BlackRock is at the forefront of the global transition to a more responsible investment landscape, having committed to make sustainability and climate action integral to portfolio construction, risk management and its stewardship activities.
In the latest collaboration with Qontigo, BlackRock is co-managing an investment mandate that tracks one of the iSTOXX APG World Responsible Investment (RI) Indices. The indices were developed together by Qontigo and Dutch pension provider APG.
We caught up with Manuela Sperandeo, EMEA Head of Sustainable Indexing at BlackRock, to ask her about the mandate, and, more broadly, to find out what role indices play in her clients’ journey to sustainability.
Manuela, across the sustainability product landscape, where are you seeing the most interest from clients? Does an index family like the iSTOXX APG RI indices reflect that demand?
Over the past 18 months we have seen significant momentum develop in the demand for climate-oriented investments. The idea that climate risk represents investment risk has moved in just a few years from a novelty in the investment world to something approaching mainstream thinking. Until recently, divestment was the predominant way to express climate-oriented objectives for investors. However, this is rapidly changing. ETFs and index investing are bringing transparency and accessibility to this emerging segment.
One specific index, the iSTOXX® APG World Responsible Low-Carbon SDI Index, reflects this demand by focusing on climate via different angles. Firstly, it only includes companies that adequately manage their ESG risks, as well as actively contribute to the UN Sustainable Development Goals (SDGs) through the products and services that they offer. Secondly, the index also has a low-carbon aspect, whereby its carbon footprint is significantly reduced compared to its benchmark.
The press release called the iSTOXX APG RI indices ‘groundbreaking.’ Why are they so?
There are a few innovative aspects to the new family of indices. Most notably, Qontigo and APG have designed them so that the indices build on each other by progressively expanding their ESG objectives. Starting with a parent index, the iSTOXX® World A Index, each subsequent index incorporates an additional sustainability layer: exclusions, ESG leaders, carbon footprint budget and SDG investments.
This layered approach allows for active choices. If, for example, investments that contribute to the SDGs are not part of an investor’s objective, then an index is available that does not have SDGs as an incorporated target. It also enables the ability to identify and measure the impact of each layer to the risk, return and ESG characteristics of the resulting portfolio, making it fully transparent.
How are your own clients incorporating climate, ESG and impact considerations into their investment process?
At BlackRock, we have devised three distinct approaches to make climate investing easier. Investors can opt to reduce, prioritize or target their climate exposure, depending on their sustainability goals.
The first approach seeks to reduce a portfolio’s exposure to carbon emissions and fossil fuels, primarily by applying fossil fuel-related screens.
The second approach is via funds that aim to prioritize the allocation of capital based on a company’s or government’s commitment and actions to the climate transition, for example those that have set science-based targets. These funds specifically integrate climate data into the investment process.
Finally, we have targeted climate themes and impact outcomes, which invest in specific sustainable activities or projects that advance environmental purposes, such as green bonds.
It sounds like investors have plenty of options, and the engagement is there. What are, on the other hand, some of the challenges that may hamper the adoption of sustainability strategies?
While there is growing consensus on the importance of sustainable investing, standardization and transparency of definitions and interpretations have been somewhat lagging. This lack of common language is now sharply in focus for regulators across Europe and within the broader ESG ecosystem, including ESG data and index providers, stock exchanges, public companies and auditors. Increasing regulation, industry standards and ESG reporting are helping to eliminate the perceived complexity of this field, counter the perception of ‘greenwashing’, and accelerate the sustainable finance transition.
And are you concerned that the increasing sophistication of sustainable products raises the risk that many clients may not fully understand what’s under the hood? If so, how do you combat this?
While the sophistication of sustainable products is indeed increasing, index investments are a powerful tool that are helping to transform an imprecise category full of acronyms and jargon. They are doing so by aggregating, standardizing and bringing transparency to sustainability data and investment methodologies. Using indexing to invest sustainably harnesses the simplicity, optionality and transparency of a rules-based ESG methodology that delivers measurable, deliberate and predictable outcomes — such as ESG score improvements or reductions in carbon intensity. This outcome-oriented approach benefits from a range of choices across ESG strategies and empowers asset allocators to build diversified multi-asset sustainable portfolios with consistent building blocks.
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