Partner Insight: Why pension funds are considering indexing for sustainable investing
Manuela Sperandeo of iShares explains the advantages of sustainable indexing
Here are the five reasons why we believe sustainable indexing gives schemes the clarity they need to help build more sustainable portfolios.
1. Indexing puts you in control of what type of sustainable investor you want to be
Sustainable investing is not one size fits all. It means different things to different people depending on their specific sustainability and financial goals. The broad range of indices available, and the transparency they offer, allow you to pick the approach that's appropriate for your portfolio, from simple exclusion of controversial businesses to a more targeted approach to selected environmental, social and governance topics.
Source: BlackRock, as at 31 August 2020
2. Sustainable indexing aims to help provide a consistent approach across a portfolio
As investors transition to sustainable investing, an indexing approach may help to ensure sustainability is expressed in a consistent way across the entire portfolio. Indexes are inherently rules-based, so the screens and ESG integration they deploy are repeatable, regardless of asset class or exposure.
3. Sustainable indexing drives industry standardisation, promotes disclosure and seeks to help motivate better corporate behaviour
We believe that indexing is bringing clarity to the sustainable investing space by providing transparency and accelerating the adoption of new market standards. Sustainable indexes will play an increasingly important role in directing capital flows to companies with the best sustainability practices and the most comprehensive sustainability disclosures. Companies that are dedicated to prioritising sustainability efforts aim to be better positioned to attract long-term shareholders, as they will have a higher weighting in the market's new mainstream ESG indexes
4. Sustainable indexes have shown resilience in difficult times
During this year's market dislocation, a majority of sustainable indexes exhibited resilience relative to broad market benchmarks.1 We believe this is because sustainable indices are generally comprised of companies with higher profitability and lower levels of leverage than the broader market.
A common misconception is that sustainable indexing works for equities but not for fixed income exposures, and fixed income ESG data will continue to lag behind equities. This misconception has been defeated over the last few years. For example, today MSCI's sustainable data covers 94% of the issuers in the Bloomberg Barclays U.S. Credit Index, versus 75% in 2013. (Source: MSCI ESG Research, as at 31 May 2020.)
1 *Source: BlackRock with Q1 2020 data from Bloomberg and Morningstar as of 7 May 2020. More than 90% of sustainable indices outperformed their parent benchmark during this period of the heightened market uncertainty and drawdown.
Risk: Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
5. Index fund asset managers with active investment stewardship seek to drive long-term change
Indexing amplifies the impact of company engagements because index investors typically take a long-term view. Those who are sustainability-minded can exercise influence with companies through engagements across environmental, social and governance (ESG) topics.
These are among the many reasons why we believe investors will choose to put an extra $1trn into sustainable index assets in the next decade.
Manuela Sperandeo is EMEA Head of Factor, Sustainable and Thematic ETFs for iShares
To learn more about investing in sustainable ETFs visit iShares.com
Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies.
The environmental, social and governance (ESG) considerations discussed herein may affect an investment team's decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.
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