2021 could be the year that advisors, like many investors and asset managers, embrace sustainable investing or at least consider it seriously.
“Interest has gone up tremendously in 2020,” says Jeffrey Gitterman, head of Gitterman Wealth Management, an RIA that specializes in sustainable investing and provides model portfolios to other wealth management firms. “Our climate strategies are the most popular. The transition (to zero emissions) is here and not going away.”
Gitterman cited the recent launch of Aladdin Climate, a new feature of BlackRock’s Aladdin portfolio management software that helps advisors quantify climate risk and low-carbon opportunities in portfolios, as well as Moody’s data on physical climate change risks and MSCI’s climate change scenario analysis, provided by Carbon Delta, which it acquired in late 2019.
“The great repricing is coming,” Gitterman said. “All data companies and reinsurers are looking at risk not yet priced into the market.”
There’s no denying that interest in sustainable investments and policies is rising.
US SIF, the Forum for Sustainable and Responsible Investment, reports that U.S.-domiciled assets under management using sustainable investing strategies grew from $12 trillion at the start of 2018 to $17.1 trillion at the start of 2020, an increase of 42%.
BlackRock’s first sustainable investing survey of several hundred institutional clients in 27 countries with $25 trillion in AUM released in early December found that half expect to double sustainable assets within five years, exemplifying “a tectonic shift in capital towards sustainable assets.”
And through the third quarter a record $31 billion flowed into ESG funds while nearly 400 ESG-focused funds launched — including ETFs and open-end funds, according to Morningstar.
“Demand has gotten to the point where most investors could use ‘40 Act funds to construct a broadly diversified allocated portfolio of sustainable funds,” said Jon Hale, Morningstar’s global head of sustainability research.
He noted there is increasing number of model portfolios consisting of just ESG funds, including BlackRock’s iShares Platform with iShares ESG Aware allocation portfolios, which tend to take a “lightest touch” approach to screening investments.
Beyond such ESG integration strategies are funds that exclude certain companies and sectors to align with investors’ values — often called socially responsible investments — and impact funds, focused on investing in assets that will have a positive impact on E, S and/or G issues.
In the meantime, many fund companies, even those that don’t have specific ESG funds like T. Rowe Price, have integrated ESG analysis across their portfolios and plan for more sustainable investing offerings, analysis and/or targeted activities on sustainability issues with corporate management through direct engagement and/or proxy votes.
T. Rowe Price expects to launch its first impact fund in 2021. BlackRock says it will use a sustainability lens in its 2021 capital market assumptions and that its votes on shareholder resolutions will will play an “increasingly important role” in its “stewardship efforts around sustainability,” focusing on companies’ efforts to achieve net-zero emissions by 2050 or sooner. (Despite pronouncements from BlackRock CEO Larry Fink, the firm’s proxy votes have disappointed sustainability activists.)
These and many other sustainable investing initiatives are taking place against a backdrop of shifting perspectives on sustainability issues, which was a key topic in many investment outlook webinars and briefings this reporter attended in the past two months.
“It used to be about how much investors were willing to give up to achieve sustainability objectives,” said Jean Boivin, head of the BlackRock Investment Institute. “Now it’s not about the tradeoff but about sustainability as a driver of returns, which will play out over years.”
“Whenever we look at a company we need to look at ESG factors because that will have an impact on the risk of a company and its potential rewards,” said William Davies, head of global equities at Columbia Threadneedle.
Taking ESG factors into account “leads to better investment outcomes, “ said Jody Jonsson, portfolio manager at Capital Group.
That has been borne out by some investment returns this year.
An analysis by S&P Global published in late December found that as the year progressed the performance of the S&P 500 ESG Index, which includes 300 of the S&P 500 companies, those with relatively higher ESG scores outperformed the S&P 500 by close to 2%.
“We are talking about resilience,” wrote Nathan Hunt. “Change is upon us — environmental change, social change, technological change, and geo-political change. ESG scores, benchmarks, and data are a way of measuring a company’s or a portfolio’s ability to weather that change effectively.”
Through the third quarter, Morningstar found that nearly three-quarters of sustainable equity funds placed in the top halves of their quartiles and and 45% placed in the top quartile.
“Given where the world is headed, companies that have ESG issues better managed or embedded … will be attractive growth prospects in the coming years,” Hale said.
He encourages advisors to be more proactive about sustainable investing, asking clients about their preferences, preparing for their responses and putting together a solution that they think will fit client needs.
“Prepare for a general investment solution; it doesn’t have to be customized for everybody,” Hale said, pointing to a wide range of solutions from basic ESG-tilted portfolios all the way to focused impact funds, as well as model portfolios.
Morningstar recently began formally integrating environmental, social and governance factors into its analysis of stocks, funds and asset managers, starting with analysis of more than 145 funds and 40 asset managers.
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