is increasing its focus on sustainability across the board — from our investment processes to the investment solutions we offer. There is growing recognition that the field presents a largely untapped source of information that can potentially identify investment risks and generate excess returns. At the same time, the data are imperfect, scoring methodologies differ, and investors need to gain greater clarity on the pitfalls of this emerging field.

We discuss three key themes driving transformation in sustainable investing: the aim to create sustainable portfolios and strategies that do not compromise financial returns; the effort to use innovative research to go beyond headline ESG scores; and the integration of sustainability-related issues into traditional investment strategies. Our work fuels our conviction that the future of investing is sustainable.

Summary

• Sustainable investing is no longer a niche area; it is going mainstream. Assets in dedicated sustainable investing strategies around the world have grown at a rapid clip in recent years. We are seeing a surge in clients’ interest in incorporating sustainability-related insights into their investments. This demand looks poised to accelerate — driven by societal and demographic changes, increased regulation and government focus, and greater investment conviction.
• Enhanced data and insights make it possible to create sustainable portfolios without compromising financial goals. Our research, which relies on backtested data, shows how ESG-focused indexes have matched or exceeded returns of their standard counterparts, with comparable volatility. We find ESG has much in common with existing quality metrics such as strong balance sheets, suggesting ESG-friendly portfolios could be more resilient in downturns.
• Driving innovation in sustainable investing requires going beneath the headlines. ESG data have evolved, but are still incomplete. New technologies and methodologies have allowed us to make great strides in improving sustainability data. This includes techniques to estimate missing data, and determine their materiality to investment performance.
• Integration of sustainability considerations into investment processes is on the rise — and for good reason. Incorporating relevant sustainability insights can provide a more holistic view of the risks and opportunities associated with a given investment. There is no one-size-fits-all approach, but the opportunity to improve investment processes by integrating material sustainability considerations is real and growing.

Evolving ESG data

With the growing interest in sustainable investing, data providers have increased their efforts in gathering and reporting ESG indicators. MSCI, for example, has boosted the number of companies and key metrics it tracks. See the Broader coverage chart below. Yet a lack of accepted data-reporting standards makes it hard to readily compare or combine insights across providers, and patchy past data make historical analysis challenging. In response, we have created a customized database that combines data across many ESG sources and fills in the historical gaps.

Broader coverage
ESG reporting by MSCI ACWI companies, 2009 and 2017

^{Sources: BlackRock Sustainable Investing and BlackRock Investment Institute, with data from MSCI, December 2018. Notes: We consider all 150 key metrics used by MSCI in its ESG corporate ratings system. A company reporting a given key metric at least once in a given year is considered one data point. The total number of potential data points are calculated by multiplying the number of companies in the MSCI ACWI Index (2,607 in 2009 and 2,622 in 2017) by 150. The orange portion of each ring shows the share of those data points that were actually reported by companies.}

A win-win

Regulatory actions and technological innovations are fueling a transition to a low-carbon economy – a society more efficient in producing goods and services, and less reliant on carbon dioxide (CO2) emissions. Our transition-ready investment approach focuses on directing capital to companies best positioned to navigate this global shift, with the aim of helping deliver competitive long-term financial returns relative to traditional benchmarks.

Beyond the potential financial uplift, a transition-ready approach can also provide better environmental outcomes relative to standard benchmarks. We find a focus on transition readiness showed a 50% reduction in emissions intensity and 30% increase in exposure to clean technology relative to the standard benchmark, based on our analysis of a hypothetical global equities portfolio. See the Environmental validation chart.

Environmental validation 
Environmental metrics of a hypothetical “transition ready” equity index, 2015–2018

^{Past performance is no guarantee of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Sustainable Investing and BlackRock Investment Institute, with data from MSCI and Sustainalytics, December 2018. Notes: The chart shows the emissions intensity and exposure to clean technology of a hypothetical “transition ready” equity portfolio that is based on the MSCI World ex-U.S. Index. The hypothetical portfolio is designed to maximize BlackRock’s “transition ready” signal while keeping within an annual tracking error of 100 basis points. Emissions intensity refers to MSCI-defined direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions normalized by annual sales. Clean tech exposure is represented by exposure to clean tech revenue as assessed by Sustainalytics, on a 0-100 scale (from the worst to the best).}