Building a sustainable portfolio


Del Stafford, CFA May 13, 2021

For more than 25 years, I have worked with a range of institutional investors to help them address a wide variety of portfolio construction issues. These challenges run the gamut of portfolio construction questions: How do I create a diversified portfolio that can help me meet my goals? What are the risks that I should be aware of and how do I mitigate them? What tradeoffs should I consider when making portfolio decisions? There are many differences between institutional investors and individual investors like myself, of course, but it should come as no surprise that these are the same challenges that I also face as an individual investor.

Understanding your current portfolio’s sustainability

In recent years, however, one theme keeps coming up in my conversations with investors: questions around sustainable investing. In a nutshell, I am asked, should I build a more sustainable portfolio, and if so, how? Here’s what I tell them:

To begin, every investor, knowingly or unknowingly, is already making decisions around sustainable investing. Take, for example, a standard 60/40 portfolio, with a 60% mixture of domestic, developed market and emerging market equities and a 40% blend of bonds. Even if the investor holding that portfolio has not given a moment’s thought to environmental, sustainable and governance (ESG) ratings, that investor is holding stocks and bonds of companies and countries that are, for example, going to adapt their business practices in response to climate change, or not; companies that are adapting their business practices to increase boardroom diversity and hire and retain talent, or not; companies that are managing governance issues, or not.

Therefore, to build a sustainable portfolio, the first step is to understand your current ESG profile.  Assume an investor holds an existing hypothetical portfolio, based on a standard 60/40 portfolio. Using indexes as proxies for holdings, that portfolio could look like this:

Original Portfolio Allocations

Original Portfolio Allocations Chart

This information should not be relied upon as research, investment advice or a recommendation regarding the Funds or any security in particular. This information is strictly for illustrative and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.


We calculate that portfolio has an MSCI ESG Quality Score of 5.9 (out of 10) and an MSCI Weighted Average Carbon Intensity of 155 (Tons CO2E/$M SALES).1

Now, consider a comparable sustainable portfolio. That might look like this:

Sustainable Portfolio Allocations

Sustainable Portfolio Allocations Chart

This information should not be relied upon as research, investment advice or a recommendation regarding the Funds or any security in particular. This information is strictly for illustrative and educational purposes and is subject to change. This information does not represent the actual current, past or future holdings or portfolio of any BlackRock client.


That portfolio has an MSCI ESG Quality Score of 6.7 and an MSCI Weighted Average Carbon Intensity of 1126 (Tons CO2E/$M SALES), giving the investor more exposure to companies with positive ESG business practices while lowering exposure to carbon intensive companies. That offers an improvement in sustainability, while maintaining an asset allocation roughly similar to a non-sustainable portfolio.

Such an approach can be created by using the iShares ESG Aware suite of funds, which seek to balance the pursuit of a similar risk and return to the relevant broad market with a more sustainable outcome. The key takeaway is investors now can implement a typical 60/40 asset allocation using sustainable products.

Sustainable investing summing up

Essentially, sustainable investing is like any other investing. The first step is always to determine the goal one is investing towards, and how much risk one is willing to take to get there. Sustainable investing does involve tradeoffs, by eliminating exposures to certain companies one could be reducing the diversification of a portfolio.

However, that could also be balanced by the potentially higher quality attributes of companies earning high ESG scores, and the opportunities presented by the transition to a green economy. Moreover, incorporating an ESG lens into investment decisions can help identify a more robust set of risks and opportunities facing a company, beyond the scope of traditional financial analysis.

How to manage tradeoffs is also an important consideration with respect to transitioning to a more sustainable portfolio. For investors with cash to invest, the illustration above is relatively easy to implement. For those who have existing portfolios, there may be tax implications and other matters to consider. The transition may need to take place over a longer period, a topic I will explore in a future article.

The investor should consider all of these tradeoffs, but it is important to reiterate:  The average portfolio is already impacted by sustainable trends. The question is whether when constructing a portfolio the investor maximizes the opportunities and manages the risks to adapt to a changing world.

Del Stafford, CFA

Del Stafford, CFA

Head of iShares Americas Portfolio Consulting at BlackRock