Short for environmental, social and governance, ESG investing has become virtually synonymous with impact investing in many circles. As a result, ESG has emerged as arguably the most powerful acronym in today’s capital markets, responsible for driving an intensifying torrent of fund flows that can now be measured in trillions of dollars. A host of asset managers large and small have jumped on the ESG backwagon in hopes of serving this lucrative new category. An ever expanding array of ESG-themed investment products have been crafted and marketed in order to meet the seemingly insatiable demand of institutional and individual investors alike.
Of the many investment firms peddling ESG wares, few stand out as clearly as BlackRock Inc. (BLK, Financial), the world’s largest asset manager. As BlackRock’s ESG evangelism has matured into impact-oriented action, some have begun to ask whether its ESG strategies will actually pay off in the form of improved returns over the long run. A lot of capital is riding on the answer to that question.
Riding high on ESG
BlackRock helped put ESG investing on the map in the first place, thanks in no small part to the efforts of its CEO, Larry Fink. In an article published last year, I discussed Fink’s public commitment to ESG, especially his move to gradually divest BlackRock from coal and other fossil fuels. However, these moves were merely a prelude.
Over the course of 2020, BlackRock added 51 new ESG index offerings, bringing its total to 141 globally. In its 2020 Sustainability Update, the company claimed that “100% of BlackRock’s approximately 5,600 active and advisory BlackRock strategies were ESG integrated, covering US$2.7 trillion in assets.” Last year also saw BlackRock help 11 index providers craft and launch their own ESG products.
Clearly, business is booming for ESG investing, and BlackRock has reaped the rewards of its strategy in the form of rising capital inflows. As of this month, BlackRock’s total assets under management now exceed $9 trillion.
A question of performance
There is some evidence that BlackRock’s commitment to ESG is already paying off for its clients and investors. In a Nov. 11 interview with MarketWatch, Carolyn Weinberg, the global head of BlackRock’s iShares and Index Investments unit, asserted that “ESG scores are consequential to returns.” According to MarketWatch, Weinberg’s claim is supported by the data:
“Weinberg says that, since Covid’s impact on markets, the company’s ESG indexes outperformed their parent benchmarks. BlackRock’s data specifically pointed to ESG scores for the gains. She says looking back to the first quarter, 94% of its ESG indexes outperformed their parent benchmarks, and 70% of that outperformance stemmed from the ESG scores.”
There is material evidence that ESG strategies can outperform their benchmarks over a relatively short span of time, but whether they will continue to do so is less clear, especially if market circumstances were to change significantly from their current state of ebullience.
My take
It is quite clear that ESG is here to stay. Whether it remains a driving force of the market zeitgeist, however, remains to be seen. Much may depend on the success, or lack thereof, of ESG strategies over the next few years.
Disclosure: No positions.
