2021 could be the year that advisors, like many investors
and asset managers, embrace sustainable investing or at least consider it
seriously.
“Interest has gone up tremendously in 2020,” says Jeffrey
Gitterman, head of Gitterman Wealth Management, an RIA that specializes in
sustainable investing and provides model portfolios to other wealth management
firms. “Our climate strategies are the most popular. The transition (to zero
emissions) is here and not going away.”
Gitterman cited the recent launch of Aladdin Climate, a new
feature of BlackRock’s Aladdin portfolio management software that helps
advisors quantify climate risk and low-carbon opportunities in portfolios, as
well as Moody’s data on physical climate change risks and MSCI’s climate change
scenario analysis, provided by Carbon Delta, which it acquired in late 2019.
“The great repricing is coming,” Gitterman said. “All data
companies and reinsurers are looking at risk not yet priced into the market.”
There’s no denying that interest in sustainable investments
and policies is rising.
US SIF, the Forum for Sustainable and Responsible
Investment, reports that U.S.-domiciled assets under management using
sustainable investing strategies grew from $12 trillion at the start of 2018 to
$17.1 trillion at the start of 2020, an increase of 42%.
BlackRock’s first sustainable investing survey of several
hundred institutional clients in 27 countries with $25 trillion in AUM released
in early December found that half expect to double sustainable assets within
five years, exemplifying “a tectonic shift in capital towards sustainable
assets.”
And through the third quarter a record $31 billion flowed
into ESG funds while nearly 400 ESG-focused funds launched — including ETFs and
open-end funds, according to Morningstar.
“Demand has gotten to the point where most investors could
use ‘40 Act funds to construct a broadly diversified allocated portfolio of
sustainable funds,” said Jon Hale, Morningstar’s global head of sustainability
research.
He noted there is increasing number of model portfolios
consisting of just ESG funds, including
BlackRock’s iShares Platform with iShares ESG Aware allocation
portfolios, which tend to take a “lightest touch” approach to screening
investments.
Beyond such ESG integration strategies are funds that
exclude certain companies and sectors to align with investors’ values — often
called socially responsible investments — and impact funds, focused on
investing in assets that will have a positive impact on E, S and/or G issues.
In the meantime, many fund companies, even those that don’t
have specific ESG funds like T. Rowe Price, have integrated ESG analysis across
their portfolios and plan for more sustainable investing offerings, analysis
and/or targeted activities on sustainability issues with corporate management
through direct engagement and/or proxy votes.
T. Rowe Price expects to launch its first impact fund in
2021. BlackRock says it will use a sustainability lens in its 2021 capital
market assumptions and that its votes on shareholder resolutions will will play
an “increasingly important role” in its “stewardship efforts around
sustainability,” focusing on companies’ efforts to achieve net-zero emissions
by 2050 or sooner. (Despite
pronouncements from BlackRock CEO Larry Fink, the firm’s proxy votes have
disappointed sustainability activists.)
These and many other sustainable investing initiatives are
taking place against a backdrop of shifting perspectives on sustainability
issues, which was a key topic in many investment outlook webinars and briefings
this reporter attended in the past two months.
“It used to be about how much investors were willing to give
up to achieve sustainability objectives,” said Jean Boivin, head of the
BlackRock Investment Institute. “Now it’s not about the tradeoff but about
sustainability as a driver of returns, which will play out over years.”
“Whenever we look at a company we need to look at ESG
factors because that will have an impact on the risk of a company and its
potential rewards,” said William Davies, head of global equities at Columbia
Threadneedle.
Taking ESG factors into account “leads to better investment
outcomes, “ said Jody Jonsson, portfolio manager at Capital Group.
That has been borne out by some investment returns this
year.
An analysis by S&P Global published in late December
found that as the year progressed the performance of the S&P 500 ESG Index,
which includes 300 of the S&P 500 companies, those with relatively higher
ESG scores outperformed the S&P 500 by close to 2%.
“We are talking about resilience,” wrote Nathan Hunt.
“Change is upon us — environmental change, social change, technological change,
and geo-political change. ESG scores, benchmarks, and data are a way of
measuring a company’s or a portfolio’s ability to weather that change
effectively.”
Through the third quarter, Morningstar found that nearly
three-quarters of sustainable equity funds placed in the top halves of their
quartiles and and 45% placed in the top quartile.
“Given where the world is headed, companies that have ESG
issues better managed or embedded … will be attractive growth prospects in the
coming years,” Hale said.
He encourages advisors to be more proactive about
sustainable investing, asking clients about their preferences, preparing for
their responses and putting together a solution that they think will fit client
needs.
“Prepare for a general investment solution; it doesn’t have
to be customized for everybody,” Hale said, pointing to a wide range of solutions
from basic ESG-tilted portfolios all the way to focused impact funds, as well
as model portfolios.
Morningstar recently began formally integrating
environmental, social and governance factors into its analysis of stocks, funds
and asset managers, starting with analysis of more than 145 funds and 40 asset
managers.
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