The conversation around sustainable investing, or ESG (environmental, social, and governance) investing has rapidly taken on increased importance. Over the past year, the pandemic has proven the value of incorporating sustainability into corporate practice – and that extends beyond just environmental factors to social and governance policies. By incorporating ESG factors into their corporate structure, companies have not only been able to cope during challenging times, but also now have a social license to continue operating in the future.
Just as the signing of the Paris Agreementi in 2015 to combat climate change was a turning point for global sustainable affairs, the global pandemic is reinforcing structural change. The world is moving toward a stakeholder economyii, where companies seek to serve the interests of consumers, employees, suppliers, and communities as a whole.
More and more people, both globally and locally, are joining the conversation about sustainable investment strategies, and more asset management firms believe it’s important for financial advisors to do the same. The first step is to help guide investors by addressing misconceptions about sustainable investments and ESG.
To do this, we spoke with Jordie Olivella, Head of Distribution and Commercial Strategy for BlackRock’s Offshore Wealth business, to debunk three of the most common myths he hears from clients when it comes to sustainable investing.
Myth 1: Sustainable investing means sacrificing returns
Even before COVID, studies showed that sustainable investing can pay off, but last years’ market volatility was a litmus test, further demonstrating the resilience of sustainable products. Over the course of 2020, companies with better ESG profiles provided resilience in portfolios and outperformed lower-rated peers.
“In the first quarter of the year 94% of a globally representative set of sustainable indices outperformed standard indices. Extend that performance to the whole of 2020, and 81% of that same set of indices outperformed,” points out Jordie Olivella.
Myth 2: There aren’t any standards
It is true that definitions of “what is sustainable” can vary depending upon which investor or investment manager you speak to. At a global level, standardization should take into account three stages, according to BlackRock: the way in which companies report information, methodologies for obtaining an ESG rating, and the classification of financial products. BlackRock uses standardized methods to create indexed products that provide options for investors’ various financial and sustainable goals, from simpler methodologies such as negative screening that only eliminate certain industries to strategies that seek out investments by subject or impact.
“At BlackRock we’re committed to providing investors with full transparency about the sustainable objectives and characteristics for all of our investment strategies. We’re committed to providing the sustainable building blocks of investment portfolios, so that all investors have sustainable options,” says Jordie Olivella.
Myth 3: It costs more to invest with ESG products
Most investors assume it’s more expensive to invest in sustainable products, but that’s not always true. According to BlackRock, the management costs of sustainable funds and ETFs are often equivalent to, and in some cases, lower than standard products.
“iShares sustainable ETFs are on average five times less expensive than actively managed sustainable mutual funds, and as flows into sustainable products continue, these costs will keep falling,” weighs in Jordie Olivella
As the shift to sustainable investing progresses it’s important to understand the facts. Flows into sustainable strategies show no signs of slowing down – according to BlackRock 2020 Global Sustainable Investing Survey, global clients are planning on doubling their allocations into sustainable strategies over the next five years.
“Now is the opportunity to understand the facts behind sustainable investments and get ahead of the demand,” concludes the firm.
The following featured products offer exposure to companies with strong ESG metrics in different geographic areas: iShares MSCI USA ESG Enhanced UCITS ETF (EEDS), iShares Global Clean Energy UCITS ETF (INRG), BGF Sustainable Energy Fund.
i United Nations Framework Convention on Climate Change (2015). Paris Agreement, https://unfccc.int/sites/default/files/english_paris_agreement.pdf
ii Business Roundtable (August 19, 2019). “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,'” available at https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
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