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.”

Bouch says the second layer of scrutiny is MSCI’s controversy scores – the assessment of controversial events that have been linked to companies and the severity they might have for stakeholders.

A third layer is a business involvement screen on what percentage of a company’s revenue is derived from certain businesses including firearms, tobacco, nuclear weapons, and companies in five fossil fuel sub industries.

“This is a meticulous process to bring it all together to make sure we have best in class,’’ Bouch says.

The capital that needs to flow towards climate initiatives and decarbonising the world will require the largest reconstruction of the global economy since the industrial revolution, she explains.

MSCI research shows a current carbon emissions trajectory of 80 per cent of the 9000 public companies across 50 developed and emerging markets will exceed the budget needed to keep global average temperatures to below two degrees celsius.

“MSCI has developed tracking and what’s required in terms of driving this capital reallocation and how we’re going to look at this net zero revolution,’’ Bouch says.

“Thinking about what’s required is something we’re spending a lot of time on, whether it’s data, indexes or tools to get companies to transition to a low-carbon economy.

“We want to avoid greenwashing and that’s why you need to have expert teams interrogating as much data as possible to ensure we are getting the right results.”

Bouch says sustainable investment performance is also showing strong gains; companies that have high MSCI ESG ratings to have a lower frequency of stock-specific incidents, lower levels of volatility and higher levels of profitability.

Chantal Giles, Head of iShares Wealth at BlackRock in Sydney, says investment performance was initially a concern for people undecided on sustainable investments.

“Our conviction is that climate risk is investment risk,’’ Giles says. “In the past, people thought they had to give up investment returns to be sustainable or ESG.”

“There’s proof that a sustainable portfolio is not trading off returns. I think it’s really clear that you are no longer giving up returns to invest in ESG… and that’s been occurring for quite some time,” she says. “I would say three to five years.”

Giles says about 81 per cent of sustainable indices outperformed parent benchmarks in the year through to December 2020 and the new iShares ETFs were about providing retail investors with access to as broad a base of Australian equities as possible, with the ability for anyone to “see what’s under the hood’’.

“They’re providing not just a lower cost, but democratised transparency.”

Bespoke modelling in action

The research Blackrock undertook in shaping its ESG ETFs gave the group the ability to create bespoke model portfolio solutions employing both its iShares ESG ETFs and iShares Index Funds.

As an example, BlackRock teamed with wealth creation firm Bell Partners to launch five ESG-model portfolios, meeting strong demand from its clients for sustainable investments.

Bell Partners’ Generation X and younger clients have recently demanded climate-friendly investment options, creating a backlog of capital ready to flow into sustainable targets according to Head of Wealth, Brett Taggart.

The 30-year-old wealth creation and advisory firm, which has collaborated with $US10 trillion fund manager BlackRock since 2011 to create iShares ETFs for its clients, saw an opportunity.

The result was the launch of three ETFs in June – the iShares Core MSCI Australia ESG Leaders ETF, and iShares Core MSCI World ex Australia ESG Leaders ETF (hedged and unhedged).

“We went to BlackRock and said this is what we want you to build because we’ve got money that’s waiting to follow,’’ Taggart says.

“That doesn’t mean we’re tied to them, it simply means as we keep doing our research and we assess all of the providers and the way that we screen and filter through, we know what’s important to us,” he adds.

“They keep coming up with the most cost effective, dynamic models that are around.”

Taggart says Bell Partners, which has AUD$600 million under management for financial planning clients, wants to reflect their needs and concerns about climate.

“Our goal is to be more environmentally and sustainably considerate in what we’re doing,’’ Taggart says.

“There’s a big generation of younger people coming through who are aware of impacts on climate and they’re the ones that will decide who’s in power and who’s not.

“We’ve got to be conscious that the client base is getting old and that money will inevitably go into someone else’s hands, and we want those people singing from the same hymn sheet as us.’’

Taggart says partnering with BlackRock in sustainable ETFs, or even with similar products with its competitors State Street and Vanguard, creates a powerful position in the push towards a decarbonised economy.

“The scale BlackRock has means a very broad range of stakeholders really take stock of what they have to say,” Taggart says.

“It’s not to say a boutique investor won’t do a good job,” he adds. “But will they have the ability to turn the dial? Probably not.”

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