Advisers well placed to harness sustainable investing’s tectonic shift

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BlackRock chairman and chief executive Larry Fink’s annual letter to CEOs in 2020 not only marked a turning point in the global appetite for sustainable investing, it also reaffirmed his conviction as global flow to this category of investments accelerated from the start of the pandemic in March 2020.

“The conventional wisdom was the crisis would divert attention from climate, but just the opposite took place and the reallocation of capital accelerated even faster than I anticipated,’’ Fink said in his seminal missive.

Fink’s letter has become the writing on the wall for further acceleration of a largely consumer-led movement towards sustainable investing.

Blackrock CEO Larry Fink

In the 11 months to November 2020, investors in mutual and exchange traded funds (ETFs) invested $US288 billion globally in sustainable assets, almost double the amount in the previous year, Fink highlighted.

“I believe that this is the beginning of a long but rapidly accelerating transition – one that will unfold over many years and reshape asset prices of every type,’’ he said.

In Australia, the focus on the environment and investing sustainably shifted quickly, in part in line with the global movement, but also on the back of a new awareness awoken by devastating bushfires that ravaged the southeast coast around the time of the first pandemic related lockdowns.

“The bushfires were a turning point where climate risk and climate change were quite real,” Chantal Giles, head of iShares Wealth within BlackRock’s client business team based in Sydney said.

“It’s just profound how quickly the investment environment has changed in Australia,’’ continued Giles, who was in the thick of conversations with advisers about bringing a new urgency to conversations around investing with climate front of mind.

“There is no road map for this, and I think it’s really driving a lot of the conversations investors are having with their trusted advisers,’’ Giles said. “It literally comes up in every conversation I’ve had – be it someone in asset allocation, or our consultant team, licensees with many financial advisers or smaller advisers.’’

Client-driven demand

On the front line, stories of clients confronting advisers with new demands and even ultimatums relating to their ESG preferences have become more prevalent in recent years, something Brett Taggart, managing director at Tamworth-based Bell Partners, experienced when one of his biggest clients told him one day she didn’t want to be supporting fossil fuels in her portfolio.

This was the moment Taggart realised his advice business needed to put an ESG option in place.

“And she wasn’t the only one,” he said.

Adviser Brett Taggart

“There were always conversations with people saying, ‘where do these [portfolios] sit in terms of ethical investing?’, or ‘I want to make an impact on the world’,” Taggart recalled.

“So it can start off very pointed, very specific and very detailed to the point that all that’s left for some clients to invest in is an organic beetroot farm, or, very broad to the extent that people just want to be a good human being and leave the planet in a better way than they found it. This is particularly true for the older clients who have grandkids and they want to be able to leave the environment and the planet in a better place,” he said.

Having only previously invested client funds in “agnostic” ETFs with no philosophy behind it other than good governance, Taggart is now working with BlackRock on a series of ESG model portfolios using active management with an ESG or environmental philosophy behind them.

While Taggart noted that ESG and ethical investing has been around and available in the mainstream for a decade or more, he said clients are moving their portfolios now because of the increasing awareness accelerated by technology, media exposure and social media platforms.

“I think fundamentally people can probably feel that things are changing, whether they believe in climate change or not… and it’s not just the environment, although most people have a conscience around that. So the awareness and their internal dialogue has really shifted.”

Environment top of mind

Giles said BlackRock was a founding member of the Taskforce for Climate-related Financial Disclosures (TCFD), which now has 1700 organisations reporting transparency and is driving the increased ESG data available to investors.

Speaking around the time of the UN Climate Change Summit in Glasgow, Giles said company moves to reduce emissions and investor focus on the “E” of ESG, would be a key  priority over the next three to five years followed by social factors such as supply chains, human rights and other impacts.

Giles’s perspective is supported by the findings of BlackRock’s latest Global Investor Pulse Survey 2020, which found that environmental issues were the main concern of the majority of respondents (87 per cent), over social (60 per cent) and governance issues (37 per cent). The survey conducted between November 2019 and January 2020 drew on responses with more than 26,800 individuals globally.

Specifically – within the category of environmental issues – respondents highlighted pollution and waste (57 per cent) and climate change risk (55 per cent) as their main concerns.

Overall, the Global Investor Pulse Survey found that a high proportion of individuals (85 per cent) want their investments to make a positive impact. It also found that among non-investors sustainable options would encourage two in five within this category to invest for the first time.

Transparency and market breadth

Advisers successful at engaging clients on ESG and environmental issues in particular have done so by tapping into the self-directed investor trend as well as appealing to an increasing hunger for transparency and offering solutions with access to a broad base of investment markets, Giles described.

“We started looking 18 months before the product launched to where investors were comfortable moving away from some of the bigger names in the market, but also we spent a lot of time debating how you can get a broad-based Australian equities portfolio that made sense for all allocations,’’ Giles explained.

In consultation with the index provider, MSCI, BlackRock’s new ETFs needed to ensure Australian investors had access to as broad a base of Australian equities as possible and the democratised nature of the products was appealing, she added.

The iShares Core MSCI Australia ESG Leaders product is more than 60 per cent weighted in financial, materials and health care sectors and includes CommBank, CSL, Macquarie Group and Wesfarmers as its top four stocks.

“(We wanted to) get that balance right between offering something that’s a broad market exposure and gives you Australian equity-like returns and has access to all of those sectors,” she said.

“Greater transparency in social issues and governance, maintaining board quality and effectiveness, gender diversity and diversity, all of these things are incentives to create value,” she said, describing issues for advisers to consider in their conversations with clients.

“It’s really providing access to sustainable investments for everyone. You can see what’s under the hood,” she said.

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

*This article is written in partnershiop with Blackrock