BlackRock CEO Larry Fink

*This article is written in partnership with BlackRock Australia

In the wake of the COP26 climate summit in Glasgow, climate concerns continue to drive astounding movement into Environmental, Social and Governance (ESG) themed investments, with exchange traded funds a way to bring retail investors in, according to financial advisers and providers.

The ESG drivers that propelled world leaders to push for change in Glasgow was echoed by BlackRock CEO Larry Fink in his 2022 CEO letter, where he said global sustainable investing now reaching US$4 trillion was “just the beginning”.

“Whether it is capital being deployed into new ventures focused on energy innovation, or capital transferring from traditional indexes into more customised portfolios and products, we will see more money in motion,” Fink said.

Given the proclivity of investors large and small to include ESG considerations in their portfolio construction thinking, and the popularity of ETFs as a vehicle for investment, the success of the two elements combined was a fait accompli.

MSCI Head of Australia and New Zealand client coverage Simone Bouch, whose firm has offered sustainable investment indexes since 1990 and has committed to being a net zero provider by 2040, says ESG ETFs around the world have seen record inflows.

“Between 2015-2020 we’ve seen growth from $US6 billion to $US150 billion,’’ she says. “We would say this is the way people will be investing now. It won’t be like you will be picking an ESG v non-ESG.”

One of the world’s largest providers of ESG-focused indices, MSCI currently has more than 1500 equity and fixed income ESG indices in every market including ESG and Climate Change, Sustainable Impact and Low Carbon Leaders.

“Underpinning it all is MSCIs best-in-class ESG research and ratings,” Bouch adds.

She says the ETF model makes ESG investment and climate-related investment strategies accessible to all investors, not just large institutions.

“Overarchingly, they’re all looking to achieve the same thing which is to represent the performance of companies with the highest ESG ratings relative to their sector peers.’’

Bouch says MSCI ESG ratings and research play a critical role in the decisions made by ETF providers.

“MSCI ESG scores are thinking about forward-looking assessments of companies’ exposures to financially relevant ESG-related risks,’’ she says.

“We think about those scores, we look at our ratings from CCC – which is a laggard to AAA – which is a leader. With these particular indices, BB is the minimum. We’re really looking at leaders in this space.”