In its 2019 ESG Survey, Callan documented the growing commitment of institutional investors to ESG investing. 41% of survey respondents claimed to incorporate ESG factors in their investment decisions, a share roughly double that of five years earlier.
For that 41%, “integration” was the most widespread form of implementing ESG. “Integration,” as defined by The Principles for Responsible Investment is “the explicit and systematic inclusion of ESG issues in all investment analysis and decision making.” This is distinguished from other more rudimentary forms of implementation such as screening out specific investments or hiring ESG specialist managers. With “integration,” the boundary lines between investing and ESG investing begin to blur, elevating ESG to an essential valuation measure across all investment decisions.
Fast forward to last week. In two open letters, Larry Fink, the CEO of BlackRock, the largest asset management firm in the world, put CEOs of companies that BlackRock may invest in and clients whose money BlackRock is responsible for, on notice. He was taking the next step in ESG integration.Going forward, BlackRock intends to “put sustainability at the center of our investment approach.” “Sustainability-integrated portfolios,” the letter continued, “provide better risk-adjusted returns” and so “sustainability will drive the way BlackRock manages risk, constructs portfolios, designs products and engages with companies.” Fink also pointed out that “sustainability extended beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain or how well it protects customers’ data.”
With these letters, BlackRock marks a watershed moment not only in the history of ESG adoption, but in the evolution of investment management. It is the moment when the world’s largest investment manager explicitly conflates profitability with social responsibility in the valuation process. We expect that this boldly stated position and the actions derived from it will resonate throughout the asset and wealth management worlds as investment product manufacturers and consumers live out its far-reaching implications.