SUSTAINABLE PORTFOLIOS START WITH INDEXING

SUSTAINABLE
PORTFOLIOS
START WITH
INDEXING

Now more than ever, investors are turning to ETFs and index funds to build more sustainable portfolios.

For decades, indexing has helped investors drive portfolio efficiency by saving time, curbing costs and helping to manage risks. Today, as more investors transition into sustainable investments, ETFs and index funds are providing the building blocks investors need to pursue their specific financial and sustainability goals.

Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies. 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.

Five reasons to choose indexing for sustainable portfolios

Explore why we believe sustainable indexing gives investors the clarity they need to build more sustainable portfolios.

Download the five reasons now

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Indexing puts you in control of your sustainable outcomes

There is no one size fits all approach to sustainable investing. It means different things to different investors depending on their specific sustainability and financial goals. For some, it means simply screening out controversial businesses, while for others sustainable investing is also about driving specific aims to generate measurable, positive change.

Disclaimer: The benchmark index only excludes companies engaging in certain activities inconsistent with ESG criteria if such activities exceed the thresholds determined by the index provider. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the Fund. Such ESG screening may adversely affect the value of the Fund’s investments compared to a fund without such screening.

Pick the approach that’s right for your portfolio

Many sustainable indexes are built from the same broad benchmarks investors follow today, but with additional degrees of sustainability screens and ESG insights built in. As a result, investors can use sustainable indexes to directly express what sustainability means to them without altering their asset allocation strategies. Also, indexes offer transparency into the details that matter most to you, your clients, stakeholders or investment boards – such as tracking error, carbon footprint, or ESG score.

Ways to align investment goals
with iShares sustainable strategies

Screened

Clients looking to exclude companies based on controversial business practices

ESG Enhanced

Clients investing to pursue similar returns to a particular benchmark and maximise ESG scores

SRI

Clients seeking to achieve concentrated ESG holdings by rewarding top ESG performers

Thematic

Clients pursuing specific sustainability themes based on a company’s operations or sources of revenue

Impact

Clients investing for a measurable sustainable outcome alongside financial returns

Source: BlackRock, as at 31 March 2020

Sustainable indexing may help provide a consistent approach across a portfolio

As investors transition to sustainable investing, an indexing approach may help to ensure sustainability is expressed in a consistent way across the entire portfolio. Indexes are inherently rules-based, so the screens and ESG integration they deploy are repeatable, regardless of asset class or exposure.

A clear sustainable narrative

Indexing may help you formulate a clear sustainable investing approach, which in turn may help you provide your clients, stakeholders and investment boards with a straightforward and consistent framework. This means you can spend less time wondering how your sustainable strategies work or relate to one another, and more time on asset allocation or selecting the right exposures.

Sustainable indexing drives industry standardisation, promotes disclosure and improves corporate behaviour

We are at the beginning of a decade-long reallocation of capital from traditional strategies into sustainable investments. As this growing pool of capital transitions into sustainable strategies, we believe that indexing is bringing clarity to the sustainable investing space by providing transparency and accelerating the adoption of new market standards. This is one of the many reasons why we believe investors will choose to put an extra $1 trillion into sustainable index assets over the course of the next decade (all use of $ refers to USD).

Past and predicted growth of sustainable index assets (2009 -2029)

Predicted growth of sustainable indexing
Predicted growth of sustainable indexing

Predicted growth of sustainable indexing key

*Projected growth. BlackRock projection, April 2020, based on Morningstar data, as of March 2020.

Subject to change. The figures are for illustrative purposes only and there is no guarantee the projections will come to pass.

Better data leads to better indexes

Capturing ESG insights through indexes used to be challenging, as information about company sustainability practices was often inconsistent and hard to source. Change is underway. The information that feeds into sustainable indexes is improving for two key reasons:

1) Companies are disclosing more ESG metrics to help measure and communicate their efforts aimed at managing ESG risk and creating value through sustainability.

