As we have reported at ESGToday, BlackRock, the world’s largest investment manager, has been particularly active on boosting its sustainability profile over the past few days. Last week, the company joined Climate Action 100+, a network of investment managers dedicated to promote cleaner practices among large corporations. Subsequently, BlackRock CEO Larry Fink published a letter to CEOs focused on climate change and putting sustainability at the core of BlackRock’s investment process.
We believe 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 significant and pervasive investment theme of the next decade.
As Mr. Fink points out in his letter to CEOs, climate change will have major implications on economic growth and prosperity, yet it is “a risk that markets to date have been slower to reflect.” We believe this to be true not just of environmental stewardship, but of all ESG risks. ESG issues, from climate change, to rising pharmaceutical pricing, to workplace safety, are increasingly front and center in media, politics, and social media… yet are all but absent in the decision-making process of professional investment managers. But we believe this is beginning to change.
In our experience, this change takes place in several stages.
First, professional investment managers become aware of the relevance of ESG issues by catering to the requests of socially-conscious clients, who don’t want to be funding companies or projects that don’t align with their values. Consider, for example, a charitable foundation that wants to avoid owning fossil fuel-producing assets.
From there, ESG awareness becomes a process of risk management – such as avoiding companies that are more likely to suffer losses due to weak governance, or with exposure to environmental fines.
Finally, we believe that ESG investing will become an investment theme that portfolio managers will pursue actively – looking for companies that will benefit from these evolving trends. As stated in the BlackRock letter:
“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – 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 will be able to use ESG strategies, not just to avoid risk, but to create superior long-term returns, making ESG investing one of the most powerful investment themes in the coming years.