As we reported on ESGToday, BlackRock, the world’s largest investment manager, has been particularly active in strengthening its sustainability profile in recent days. Last week, the company joined Climate Action 100+, a network of investment managers committed to promoting cleaner practices at major companies. Subsequently, BlackRock CEO Larry Fink published a letter to CEOs focusing on climate change and putting sustainability at the center of BlackRock’s investment process.
We believe that BlackRock’s new focus on sustainability marks the beginning of a fundamental shift in the investment management universe, namely the emergence of ESG as the most important and ubiquitous investment theme of the coming decade.
As Mr. Fink notes in his letter to CEOs, climate change will have major implications for economic growth and prosperity, yet it is “a risk that markets have so far not considered as well.” We believe this applies not only to environmental management, but to all ESG risks. ESG issues, from climate change to rising pharmaceutical prices and workplace safety, are increasingly front and center in the media, politics and social media… but virtually absent from the decision-making process of professional investment managers. But we believe this is starting to change.
Our experience is that this change takes place in several phases.
First, professional investment managers are waking up to the relevance of ESG issues by responding to the requests of socially conscious clients, who do not want to finance companies or projects that do not align with their values. Consider, for example, a charitable foundation that wants to avoid owning assets that produce fossil fuels.
From there, ESG awareness becomes a risk management process – such as avoiding companies that are more likely to suffer losses due to weak governance or are exposed to environmental fines.
Finally, we believe that ESG investing will become an investment theme that portfolio managers will actively pursue – looking for companies that will benefit from these evolving trends. As stated in the BlackRock letter:
“These questions require a profound reassessment of risks and asset values. And as capital markets highlight future risks, we will see changes in capital allocation faster than changes in the climate itself. In the near future – and sooner than most expect – there will be a significant reallocation of capital.”
As investors, we know that significant reallocation of capital creates significant opportunities. We believe the best forward-looking managers can use ESG strategies not only to avoid risk, but also to create superior long-term returns, making ESG investing one of the most powerful investment themes in the coming years.