A new mega trend has emerged- Sustainable Investing
Larry Fink, the CEO of BlackRock, released his annual letter this week. If you are interested in reading the letter, it can be found here. Larry has been compared to Jeff Bezos as one of the best CEO’s. In the last 20 years, he has grown BlackRock into the largest asset managers in the world with nearly $7 trillion in assets. In this letter, he makes a strong case for sustainable investing titled, “A Sense of Purpose”. His vision is that companies exist to benefit their stakeholders but they need to make a positive contribution to society. The significance of this letter can’t be ignored. The largest asset manger in the world has just become the world’s largest sustainable investor. This letter will serve as the underpinning of the new mega trend of investing that has emerged over the last few years.
Larry wrote, companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?
We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.
If they already haven’t, I expect that other large institutions will follow Larry’s lead. Endowments and foundations will begin to mandate that all investments meet three central factors that impact a company – Environmental, Social, and Governance (ESG). This is how I expect new capital will be allocated at the largest institutions.
Larry backed up his change in strategy by joining the Climate Action 100+. The Climate Action 100+ is a five-year initiative led by investors to engage systemically important greenhouse gas emitters and other companies across the global economy that have significant opportunities to drive the clean energy transition and achieve the goals of the Paris Agreement. Since starting only 24 months ago, there are now more than 370 investors with more than USD $41 trillion in assets under management that have signed this initiative. BlackRock wrote in an email statement – Joining Climate Action 100+ “is a natural progression of the work our investment stewardship team has done. We believe evidence of the impact of climate risk on investment portfolios is building rapidly and we are accelerating our engagement with companies on this critical issue.
Bloomberg reported that investor money is starting to follow, with environmental, social and governance, or ESG, investment strategies for exchange-traded funds drawing in a record $8 billion in 2019. This trend can no longer be ignored by other CEO’s or their businesses will become like an outdated strip mall. I expect that alternative energy investments will continue to attract new money. For example, the iShares Global Clean Energy ETF is up 43% in the last year and is up 6% in the first two weeks of the year. All the while, the Energy Select Sector SPDR® ETF is up only 0.84% in the last year and -1.53% year to date. These returns over the last few year strongly support that even more money can be made being environmental friendly and socially responsible . In full disclosure, I’ve owned investments in each area for clients but they have been very low allocations. Many clients will notice ESG types of investments in their portfolios. Overall, the allocation to the Energy sector has been less than 1% of all investments at CGF and after this week it is now close to 0%. I have three clients that have required that I own own mostly all clean energy and/or ESG investments. For my clients that have high risk tolerances, I’ve owned more clean energy types of investments. The reason is that many of these companies trade at much higher valuations and are much more volatile.
A few years ago I wrote an email to many of my clients and asked them if sustainable investing was important to them. The feedback that I received was that it ranked low and that I shouldn’t change my investing process. Given this new trend, I wonder if my clients feelings and opinions have changed in this area. Is it worth taking more risk and investing more money into this trend? Should there be a requirement that all new investments rank high in ESG? I believe that if Larry Fink can lead a $7 trillion asset manager, I can do the same for my clients while continuing to maximize their returns and managing to their stated risk tolerance and goals.
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