Why sustainability investing is a long-term game

Hans Lee

Livewire Markets

The modern definition of sustainable investing can be traced back to the early 1970s when Pax World launched the first sustainable mutual fund. Two United Methodist ministers were trying to avoid investing church dollars in companies contributing to the Vietnam War, and from that, founded the Pax World fund. 

Incidentally, Pax World still exists today and yes, that fund is still there after more than 50 years. 

In 2011, 40 years after the founding of the Pax World fund, Blackrock CEO Larry Fink began writing an annual investor letter that is now read by all of Wall Street. Since 2019, that letter has included a note on the importance of sustainability as an investment goal. Here is an excerpt from his 2022 letter.

This is just the beginning – the tectonic shift towards sustainable investing is still accelerating. 
Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customized portfolios and products, we will see more money in motion.

iShares Australia's sustainability specialist Steve Monnier feels the same way. He argues that this is just the start of a very long transition - with the global economy going from "shades of brown to shades of green". 

In this edition of Expert Insights, we'll take a look at the evolution of sustainability in funds management plus take a closer look at the iShares approach to investing. Plus, find out why he believes sustainability-linked strategies can be a resilient force even in market downturns.

For his in-depth views, please click the video or read the transcript. 

EDITED TRANSCRIPT

Why is sustainability investing a fiduciary responsibility?

Since Larry has been writing his letters, since 2011, he's always approached that through the lens of our fiduciary responsibility to our clients - recognising that investment stewardship is a core part of that responsibility. 

But also about having a long-term perspective when it comes to managing assets on behalf of our clients. In recent letters, he's talked more about purpose, and then more recently around stakeholder capitalism, and how that can be a force for good. 

And I think what we've really seen in that latest letter is recognising the role that companies play within the society in which they operate, and how they interact with their employees, their suppliers, and the communities, as well as shareholders. So I think that that will continue to be a real focus as we think about the transition that we are looking into.

We recognise that we're at the start of a very, very long transition, that the economy will go from shades of brown to shades of green, and that through that transition, companies will need to be able to navigate through that. 

So one of the things that we've been calling for from companies through that is the TCFD disclosures, but specifically around target-setting as well, around that. Because we think that that is vitally important for clients as well. 

That's been a very big part of our work and our engagement work with companies. And I think more broadly, this is sort of the direction where we recognise that during that transition, we're going to see the way that we produce energy, the way that we move people and move goods, is going to kind of transform the way that we operate.

How does iShares tackle sustainability investing?

I think we start from the position of our clients, and our clients really come to this from one or two impulses, either the impulse to avoid or the impulse to advance. So, typically sustainable investing has very deep roots around screen-type strategies, which is the avoid, so avoiding investing in particular stocks or particular sectors that violate their end asset owner's values. So it's a much more kind of values-based discussion. On the other hand, and increasingly, we see clients want to advance their investment in sustainability, and that's really about aligning their capital with positive social and environmental outcomes.

During our 2022 letter, we talked about the transition to a net-zero, and we introduced a framework to help our clients navigate the transition to a decarbonised world, which we termed navigate, drive and invent

This really complements that framework as well, because we think that for every investor, the base case position will be to navigate the transition, to navigate those risks and opportunities associated with the transition. But what we do see from clients, is some clients want to go further, they want to do more, and they want to kind of drive. They want to invent the transition. For that type of strategy, that's really about how they align perhaps capital to perhaps carbon-intensive companies that have good decarbonisation strategies as well. And so around all of that is really where we're developing solutions to provide clients with choice when it comes to sustainability.

How do sustainable fund returns compare against other fund returns?

Well, I would say that sustainable investing is not just one single thing promising one single outcome. It can have different objectives and different outcomes, which is really why you want to start from the perspective of your clients and what their objectives are. I talked a little bit about data before, and that data has helped us understand that you don't need to trade returns to invest sustainably. And certainly, if we look through periods of market downturn, or if we look through the COVID period as well, what we did see was that real resilience and outperformance of sustainable strategies relative to their parent benchmark. But if we think about the transition, and again, thinking about the long-term perspective that our clients bring to this, it's not about today or tomorrow. The transition is a 30 to 50-year time horizon. And so typically clients aren't investing, looking at simply just returns today, tomorrow, or the next quarter, they're really taking a much longer perspective when it comes to sustainability.

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.

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iShares Core MSCI World Ex Australia ESG Leaders ETF
Global Shares
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iShares Core MSCI Australia ESG Leaders ETF
Australian Shares
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iShares Core MSCI World Ex Australia ESG Leaders ETF
Global Shares
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Hans Lee
Content Editor
Livewire Markets

Hans writes the website's pre-market wrap "Charts and Caffeine", moderates "Signal or Noise", and leads Stats Incredible in the daily newsletter.

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