The Past Five Years – Rising Expectations
Sustainability has become an important issue for many regulators and investors. Regulations have come thick and fast with Securities Financing Transactions Regulation (SFTR) and Sustainable Finance Disclosure Regulation (SFDR), as well as Task Force on Climate-related Financial Disclosures (TCFD) having been implemented.
In addition to changes in the regulatory landscape, each and every investor has different objectives. Hickey explains: “With greater understanding of how ESG factors can impact asset valuations, many asset owner clients – particularly long-term investors like pension funds – are asking how to mitigate risk and capture opportunities associated with sustainability and the transition in their portfolios. Some want to increase their exposure to the transition, some want to align their portfolios with a net zero pathway, and some want to achieve impact or sustainable outcomes in addition to financial return or to limit exposure to specific sectors. Others may choose not to invest using strategies that have sustainable investment objectives.”
For asset managers like BlackRock, Hickey explains, “As a fiduciary, our approach to investing is grounded in three principles. One, we start by understanding the client’s investment objectives. Two, we seek the best risk-adjusted returns within the scope of the mandate they give us. And three, we underpin our work with research, data, and analytics.
Hickey adds: “That means being as rigorous in analysing the impact of ESG factors on portfolios as you would any other investment factor. If you’re incorporating ESG related risks and opportunities, it’s not only about being more sustainable, but making sure you can monitor your risk more fully.”
There has been a need to develop products that enable greater climate risk integration to meet client demand. Guirey explains that data providers have a key role to play in having decision-useful information ready across multiple asset classes. This can be a challenge in less liquid segments such as private markets and infrastructure.
Indexes provide a medium through which Pension Schemes can reflect their objectives, either by meeting and aligning with Climate Transition Benchmarks or Paris Aligned criteria set out in the EU Taxonomy or by employing more specific Low Carbon Indexes and other customized criteria in a rules-based index methodology.
The range of available indexes on the ESG and climate front has expanded to offer greater choice, to meet the ever growing needs of the market.
Additionally, data providers play a key role in helping clients seeking to further harness data supplied to them and keep up to date with regulations such as TCFD and SFDR. The sustainability landscape is constantly evolving, meaning index and data providers need to stay at the forefront of regulatory demands if they are to assist their clients.
The Role of Indexes
For ESG data to become integrated into more investors’ portfolios, widely adopted indexes may need to capture more climate risk factors. Hickey and Guirey see a future where themes that were once the focus of niche funds, will become core components of major index funds too. Guirey: “A key area to watch for me is biodiversity. As biodiversity impacts are becoming visible, consider deforestation, wildfires, ongoing ocean pollution.”
On top of this, Hickey explains that there will be greater granularity to the climate risk provided, with factors such as carbon and natural capital being captured. The aim is that more clients and investment managers will be able to see different parts of the investment ecosphere and have a comprehensive view of their climate risk exposure.
The Next 5 Years
However, while ESG data integration is becoming more readily available, it doesn’t make it easy to implement. Guirey and Hickey acknowledge that data providers are working hard on how to define material issues and improve data availability on themes such as deforestation.
Guirey adds “There has certainly been a change in investors sentiment away from action that solely decarbonizes their portfolio and into the impact their actions are having on real world decarbonisation. This has an impact on how they engage and the information that Pension Schemes and Investors require.
Challenges also persist in other forms. Regulatory harmonisation is an ongoing process and the need for collective action remains key.”
Hickey concludes: “We’re aware of how much investment is required to make the transition happen. If we can provision the product choice that allows that money to flow, for me, being just a small part of that machine, is extremely exciting.”
This article is co-sponsored by Blackrock and by MSCI Inc. Although they may utilize MSCI products or services, none of the financial products or services of BlackRock, Inc. or its affiliates, including the [funds/accounts/products/securities] referred to herein, are sponsored, endorsed or promoted by MSCI Inc. or its affiliates. MSCI bears no liability with respect to any such BlackRock products or services or any index on which they are based. The applicable prospectuses contain a more detailed description of MSCI’s limited commercial relationship with BlackRock or its affiliates and any related products or services.
Risk Warnings
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
ESG Investment Statements: This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.
The environmental, social, and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
Important Information
This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. MKTGH1023E/S-3073498.
Comments