2) Companies are increasingly disclosing information in a manner that makes it more readily comparable for investors.

There is no guarantee that research capabilities will contribute to a positive investment outcome.

More companies are reporting on ESG

Increase in companies reporting on ESG

Source: Governance and Accountability Institute (December 2019)

Driving change

Sustainable indexes will play an increasingly important role in directing capital flows to companies with the best sustainability practices and the most comprehensive sustainability disclosures. Companies that are dedicated to prioritising sustainability efforts will be better positioned to attract long-term shareholders, as they will have a higher weighting in the market’s new mainstream ESG indexes. At the same time, companies that are slow to respond in addressing sustainability risks may encounter growing scepticism from investors. A company’s inclusion or position in a sustainable index will present a clear indication of how it performs against its industry peers, prompting action that can lead to enhanced corporate sustainability practices.

Sustainable index strategies have shown resilience in difficult times

During this year’s market dislocation, sustainable ETFs and index funds exhibited resilience relative to broad market benchmarks. We believe this is because sustainable indexes are generally comprised of companies with higher profitability and lower levels of leverage than the broader market. Companies with healthy balance sheets and sound governance practices may be better positioned to focus on mitigating ESG risks and introducing sustainable practices than their less-profitable peers.

Source: BlackRock, Morningstar as of May 11, 2020.

Investors remain committed to sustainable exposure

Despite volatile market conditions, investments in sustainable strategies continue to grow at a record pace. These inflows demonstrate an increasing focus among wealth and asset managers to look beyond short-term volatility and position their portfolios for the long term, through sustainable investments.

Source: BlackRock and Markit, from 21 February 2020 to 31 March 2020.

Index asset managers with active investment stewardship seek to drive long-term change

Indexing amplifies the impact of company engagements because index investors take a long-term view. Those who are sustainability-minded can exercise influence with companies through engagements across ESG topics. Index asset managers can demonstrate their long-term commitment to a company – potentially well beyond the tenure of the current board and management – and be persistent in encouraging change in practices that enhance financially material sustainability strategies. This includes how companies are managing, as well as reporting on, the material environmental and social impacts of their operations.

There are two main stewardship levers, both of which are crucial to achieving sustainable, long-term value creation:

Engagement – or direct dialogue – with companies is critical for ensuring that we vote in an informed way and provide timely feedback to companies to protect our clients’ long-term economic interests.

Voting at shareholder meetings is the formal mechanism through which we provide feedback to companies on their corporate governance and business practices.

In our engagements, we encourage companies to deliver long-term, sustainable growth and returns for our clients. BlackRock’s stewardship activities are carried out in all firms within our index funds, regardless of whether the funds have a specific ESG mandate. Learn more about BlackRock’s stewardship practices.

Listen to The Bid podcast to learn more about investment stewardship.

Three habits of effective sustainable investors

Over the last two years the BlackRock Portfolio Analysis and Solutions team (BPAS)1 has helped over 600 European institutions2 assess and repositioning their portfolios. Based on these interactions the team has identified three habits that successful investors are adopting as they incorporate sustainability into their investment approaches.

number 1

They understand
their portfolio

Leveraging technology and working with partners to measure the sustainable impact of their portfolio.

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number 2

They identify and
combine sources of return

Embedding sustainability at the heart of portfolio construction processes, from asset allocation to factors, timing and security selection.

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number 3

They use the
whole toolbox

Embracing greater choice and the flexibility to integrate ESG into their portfolios while balancing value with values.

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1BPAS (BlackRock Portfolio Analysis and Solutions) is a team of portfolio consultants that seeks to provide industry-leading tools, analysis and insights for our clients. Through customised, outcome-orientated client engagements around portfolio construction and risk management, the team can assist clients with asset allocation, portfolio restructuring and implementation decisions.

2BlackRock Portfolio Analysis and Solutions, from January 2018 to December 2019.