Sustainable allocations to double in next five years, finds BlackRock

Green glass globe

Investors plan to double their allocations to sustainable products over the next five years, according to BlackRock’s Global Client Sustainable Investing Survey, which finds that the pandemic has accelerated investor demand. One fifth of those surveyed said that the pandemic would actually accelerate their sustainable investing allocations.

“The tectonic shift we identified earlier this year has really taken hold, as the convergence of political and regulatory pressures, technological advancements and client preferences have pushed sustainability into the mainstream of investing,” says Mark McCombe, chief client officer at BlackRock. “The results of our survey show this sustainable transition is occurring all around the world.”

The survey gathered insights from 425 investors in 27 countries, including corporate and public pension plans, asset managers, endowments, foundations, and global wealth managers with nearly USD25 trillion in assets under management (AUM).

The survey suggests this is the beginning of a sustained shift for at least the next five years, with survey respondents planning to double their Environmental, Social and Governance (ESG) assets under management (AUM) by 2025. While growth in sustainable assets is most pronounced in Europe, it is also growing in prominence in the Americas and Asia-Pacific as well.

ESG Integration

The majority of survey respondents believe that sustainability is fundamental to investment processes and outcomes, and 75 per cent now use or would consider using an integrated approach to account for environmental, social and governance (ESG) risks in their portfolios. An integrated approach looks at ESG criteria across all holdings and to inform future investment decisions through a holistic sustainability lens.

Though integration ranks highest, more targeted sustainable investment approaches such as thematic and impact solutions were also favorites of clients in EMEA, with 56 per cent and 52 per cent of respondents seeking these strategies, respectively.

Regional Differences to Adoption

Global demand for sustainability is driven regionally by different regulatory environments, public perceptions, board and management oversight and awareness of performance benefits.

In EMEA, the top reason (51 per cent) respondents provided for adopting sustainable strategies was because it is “the right thing to do,” while just 37 per cent of respondents in the region said “mitigating investment risk” was a key consideration.

In the Americas, mitigating risk is the second highest driver of adoption (49 per cent), followed by “better risk-adjusted performance” and “mandate from board or management” (both at 45 per cent).
 
“Region by region, clients are prioritising ESG issues and implementation differently. While all recognise the primacy of climate risk, there are different levels of focus on issues like human rights, and diversity and inclusion,” says McCombe.

“Critically, clients’ reasons for investing sustainably shows significant regional variance. For many European investors, they see the benefits of sustainability through the lens of societal impact. In the US, investors are more focused on risk management and investment performance.”

Environmental Risks are Clients’ Top Concern

One area where clients in all regions responding to the survey overwhelmingly agree is that 88 per cent have placed climate-related risks at the top of their portfolio concerns to date. Going forward, while climate is expected to remain the leading concern, a growing number of survey respondents (58 per cent) said that concerns over social issues such as diversity and inclusion, and fair labor practices are expected to rise the most in the next 3-5 years. 

The rise of ESG criteria in investing is driven by a host of reasons, including greater company-level disclosures bringing more information to the public and other advances in data analytics to understand how ESG issues are material to investing.

Concerns about Data Quality

While the availability and quality of data has improved over the past decade, more than half (53 per cent) of global respondents cited concerns about “poor quality or availability of ESG data and analytics” as their biggest barrier to adopting sustainable investing, higher than any other barrier that was tested.

“As we saw in this year’s survey, investors around the world are demanding continued focus from the industry on sustainability initiatives that will help them build better risk-adjusted portfolios for the future,” said McCombe.

In January, BlackRock detailed a series of steps to make sustainability a key component to the way it manages risk, constructs portfolios, designs products, and engages with companies. This included integrating ESG into 100 per cent of its approximately 5,600 active and advisory BlackRock strategies with USD2.7 trillion in assets, as well as introducing 93 new sustainable solutions in 2020.

All its discretionary active portfolios have completely exited any investment in public companies with more than 25 per cent of revenues from thermal coal production.