New research highlights sustainability data, climate-related financial catalysts, and emerging technologies as areas of opportunity
As countries and companies around the world set a course towards a net-zero carbon future, the transition of ESG from an investing fad into a fundamental thesis appears to be all but decided – and active managers may very well be set to benefit.
In a new white paper, BlackRock asserted that through the use of emerging data and research focused on sustainability, investors have a chance to achieve excess returns when compared with the broader market.
“We’ve been clear about our conviction that sustainability criteria have material impacts on investment returns, and our latest research builds on our thesis,” said Rich Kushel, senior managing director and head of the Portfolio Management Group at BlackRock.
According to the paper, active investment managers can use both systemic and fundamental approaches to outperform the broader financial markets. Focusing on sustainability-oriented business catalysts and data, it said, can help identify companies that are poised to beat traditional benchmarks as the world shifts to a net-zero economy.
Aside from weaving sustainable insights into their investment strategies, BlackRock said stock-pickers can identify climate-related financial catalysts and incorporate them into the investment process, and seeking out investment opportunities in emerging technologies.
“The proliferation of datapoints is the product of greater transparency and more consistent standards … But only a fraction of these materially affect financial performance,” the report said.
Stressing the need to look beyond self-reported measures – BlackRock cited conference calls, web postings, government reports, and companies’ use of Leadership in Energy and Environmental Design (LEED)-certified buildings as possible alternative data sources and indicators – the paper said disparities among measurement methodologies can be viewed as market inefficiencies that offer a greater opportunity for outperformance.
Drawing on sustainable and climate-related insights, investors may also develop new ways of holistically assessing companies to find which business models are poised to thrive relative to peers, which management teams have thoughtful plans to lead through disruption, and which companies are most at risk of falling behind, the paper said.
“We believe that investors could find once-in-a-generation opportunities in the technologies and differentiated business models that will be required to transform the economy, particularly in industries such as clean energy and microfinancing,” it added.
But even as it outlined the different active-investing doors to ESG alpha, BlackRock acknowledged that there’s still room for index-based strategies to prosper in the future of sustainable investing.
“[A]s the datasets continue to evolve, we think that more sustainable signals could be used as inputs in the construction of rules-based index methodologies for sustainable index strategies,” it said.
