dChan
Anonymous ID: 28d05c Oct. 1, 2021, 5:48 p.m. No.14702707   🗄️.is đź”—kun

CARBON COPY

 

“The long-term story is clear,” Philipp Hildebrand, former head of the Swiss National Bank turned vice chairman of BlackRock, told Bloomberg Television this morning. “We’re going to continue to see a vast reallocation of capital towards sustainable products.”

 

That mass migration is well underway. Assets under the environmental, social and governance umbrella reached $35.3 trillion globally as of the beginning of last year according to the Global Sustainable Investment Review for 2020, up 15% from the start of 2018 and representing 36% of all professionally managed funds. BlackRock will do its part to make sure that figure grows larger. “Our job as an asset manager is to increase the scope of our product offering, ensure that it’s transparent and continue to innovate together with the index providers to make sure we can offer more choices,” Hildebrand added.

 

To that, big investors say, keep those green investment products coming. California State Teachers' Retirement System chief investment officer Christopher Ailman declared at a conference Wednesday that climate change “is a mega-trend that if you take advantage of it, and get ahead of it, it’s going to be an alpha generator for the next 30 or 40 years.” Conversely, “if you don’t pay attention to it, it’s going to be a negative alpha and you’re going to be stuck with a low-beta return.” Those sentiments are widely shared. Summarizing the results of a global survey of 24,000 investors, Sarah Bratton Hughes, head of sustainability for Schroders North America, termed 2020 an “inflection point” for ESG strategies. “It is now less about risk and more about return.”

 

Mushrooming assets under the ESG purview and ambitious investor expectations lead some to wonder just how financially sustainable the phenomenon really is. Thus, the Bank for International Settlements issued a stark warning in its most recent quarterly review published Sept. 20: “Historical lessons from the investment volume and price dynamics in rapidly growing asset classes could be relevant for ESG securities. Assets related to fundamental economic and social changes tend to undergo large price corrections after an initial investment boom.” Railroad stocks in the mid-19th century, dot com stocks at the late 1990s and mortgage-backed securities during the mid-aughts housing boom all fit the bill as historical analogies, the central bank of central banks ominously writes. "You could have too much, too quickly of a good thing," BIS monetary and economic department head Claudio Borio told Reuters. "We know valuations are rather rich."

 

Indeed, new evidence suggests that the ESG boom and the grand bull market are inextricably linked. An August paper from EDHEC-Risk Institute analyzing portfolio construction across green-focused exchange traded funds in Europe from 2011 to 2020 found that in climate focused strategies, only 12% of a given stock’s weighting was determined by its climate score. Market capitalization accounted for the other 88%.

 

What’s more, firms that failed to do their part for Mother Earth often saw little in the way of consequence: 35% of companies with deteriorating environmental scores over that 10 year period managed to grow their ESG portfolio weightings anyway. Finally, the EDHEC researchers find that ETF promoters chronically underweight economically critical but high emission sectors like energy and utilities in their portfolios, burnishing those managers’ green bona fides but depriving the firms with the most room to enact environmental improvements of the capital to do so.

 

With fossil fuel prices now going vertical around the globe, the limitations of that strategy are abundantly clear. “The generators of innovations to address environmental issues must have an incentive” to do so, Will Thomson, managing partner at Massif Capital, writes today. “Such environmental innovation is most likely to arise from firms that create environmental problems or firms in industries with environmental problems. In our minds, this is common sense.”

 

For more from Thomson on this essential topic, join us in person at the Plaza or tune in for the webinar of the Grant’s Fall Conference on Oct. 19 (advt.)

 

https://www.grantspub.com/resources/commentary.cfm