Sustainable Investing in the News

Recently the founder and CEO of BlackRock, the world’s largest asset manager widely known for its iShares family of exchange-traded funds, announced that his firm will be incorporating environmental sustainability as an essential factor in all their investment decisions.  In his annual letter to chief executives, Larry Fink articulated his company’s commitment to deepen their integration of sustainability into their technology, risk management and products.  Mr. Fink made the point that the investment risks introduced by climate change are likely to precipitate a significant reallocation of capital in the coming years.  As a fiduciary, his firm is bound to consider this “transition risk” in offering investment products and advice to their clients.  Simply put, investment managers need to acknowledge and plan for all risks.  Mr. Fink adds “Our investment conviction is that sustainability-integrated portfolios can provide better risk-adjusted returns to investors.”

Mr. Fink outlined the following steps his firm will be taking this year:

• Making sustainability a standard offering in all their investment solution, at fees comparable to traditional investments.  This means including sustainable offerings in their flagship model portfolios, asset allocation funds and target date funds.
• Integrating sustainability into their active investment process, so that portfolio managers will be considering Environmental, Social and Governance (ESG) risk with the same rigor they use in analyzing traditional metrics such as credit and liquidity risk.  (For a summary of ESG principles click here https://empowermentfinance.com/services-sustainable-investing.html).
• Reducing exposure to sustainability risk in active strategies, including divesting from debt and equity securities of companies that generate more than 25% of their revenue from thermal coal production.
• Increasing access to sustainable investing by doubling their offerings of ESG-themed exchange-traded funds (ETF’s) over the next few years, and incorporating ETF’s with various screens including fossil fuels.
• Working with index providers to promote greater standardization and transparency of sustainability measurement.
• Enhancing transparency of investment stewardship practices with more frequent disclosure and explanation of voting decisions.  Investment stewardship is the process of engaging with companies to understand whether they are adequately disclosing and managing sustainability-related risks.  Because of their index holdings on behalf of clients, BlackRock’s proxy votes have substantial influence.
• Mapping engagement priorities to specific UN Sustainable Development Goals.
• Joining Climate Action 100+, a group of investors who engage with companies to improve climate disclosure and align business strategy with the goals of the Paris Agreement.

This came as no surprise to the Empowerment Financial Guidance team, as we’ve been working to incorporate sustainability principles in portfolios for years.  We’ve forged partnerships with a number of fund providers who are working to bring ESG-themed investments to the marketplace.  We’ve seen BlackRock show leadership in this area, bringing out many of the funds and tools that make it possible for us to craft well-diversified and low-cost models for our clients.  It’s great to see the CEO making a strong and eloquent case for treating sustainability risk as seriously and systematically as any other investment risk.  Mr. Fink makes it clear that these measures are grounded in his company’s fiduciary commitment to clients.

What does this mean to you as an investor?  It’s great news, because it will increase your choices in the marketplace, and enable you to influence the way companies do business.  We’re particularly glad to hear that BlackRock will be working with index providers to promote standardization of ESG measurement.  This will help all of us evaluate companies and funds for sustainability because we will all be on the same page, which has historically been a problem in this evolving marketplace. 

Blackrock asks companies to publish disclosures aligned with the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD).  These relatively young organizations are setting the standards for collecting companies’ sustainability information, much the way the Financial Accounting Standards Board (FASB) has standardized the way other financial data are reported.  Why is that important?  Because what gets measured gets managed.  Companies want to be included in mutual funds and ETF’s so that their securities can be represented on retirement plan platforms and be accessible to more investors.  If we as investors prefer to buy funds holding the stocks or bonds of sustainable companies, more businesses will have incentive to measure and improve their sustainability.  Investors get to choose which businesses models we wish to support.  

If you’d like to discuss sustainable investing further, please contact us.  We have just launched a full suite of updated ESG portfolios that can be customized to suit your situation.  You can read more about ESG investments here:  https://empowermentfinance.com/services-sustainable-investing.html