BlackRock, the world’s largest money manager, has made a bold commitment to sustainable investing. CEO Larry Fink describes this as a “fundamental reshaping of finance.”

In a recent letter to investors and stakeholders, Fink identified climate change as a defining factor in the future of investing. He identified that “climate change is almost invariably the top issue that clients around the world raise with BlackRock.”

Given this reality, Fink said considerations of climate risk need to be factored into investment decisions. A “significant reallocation of capital” toward climate initiatives is already underway, and that means investors need to be prepared for this changing paradigm.

Accordingly, BlackRock is expanding its environmental, social and governance (ESG) investing. The asset manager is planning to double its ESG fund offerings to 150 over the next few years.

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Luckily for investors, strategies that emphasize environmental sustainability tend to outperform the market. Research from BlackRock shows that indexes based on ESG models “have matched or exceeded the returns of their standard counterparts, with comparable volatility.”

BlackRock research also reveals that ESG-friendly portfolios tend to exhibit strong balance sheets, making them more resilient to swings in the business cycle. So not only is sustainable investing a moral endeavor, investors won’t have to sacrifice returns for the greater good.

The following chart highlights the benefit of investing in companies that are best positioned to transition to a clean economy. According to BlackRock, “overweighting companies with better transition readiness from a high-carbon to a carbon-neutral framework, and underweighting their less-prepared peers, resulted in the outperformance of our hypothetical portfolio versus the benchmark index.”

Source: BlackRock

Although ESG appears to be an overarching strategy, BlackRock says there’s no one-size-fits-all approach. The key is to integrate “material sustainability considerations” into the investment process with the goal of producing sustainable long-term financial returns.

By January 2019, ESG exchange-traded funds had $760 billion in assets under management –and that’s just in the United States and Europe. Five years prior, ESG funds had $453 billion on the books.

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In his letter, Fink identified several climate change initiatives being undertaken by his firm. BlackRock is not only a signatory of the UN’s Principles for Responsible Investment, but it was also a founding member of the Task Force on Climate-Related Financial Disclosures. It has also partnered with France and Germany to establish the Climate Finance Partnership, a public-private initiative for financing new infrastructure projects.

In pursuit of sustainable investment, BlackRock is also committing to improved disclosure for shareholders. This includes not only questions related to climate change but also factors related to diversity and inclusion, sustainable supply chains and consumer privacy.

The investment risks posed by climate change are accelerating a major shift in capital among governments and businesses. As Fink wrote in his 2020 letter to CEOs, this will have a “profound impact on the pricing of risk and assets around the world.” The rise of ESG requirements also has direct implications on accounting bodies and financial regulators. As KPMG notes, these requirements have already begun to impact investing and lending appetites in regions like the European Union.

Faced with this reality, companies are beginning to take action in assessing ESG opportunities and risks. For many of them, ESG principles will become essential to long-term success as investors continue to prioritize business models that are attuned to climate risks.

For investors, the rise of ESG consciousness means there will be more opportunity to gain exposure to funds that prioritize climate change, the ethical treatment of employees and customer satisfaction. As the inflows into ESG funds have clearly demonstrated, there’s a growing appetite for such products.

BlackRock is clearly demonstrating that sustainable investing is not just a fad, but part of its long-term strategy. As Larry Fink noted in his letter, the ultimate goal remains long-term profitability – but not at the expense of corporate social responsibility.

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