Sustainability leader explains how the rise of index-based ESG strategies promises to put more power in investors' hands
While ESG investing lends itself well to fundamental, bottom-up approaches that incorporate non-financial data, investment products underpinned by index-based strategies will have a vital role to play as the world transitions to a greener economy, according to a sustainability expert from BlackRock.
In an interview with SPDJI, Muhammad Masood, director of iShares Sustainable Investing at BlackRock, said EMEA investors are anticipating nearly 50% of their AUM to be in sustainable investing by 2025—this is up from just 21% in 2020. We have already started to see this fundamental reallocation of capital; in 2020, there were net inflows of USD 425 billion into sustainable assets globally. In H1 2021, we have already seen USD 353 billion.
“This shift into sustainable investing has resulted from a range of factors, driven by changing consumer and investor preferences, improved sustainability data, and more sustainable investment options designed to meet various ESG and investment goals and the requirements of increasing regulation,” Masood said.
Within that broader trend, he said index-based ESG strategies have also risen, with sustainability-linked index mutual funds and ETFs growing from over US$220 billion at the end of 2019 to US$630 billion by June 2021. He attributed that demand to the explosion in index choice within the space, as sustainable index funds covering nearly every corner of the equity and fixed-income markets offer investors increasing flexibility in executing their preferred sustainability approach.
“While an increasing number of investors are accepting that climate change brings certain investment risks and opportunities, the ways they choose to implement their view can vary,” Masood said.
While some may wish to dial down their fossil-fuel exposure by tilting away from high-carbon-emitting companies, he said others are taking a wider view by consider physical risk indicators or taking corporate emission-reduction targets into account. Others take a more proactive tilt by focusing on certain thematic strategies or looking at impact investing.
With the emphasis on climate change increasing among investors, consumers, and regulators, Masood said companies are taking action by building sustainable policies, generating disclosures viewing their enterprises through a climate lens, and reporting metrics around their emissions. He added that the trend is set to accelerate as the demand for greater quality and quantity of data pertaining to environmental factors persists among investors.
“Climate integration in portfolios may also move beyond just security selection at a product level to a more holistic approach where strategic asset allocation decisions also incorporate the risks and opportunities of climate change,” Masood said. “In the construction of targeted thematic strategies and implementing strategic asset allocation decisions, indexing will continue to play a key role in the climate investing space.”
