Sustainable investment is in the focus of attention of large fund managers. A trend that is driven by public sector initiatives to achieve the goals of the Paris Agreement and the Sustainable Development Goals.
On the part of investors, including the incorporation of climate transition factors in investment decisions, there has been strong growth in the use of ESG approaches: A (environmental), S (social) and G (corporate governance).
At the same time, ESG investing has become a leading form of sustainable financing for long-term value and alignment with society’s values, and has evolved from its earliest stages of development to mainstream investment.
The environmental score of the “A” pillar of the ESG rating is increasingly used as a tool to align the investments with a low-carbon transitionand in principle could help uncover valuable forward-looking information on companies’ climate transition risks and opportunities.
In addition, a number of financial market products and practices have emerged to align capital flows with the low-carbon transition. These cover instruments for issuers, third-party ratings, principles and guidanceas well as index and portfolio products to help channel funding to entities in transition, and better price transition risks and opportunities.
Managers such as Blackrock, the world leader in asset management, have been quick to detect the trend and position themselves through a extensive range of investment products to channel the investment desire of ESG investorsboth from the point of view of equities and fixed income.
In addition, the board has set a course towards sustainability, not because Blackrock is an environmentalist but, as cited in the letter from Larry Fink, CEO of the company, towards its executive directors because they define themselves as capitalists and trustees of the clients. . For Blackrock there is an opportunity.
“We are asking companies to set short-, medium- and long-term goals for greenhouse gas reduction. These goals and the quality of the plans to meet them are critical to the long-term economic interests of their shareholders. It is also That’s why we’re asking you to report consistently with the Task Force on Climate-Related Financial Disclosures (TCFD): because we believe these are essential tools for understanding a company’s ability to adapt to the future.”
However, they are not committed to disinvesting in companies linked to carbon…
“Divesting entire sectors, or simply shifting carbon-intensive assets from public to private markets, will not get the world to net zero. And BlackRock doesn’t pursue divestment of oil and gas companies as a policy. We have some clients who choose to sell their assets, while other clients reject that approach Forward-thinking companies in a wide range of carbon-intensive sectors are transforming their businesses and their actions are a critical part of decarbonizing We believe companies leading the transition present a vital investment opportunity for our clients and that driving capital into these Phoenix will be essential to achieving a net-zero emissions world.”
However, the letter does not mention the returns of ESG companies. So you have to ask yourself if there is a significant differential or not for this type of investment.
The results of ESG investing
In the first place, it is fair to mention that despite notable progress, considerable challenges remain that hamper the effectiveness of these approachesand in particular ESG investing, to support long-term value and international climate-related goals.
These challenges include promulgation of different approaches, data inconsistencies, the lack of comparability of ESG criteria and rating methodologiesas well as the lack of clarity on how ESG integration affects asset allocation.
Thus, we will find studies that point to an improvement in the profitability of ESG investment compared to the market and studies that point to the opposite.
More than 1,000 research papers exploring the relationship between ESG and financial results have been published since 2015, pointing to a growing consensus that good corporate governance of ESG issues are often related to an improvement in operational metrics, such as ROE, ROA or share price.
To deliver results, we will focus on the first ESG index which was the Domini 400 Social Index (now MSCI KLD 400 Social Index)was launched by KLD Research & Analytics in 1990. There are now more than 1,000 ESG indices, reflecting investors’ growing appetite for ESG products and the need for measurement tools that accurately reflect ESG goals. of sustainable investors.
Let’s go to the ten-year annualized returns. For the KLD 400 we have an annualized return of 16.97%. In comparison and the MSCI USA has given 16.64%.
As we see the ESG investment, it has reported relatively better results against indices but Is it because of more volatile values? To answer this question, let’s look at the sharpe ratio that relates profitability (discounting the risk-free rate) to volatility.
For the KLD 400 we have an annualized 10-year sharpe ratio of 1.19. In comparison, in the MSCI USA it is 1.18… They practically match the results, which means that due to the greater risk incurred when choosing this index, there is a plus of marginal profitability. Nevertheless, adjusting for risk, ESG investing does not show a great disparity compared to the US stock market.