There is no evidence of a sustainability “bubble” with climate repricing having further to run as European investors look to ramp up sustainability focus in portfolios, according to research from BlackRock.
Research by BlackRock suggests that climate repricing of assets is underway, but the majority of repricing is yet to occur, and there is no evidence of a sustainability “bubble”. The survey of 175 investors representing over £370bn in AUM focused on Sustainable Portfolio Construction and Asset Allocation.
75 per cent of investors plan to use or already use sustainable building blocks at the core of their portfolios. Sustainable products comprised 25 per cent of the 260 portfolios surveyed, and Portfolio construction is responsible for 68 per cent of the most significant barriers to sustainability adoption.
BlackRock co-head and chief investment officer for multi-asset strategies and solutions Pierre Sarrau says: “Rock bottom rates and rising inflation have eroded the income from government bonds that have historically stabilised portfolios, in an existential challenge to well-established approaches such as the classic 60/40 portfolio split between equities and fixed income. Another factor pushing investors to reconsider portfolio construction and assess resiliency is the green energy transition, which presents both risk and opportunity. While the current environment is constructive for risk assets, much uncertainty lies ahead.”
BlackRock senior portfolio strategist Vivek Paul says: “A couple of years ago, we said a tectonic shift of capital to combat climate change would likely change the relative price of assets. But back then, this effect was yet to occur, and by definition, we lacked the data to assess whether it was happening. Fast forward to today and we believe that there is strong evidence that the dynamic is real and is affecting prices right now. The cost of capital for securities perceived to be greener is falling, and vice versa. Yet, although this effect is now statistically significant, most of the repricing is still to come. In our view, this implies that sustainable assets are on aggregate far from bubble territory; and that portfolios tilted towards assets the market perceives as better aligned to the transition to net-zero should outperform due to this repricing.”
Over the course of 2021, BlackRock surveyed 175 large investors in EMEA with a total of 260 investment portfolios representing over £370bn in AUM. Three-quarters of respondents (75 per cent) said they use or plan to use sustainable building blocks at the core of their portfolios, while 45 per cent believe portfolio holdings will comply with Article 8/9 of the European Commission’s Sustainable Finance Disclosure Regulation in the future. The majority of respondents (62 per cent) stated that they would only continue to invest in SFDR Article 6 funds if Article 8/9 alternatives introduce significant performance or tracking deviation.
BlackRock head of portfolio analysis and solutions EMEA Ursula Marchioni says: “In our view, the ESG journey is continuous. In its broadest sense, incorporating sustainability into portfolio construction is about future-proofing portfolios. But investors are using a wide spectrum of approaches to attain this goal, from the use of specialised products to achieve Environmental, Social and Governance (ESG) objectives at a specific exposure level to the more transformational embedding of sustainability throughout the entire investment process. We expect that this latter approach – in which sustainability is seen as a core part of strategic asset allocation design– will emerge as the more prevalent one over the next 12-24 months.”
Sustainable products accounted for 25 per cent of the 260 portfolios surveyed, an increase from the 17 per cent average share in all 650 EMEA portfolios examined last year. Within the sample, adoption is spreading across asset classes, with equities receiving the highest allocations (29 per cent), followed by fixed income (24 per cent), and multi-asset coming in a close second (24 per cent).
In equities, global exposures have seen the most adoption, with regional, single-country, and sector strategies gaining traction. The EUR money market and GBP fixed income had the highest fixed income adoption, followed by convertibles, the US money market, and European fixed income.
Blackrock global CIO of solutions multi-asset strategies & solutions Simona Paravani-Mellinghoff says: “Climate change affects every aspect of modern life, so it is no surprise that it is shaping portfolio construction too. The reallocation of capital is already underway, with more than $2.9 trillion of assets under management in sustainability funds globally as of the third quarter of 2021. We believe climate risk is investment risk, and the increase in the adoption of sustainable products suggests many investors are keen to assess the risks but also the opportunity the transition presents.”
According to the research, the majority of challenges (68 per cent) faced by investors when implementing sustainability are related to portfolio transition, with the top two focusing on measuring a portfolio’s sustainability features (27 per cent) and the ability to measure the impact of sustainable strategies on risk, return, and tracking error (20 per cent).
BlackRock head of MASS portfolio solutions in EMEA Stephen Crocombe says: “It’s clear that many investors want to adopt sustainability in their portfolio but struggle to do so, with an aggregate 68 per cent of challenges cited relating to portfolio construction in our recent sustainability survey. In the case of pension schemes, this adoption is made more difficult by the structural challenges of managing a scheme today, such as a more complex investment and regulatory landscape and rising operational costs. To help overcome these obstacles, many pension schemes are looking externally for investment management capabilities. Based on our experience, we can expect at least 100 pension schemes every year to appoint an outsourced provider for the first time in the UK. For the pensions industry, this represents a significant rate of change.”
