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.

The challenge

How can I adapt my portfolio to fulfil sustainability objectives?

In recent years, environmental, social and governance (ESG) risks and opportunities have become an increasingly important component in the investment decision-making framework for fund managers.

As more and more studies of ESG integration emerge, an increasing number of fund managers are starting to believe that:

1) ESG integration can increase the prospect of stable long-term value
2) Sustainability factors can materially influence the risk-return profile of their investments.

Source: PLSA Made Simple Guide: Environmental, Social and Corporate Governance (ESG), March 2019.

BlackRock research shows that sustainable assets could outperform non-sustainable ones in upcoming years, while also being relatively more immune to long-term risks such as climate events.

The action

Embedding sustainability ratings and increasingly, capital market assumptions for sustainable assets into the portfolio design phase is an important third dimension to add to the current primary risk and return objective of building portfolios.

The proliferation of index building blocks featuring different ESG criteria is empowering investors to start implementing sustainable decisions into their investment process, and providing them with the opportunity to transform their whole portfolio, beyond the current tactical adoption of products at the fringes.

Carbon Emissions Intensity (Metric tonnes CO2/Sales)

Carbon Emissions Intensity (Metric tonnes CO2/Sales)

*Source: BlackRock, MSCI ESG Research as at May 2020.
For illustrative purpose only.

Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged, and one cannot invest directly in an index.

The outcome

In this example, transitioning the portfolio’s strategic asset allocation to sustainable benchmarks of equivalent exposures resulted in a 60% reduction of carbon emissions, which is equivalent to 23 cars driven each year.*

Overall portfolio risk also decreased, which could have been partly driven by the increased exposure to companies that are adopting stronger working practices, and therefore exhibiting greater quality factor characteristics.

Why indexing?

The rules-based approach to defining the universe and standards for ESG characteristics within indexing enables investors to incorporate sustainability criteria in a transparent and low-cost manner while remaining aligned to their broader regional and sector investment views.

Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.

Risk: 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.


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