Why sustainability will become the new standard for investing

Hans Lee

Livewire Markets

There is no doubt that sustainability is all the rage - and for good reason. There is not a day in the news cycle where ESG skeptics and proponents clash on a range of issues. Now, regulators and index providers are starting to take notice.

Last week, the US securities regulator (SEC) proposed two new rules. One proposal would require funds with “ESG” or related terms, such as “sustainable,” in their names to commit at least 80% of assets under normal conditions to investments that meet their ESG criteria. The other would require funds that use ESG in their investment process to disclose more about how they do so in their prospectuses and annual reports.

Then late last week, Tesla was removed from the S&P's ESG index - even as Exxon Mobil continues to remain there. 

So is sustainability taking its place as the next stage in the evolution of investing? If so, what will the rules surrounding its presence look like? We posed those questions to iShares Australia sustainability specialist Steve Monnier.

For his in-depth response, watch the video or read the transcript below.


Why will sustainability become the new standard for investing?

In 2020, as part of Larry Fink's Annual CEO letter, we announced that sustainable was our new standard for investing. And that was really based on two of our investment convictions. So one, that sustainable and climate risks were investment risks or are investment risks. And secondly, that sustainability integrated, climate integrated portfolios tend to be more resilient and provide better risk-adjusted returns in the long term, recognising that most of our clients are long-term investors saving for long-term goals, such as retirement. 

In terms of how it actually manifests, it means that sustainability is very much at the heart of our investment approach. So everything from how we manage risk, construct portfolios, develop sustainable solutions, and also how we engage with companies through our stewardship function as well.

Does ESG investing present a trade-off against returns?

I think it's a longstanding myth that you need to sacrifice return to invest sustainably. And actually, we really disagree with that. We believe that the opposite is true, that you don't need to make that return sacrifice to invest sustainably. 

Why do I say that? There are probably a couple of reasons, partly its improvements in ESG data, partly greater disclosure from companies around ESG data and insights that enable us to do that analysis now that really helps us to dispel those myths that you need to make that kind of risk-return trade-off. So I think that those two things have been really informative for us as investors as well.

Does ESG need a universal standard?

I think it's been a priority for a long time. It's certainly been a priority for investors. And investors like ourselves who've been calling for a convergence of different sustainability frameworks and harmonisation of standards as well. 

So I think that is a priority. 

And what we're really seeing in the last year is private market standard setters, organisations coming together, really trying to work towards a single harmonised goal of having one sustainable standards. 

That's definitely been the direction of travel and it's certainly something that we have been calling for as investors for some time because it helps us in terms of how we think about the sustainability insights. How do we think about having meaningful information for all investors to be able to analyse model portfolios and also disclose in a transparent way? 

I think that continues. And for us, we very much welcome that sort of harmonisation. And we've been really calling for that through our public policy engagement work.

When we engage with companies, we've been asking for companies to disclose in line with the TCFD or SASB frameworks for the past couple of years. And what we have seen is great progress around those two reporting frameworks. 

Until we reach that single harmonised approach, we continue to advocate for that in the meantime, because we think that they are decision-useful structures for investors. 

But what I would say is that it's not just for public companies to be disclosing in line with the TCFD framework. But we think that there's real value for large private companies to also disclose in that framework.

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.

iShares Core MSCI Australia ESG Leaders ETF
Australian Shares
iShares Core MSCI World ex Australia ESG Leaders (AUD Hedged) ETF
iShares Core MSCI World Ex Australia ESG Leaders ETF
Global Shares
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Hans Lee
Senior Editor
Livewire Markets

Hans is one of Livewire's senior editors, leading the team's coverage of economics, the RBA, and global markets. He is the creator and moderator of Signal or Noise, Livewire's show dedicated to top-down investing.

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