BlackRock Rapidly Expanding ESG Reach

March 01, 2017

Deborah Winshel

Deborah Winshel
Global Head of Impact Investing
BlackRock

The iShares lineup of funds has a broad and growing offering of ESG and SRI ETFs. Deborah Winshel, BlackRock’s global head of impact investing, discusses why this investment space is expanding so quickly.

BlackRock has been rapidly growing its lineup of socially responsible investing (SRI) and environmental, social and governance (ESG) ETFs over the past few years. Why is the firm so focused on adding funds in that particular space?
The ETF business is a very important market and sector for BlackRock. Combining that with the growing demand for impact or sustainable investments has been a natural place of growth and focus for us.

Early on, interest was driven by mission- or values-driven organizations and family offices. This has really broadened to include many investors who have stakeholders or leadership that are focused on investing in socially responsible companies, or companies, for example, that have a low carbon footprint.

Over the last year or two, we’ve seen that demand grow to include individual investors, in particular high net worth, as well as institutions such as pensions and endowments. It’s really across the board. Interestingly, much of this demand is driven by millennials and women; both demographics have an interest in sustainability and impact outcomes, in addition to financial returns.

You mentioned that millennials are a big growth area. Is that because that’s a generation that’s very comfortable with technology and science?
There are probably two components. One is, millennials are very drawn to ETFs in general. BlackRock’s recent ETF Pulse1 survey shows that millennials are likely to be a significant group driving the growth in ETFs going forward. Millennials (age 21 to 35) are currently more invested in ETFs than other investors, on average, and are more likely to plan to invest in ETFs in the next 12 months.

On the impact side, if you look at the millennial demographic, they’re a very socially aware generation. You see that in their consumer behavior. They care about corporate responsibility and the impact of a company’s goods and services. They also express the same mindfulness in how they invest. Investing in funds that have a positive impact on the environment, on the world around them, is a key consideration for this generation.

Are there different categories of ESG investing? Where are you seeing the most demand?
We have seen two areas that lead demand among investors. The first is the broad ESG category, which represents investing in companies that are more responsible across a variety of environmental and social issues. The second category would be more thematic; for example, climate, diversity, thematic or issue-driven investing. And within that, we’ve seen the greatest interest around climate—climate impact and carbon efficiency, for example.  Our iShares MSCI ACWI Low Carbon Target ETF (CRBN), which launched at the end of 2014, is a good example of that type of thematic product.

Do SRI/ESG investment approaches mean investors have to give up achieving the performance of a similar fund without any ESG investment parameters?
I think the No. 1 misconception today is that ESG strategies underperform non-ESG strategies. However, there are a number of studies2  that support the fact that ESG investments can potentially perform as well as—if not better than—traditional strategies.

That said, the most recent suite of products we’ve introduced, the iShares Optimized suite—the iShares MSCI USA ESG Optimized ETF (ESGU), the iShares MSCI EAFE ESG Optimized ETF (ESGD) and the iShares MSCI EM ESG Optimized ETF (ESGE)—has an elevated ESG rating,3  but these funds seek risk and return similar to more traditional indices, so it’s a way for clients to bring ESG into the core of their portfolios.

Is there also a sense that, by investing according to ESG criteria now, investors will reap benefits later, because companies that hold to these standards are going to perhaps outperform their competitors over the long run because they have better environmental practices, better governance, better social practices, etc.?
We believe sustainable investing is just good investing. Companies with good governance have the potential to create long-term shareholder value consistently. And a lot of the factors within the ESG spectrum are also good financial or good economic criteria. For example, being carbon efficient is a very good proxy for operating efficiency for a company. We know there’s a correlation with strong performance, good management and efficient use of resources.

DSI and KLD are the oldest of the SRI and ESG funds. How has that space changed since they were launched about 10 years ago?
When we launched the iShares MSCI USA ESG Select ETF (KLD) and the iShares MSCI KLD 400 Social ETF (DSI), they were considered the forerunners of sustainable investing, and were the only ETF options in the U.S. market. We continue to see clients investing in both of these products, but we also find that more investors are focusing on the positive ESG characteristics and less on exclusionary methodologies; additionally, they’re all very concerned with how these exposures fit into a portfolio and understanding what unintentional biases may be incorporated with an ESG solution.

This is why we designed our iShares Optimized suite of ETFs, which are broad market solutions that seek to align ESG and financial outcomes. They’re meant for investors who aren’t looking to take on large deviations from a market-cap-weighted index and could potentially replace traditional USA, EAFE and EM exposures. 

The fact that we now have international and even emerging market ESG ETFs is also a relatively new development in this space. In the past, ESG funds really focused on U.S. equities, but now that there’s expanded ESG ratings coverage, we can create a variety of building-block exposures. Currently, ESGE is the only emerging market ESG ETF out there.


Endnotes

1Source: BlackRock ETF Pulse Survey, 2017: https://www.ishares.com/us/about-etfs/etf-pulse
2Source: ESG and Financial Performance: Aggregated Evidence From More Than 2,000 Empirical Studies,
Deutsche Asset & Wealth Management and Hamburg University, 2015
3ESG ratings provided by MSCI on over 6,000 securities based on 37 industry-specific issues weighted based on the industry’s impact and the time horizon of the risk/opportunity.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

The Funds are distributed by BlackRock Investments LLC (together with its affiliates, “BlackRock”).

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets and in concentrations of single countries.

The Fund’s ESG investment strategy limits the types and number of investment opportunities available to the Fund and, as a result, the Fund may underperform other funds that do not have an ESG focus. The Fund’s ESG investment strategy may result in the Fund investing in securities or industry sectors that underperform the market as a whole, or underperform other funds screened for ESG standards. In addition, the Index Provider may be unsuccessful in creating an index composed of companies that exhibit positive ESG characteristics.

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

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