The right way to get investors a long term return they can trust

Environmental, social and governance issues have been thrust from the fringes into the mainstream of investment strategy.

For BlackRock, a fund manager with about US$9.5 trillion in assets under management, ESG has become part of the everyday process. 

Blair Hannon, BlackRock's relationship manager and iShares investment specialist, says there are a number of factors behind this.

Overall, ESG focuses strongly on governance, which gives companies a better chance to outperform in the long term. 

BlackRock recently reported that throughout the COVID recovery, 51 out of 57 of Morningstar's sustainable indices outperformed their broad market equivalents, while MSCI reported 15 of 17 of their sustainable indices outperformed broad markets. This shows the resilience of this sector through a downturn. 

"When we think about it from the index point of view, it's about choice. We want to give investors choice," Hannon says.

In this video, he explores BlackRock's approach to sustainable investing. 

Edited transcript

BlackRock CEO and chairman Larry Fink, in his 2021 annual letter to investors, said: “Climate risk is investment risk.” What are these risks and how are you mitigating your clients’ exposure to them?  

Obviously, there's a raft of risks that investors face today. And many have been known for many, many years. We think something like climate risk is essential as part of that overall process. Incorporating data, insights that are ESG related should be built into the process, right alongside traditional investment metrics.

So when you're thinking about investing and when we at BlackRock think about investing from the perspective of our active portfolios, ESG is manageable. It is part of the process.

It's one of the boxes that we must tick when we think about what we're going to do if we would invest in a company. And that's not just for sustainable investment portfolios, that's for every type of investment we have from an active point of view.

When we think about it from the index point of view, it's about choice. We want to give investors choice around 'am I happier and comfortable investing in what is a traditional market-cap index, like the S&P 500, S&P ASX 200? Or around climate risk, I want to invest in a more sustainable investment process that has screened out some of those companies that I don't believe in.'. I think that choice is important. And I think it really goes back to this idea that risk is integral to the process. So if it's a risk, does it then provide better investment returns in the future? And we have seen some data, case studies around the resilience that sustainable portfolios have through things like COVID or even over a longer period. Yes, they have been potentially more resilient and are likely to outperform in the long term as well.

What is BlackRock doing to help drive sustainability outside of sustainable investment products?

BlackRock has taken a really strong approach to this. And I think there's a couple of key areas we could think about BlackRock as a company is doing. But BlackRock as a fiduciary, what we do, what we're really passionate about, is managing the money of our clients.

We don't invest our own money. We're investing clients' money. And as many investors would know, we have a large index-investing capability in the iShares business. We're bestowed a fiduciary role here, and what that role entails is talking to companies about advancing the long term economic interests because again, we're a fiduciary.

We want to make sure that our investors are getting that long term return. So, we will vote and we will be transparent around how we vote in certain companies.

And we want to, even outside of those votes, engage companies, to focus on their governance, to focus on their sustainability risks, because again, we believe that those risks are built into the process and they will generate longer-term financial returns that are better for our clients. I think that's certainly one component.

If I think about BlackRock in general, as you might've read through Larry's letter earlier this year, we're supporting the transition to net-zero by 2050. It's important to us as a business, not just from the investment products we have, but us as BlackRock.

We're doing a range of things that we think are important to help our investors and our clients get there. For example, we're going to publish things like temperature alignment metrics for all our public equity bond funds. We're going to give our clients who utilise our Aladdin software, many institutional clients, access to climate objectives.

We're going to scrutinise more of our portfolios around climate. And then back to that earlier point around voting, we're going to ask companies that we invest in, what's their business plan? What are they doing to get to net-zero by 2050?

And then from a BlackRock point of view, we need to be accountable as well. There's no question. So, we're going to report, and be transparent around what's our environmental impact; how we govern. We're going to disclose all that information too. 

It’s time to think sustainably

See how sustainable ETFs and index funds give investors the clarity they need to build sustainable portfolios here.