Getting started with sustainable investing
Sustainability is a huge word. The range of investment opportunities under its umbrella is enormous - and some of them are not even guaranteed to make you a return that you can feel proud of.
In researching for this piece, I stumbled on a remarkable statistic that just demonstrates how difficult it has been to filter the ESG universe down to the few names that count.
Morningstar analysed the assets of 155 sustainable funds and found 74 of them had fossil fuel investments.
No wonder selection is important. But how can you have a selection if you don't have a choice? In this edition of Expert Insights, we're delving into all things sustainability investing with Steve Monnier of iShares Australia. We'll discuss the importance of choice when it comes to ESG filtering and how investors can start harnessing sustainability as an investment megatrend.
Stay until the very end to learn about how Steve and the iShares team handle difficult boardroom decisions about ESG direction at the company level.
Watch the video or read the transcript below to get started.
How does iShares work with index providers to deliver investing choices?
It comes back to choice and providing our clients with choice. And so the work that we have done as we outlined in our 2020 letter was really about providing clients with choice. But I think index investing or ETFs have really democratised access, not only to sort of broad market investments but also sustainable investments as well if we kind of play that forward.
This sort of structure has really facilitated and allowed people to kind of access that type of strategy. And it has done it in a few different ways. So we know that they are transparent vehicles. We know that you can see not only the financial metrics in terms of tracking error, for example, but you can also see the sustainability characteristics such as a carbon footprint.
We know that they are low-cost type vehicles. Perhaps in the past, they had been the privy of more institutional investors. But today we see that this is something that broad retail investors can also access. So it's really helped to democratise access as well.
Then, we talked a little bit about returns and resilience. And so we can see that these strategies do provide more resilient type qualities. And you would sort of wonder, well, why is that? And that is in part because we can see some of these companies are more profitable and they are less leveraged.
I think what we start seeing through investing in these types of strategies, is a bit of a virtuous circle, and that the capital is being allocated to those companies that are perhaps better positioned to take advantage of those risks and opportunities and also have those sound governance practices that we are looking for.
But simply looking at the indexes as well, the sustainable index is really building on those traditional broad market industries that are available to clients today. They can actually invest in these types of strategies without really having to change their strategic asset allocation.
What makes iShares stand out as a sustainability investor?
I think it's starting from the perspective of our clients and providing our clients with choice is really at the heart of what we do. As I mentioned, it is at the heart of how we've made sustainable our standard for investing. But I think we've also been able to develop a framework to help our clients think about this. Whether it is replacing using sustainable strategies as a replacement strategy to their core, leaning into particular structural, social, and environmental trends, or leaning into strategies that align with those kinds of more impactful, positive social, and environmental outcomes.
Then, if I unpack that a little bit if we think about using our sustainable index strategies as a replacement to their core strategies, they can do this in a number of ways.
They can do this by using our screen solution. We talked about how this is sort of an entry point to sustainable investing. It's really about taking out those names or those sectors that don't align with the end asset owner's values. So, that could be one strategy.
Another strategy could be around a more ESG optimised strategy. Which is tracking a benchmark very closely, but having an improved ESG score outcome.
Then, the third type of product that is available for clients in our framework is really to do something that might be a bit best in class. A slightly higher conviction type strategy - it's maybe a little bit more concentrated and therefore has a little bit more tracking error, but it's really about that belief of leaning into those companies that are leaders in their particular sector so there are better-performing companies in terms of ESG credentials and really trying to lean into that.
How can investors start harnessing sustainability investing?
I think it comes back to this idea of choice and that's where we spent a lot of time working with index providers, developing solutions to recognise that our clients' needs are many and varied.
How can we develop solutions that meet both the financial and the sustainable goals as well? So that's really our northern star when we think about how we express our fiduciary duty to clients. That's a really important part of our approach.
Another really important part of our approach is our framework, our sustainable product framework, and how we're able to help clients think about, well, where are they on their sustainable journey.
- How can they start if they want to invest in a more sustainable way?
- Or if they have been doing sustainable investing for some time and have higher conviction, what sort of strategies are available to them?
But we also know that climate risk is probably the number one issue on clients' minds. And so developing a product framework that really helps clients think about how they navigate the transition or drive or invent the transition and how we develop solutions to support that has been really important.
How have recent events shaped your voting pattern as investors?
Our investment stewardship team is 70 people strong. It's a global team, it's a centralised team and it's responsible for voting and engaging across all of our listed global holdings. I think it's an important part of an index investor's duties to actually vote and engage. Because, unlike an active investor, you're unable to walk with your feet. So the way that you can encourage companies to adopt those sustainable business practices that we think will lead to better risk-adjusted returns for our clients, in the long run, is about engaging and voting. And so we vote all of our index and active holdings.
It's time to think sustainably
Sustainable investing is about investing in progress. Recognising that companies with a more sustainable approach to business may be in the best position to grow. At BlackRock, we’re committed to making sustainable investing as straightforward as traditional investing.
See our site to find out how our sustainable ETFs and index funds give investors the clarity they need to build sustainable portfolios.
MORE ON Investment Theme
2 stocks mentioned
3 funds mentioned
1 contributor mentioned
Hans is a content editor at Livewire. He is the lead writer of Charts and Caffeine and created Signal or Noise. He graduated with an economics and journalism double degree from Macquarie University.