Sustainable investing – the new frontier?
Updated: Feb 22, 2021
Have you ever wondered what lies behind the surface of your investment?
In the past, companies only focused on the outcome and not on the potential future opportunities of the investment itself.
In recent years, data shows that assets in dedicated sustainable investment strategies have grown drastically, and this trend is not showing signs of slowing.
Nowadays, companies take on big responsibilities to safeguard our planet and specialize in creating self-sustainable business plan, trying to get more investors involved in the future that the company is building.
According to Brian Deese, the Global Head of Sustainable Investment in BlackRock, this new investment strategy “combines the best of traditional investing approaches with insights about society, traditionally non-financial ones, to generate better long-term outcomes for our clients.”
It is about finding ways to integrate sustainability consistently with driving long-term financial performance, but also improving the structure of investments by including new data.
Companies are now confronted to issues that were not considered as financial until recently, such as climate change. Including sustainability-related topics in their financial analysis is therefore a central challenge for the durable future of finance.
Investors now need to reconsider their choices and turn to more environmental-focused solutions and assets, and analyze the related opportunities.
“Sustainable investing combines the best of traditional investing approaches with insights about society, traditionally non-financial ones, to generate better long-term outcomes for our clients.” Brian Deese – Blackrock’s Global Head of Sustainable Investment
BLACKROCK'S NEW INVESTMENT STRATEGY
After many years of criticism due to its investment policy, Larry Fink, BlackRock’s CEO, announced that it was time to put sustainability at the centre of his fund. Some of the new reforms focus on the voting policy of the fund, improving transparency and voting against board directors if they are not active enough on sustainability matters. Thanks to these reforms, the fund obtained a B grade for engagement, improving from the previous C+. However, BlackRock is still way behind European investments funds which have a much higher voting record on ecological resolutions and, even the transparency in stewardship processes, is not yet at the level of its European colleagues. The lack of support from the fund to these issues, similarly to many other US funds, remains a barrier for forceful stewardship by investors on climate emergency.
In addition, BlackRock has proclaimed that it will integrate ESG in its investment portfolios together with launching new related products, and indeed by the end of 2021 the number of these indexes will double. Furthermore, the company will publish sustainability reports for each fund, making it possible for investors to check the level of sustainability according to various metrics, including carbon footprint and controversial holdings. Moreover, BlackRock will disinvest from fossil fuel companies that generate more than 25% of their revenues from thermal coal. Nevertheless, the fund will remain highly exposed to the coal industry, holding $85bn in this sector. Despite these reforms, many experts claim that BlackRock can do much more on the sustainability field, especially due to its worldwide reach and renown as a fund.
US ENVIRONMENTAL POLICY
BlackRock’s latest decisions could be affected by the recent outcome of the US election, focused on environmental concerns. Indeed, after Trump’s administration, clean energy policy is suddenly at the centre of a vast federal plan to revive the American economy. Joe Biden, the new President of the US, signed several executive orders the day of his election, and the new campaign relies on a pledge to open a new era of American energy. President Biden declared explicitly the need to rejoin the 2016 Paris Agreement, but this is just the start of a long-term project to reform the US climate policy.
Enforcing stricter domestic legislation and reversing Trump-era rollbacks will be extremely important if the US wishes to outline a credible climate target. Indeed, five years ago, former President Trump had campaigned on a pledge to revive the US coal industry, making the United States less reliant on imports and, despite its clear positive aspect for the economy, it might not have been the best environmental solution. The new eco-climate plan will focus on several aspects, such as increasing the budget for sustainable infrastructures and clean energy projects. In addition, to achieve the goal of reinstating the climate policy, President Biden appointed a strong energy department composed of 19 professionals heading and proposing new legislation. In the near future, the US is expected to change the pace and heavily invest in sustainable and eco-friendly resources. As a result, many companies and startups will try to find their way into this new type of business, completely relying on sustainability.
Investors will be attracted to the possible return of renewable energy and all the applications surrounding it, pushing for even greater research and expertise in the field. A perfect example is the huge rise in the price of Tesla and NIO stock, due to their significant competitive advantage in electric battery knowledge and performances. In fact, other traditional automakers are only now trying to switch to electric vehicles from combustion engines. Moreover, investment banks and funds, such as BlackRock, are trying to reduce carbon dioxide emissions and pollution by moving their investments into sustainable companies, which were recently found to be even more profitable. A recent study by Morningstar revealed that the more sustainable funds had outperformed non-ESG ones in both the long and short term, partly due to growing investor demand, but also a general rise in prices.
Considering Joe Biden’s incentives and the efforts that different funds and individuals are making, it is not hard to imagine that results will be achieved hopefully in the long-term, whereby sustainability could stand at the forefront of humanity’s achievements.