Investing in a sustainable future A framework for charity investors to translate intention into implementation December 2017 Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
Key points While many charities invest to maximise long-term returns and deliver a steady income from their portfolios, some organisations also want their investments to reflect their values, ethos and principles. Sustainable investing a discipline that considers environmental, social and corporate governance (ESG) criteria to generate longterm competitive financial returns and positive societal impact can facilitate this. It allows charities to avoid industries that conflict with their activities and support corporate behaviours that are aligned to their own. Sustainable investing can be a rewarding investment approach. We believe it may provide an additional lens for investors seeking to improve investment outcomes both financial and societal. There can be no guarantee that the investment strategy will be successful and the value of investments may go down as well as up. It also means that an increasingly wide range of ethically produced funds and strategies are evolving becoming available to meet diverse charity investor objectives. Today investors have the option to choose the best solution according to their priorities. 2 INVESTING IN A SUSTAINABLE FUTURE
Over the long-term, environmental, social and governance (ESG) issues ranging from climate change to diversity to board effectiveness have real and quantifiable financial impacts. Larry Fink, CEO & Chairman, BlackRock There is a growing recognition that sustainability issues may have real and quantifiable financial implications. 1,2 This is driving an increasing move to incorporate sustainable considerations into investment decisions. What began as a niche segment of investors divesting out of controversial businesses has moved to the mainstream. Today, global investors ranging from large institutional investors to individual asset owners are adopting a variety of sustainable strategies to achieve their investment outcomes. Whether targeting specific social and environmental objectives or enhancing long-term financial value, we believe sustainable investing is increasingly seen as a sensible investment approach. There are now more opportunities for charity investors to align their financial goals and sustainability goals across their entire portfolio. Although matching these opportunities across asset classes and investment styles can be challenging, we offer a three-step framework to help investors move from the idea of sustainable investing to effective implementation. 1 Barclays, Sustainable investing and bond returns, November 2016. 2 Harvard Business School, Corporate Sustainability: First Evidence on Materiality March 2015. IMPORTANT INFORMATION Unless otherwise stated, any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are our own at the date of the relevant content. They are considered to be reliable at the time of writing, may not be all-inclusive and their accuracy and any forecasts are not guaranteed. They may be subject to change without reference or notification to you. Please note that any decision to make an investment should not be made solely on the basis of information contained in this whitepaper. A FRAMEWORK FOR CHARITY INVESTORS TO TRANSLATE INTENTION INTO IMPLEMENTATION 3
Sustainability factors may impact financial performance Step one: Identify risks and opportunities Sustainability factors can encompass a wide range of issues that fall within ESG criteria such as waste management, carbon emissions, or employee health and safety. It s important to identify and understand the risks and opportunities associated with them. It s no longer a feel good exercise to incorporate these factors into the investment process. For example, risks such as resource degradation can have a real and quantifiable impact on a company s bottom line and long-term investment performance. By contrast, so too can opportunities such as employee diversity. More investors are recognising the materiality of these factors and believe that how a company manages the environmental (E) and social (S) aspects of its business can be signals of operational efficiency and productivity. Corporate governance (G), including board governance and independence, can indicate the strength of a company s leadership and management. A growing body of research highlights the importance of these factors to long term investment returns. Analysis of more than 160 academic studies, for example, demonstrates that companies with high ESG ratings have a lower cost of capital. 1 Additional studies 2 have found that companies with transparent disclosure of ESG data have lower price volatility. Changing technological, regulatory and social factors can also lead to investment risks. Consider that, according to a 2014 study by the US Department of Energy 3, increased use of light-emitting diodes (LEDs) could cut power consumption from lighting by 40% from 2013-2030, or that wind and solar are forecast to add as much to the global energy supply between 2015 and 2020 as US shale oil did in the preceding five-year period. In addition, renewables provided 55% of all new capacity added worldwide last year. 4 Overlooking these factors could lead to missed opportunities at best, or a material loss of capital at worst. Investors must also consider the swelling tide of sustainability-related regulations: the ratification by 158 parties 5 of the Paris Agreement (as of August 2017) to deal with climate change; Canada s carbon tax, due to go live in 2018; and France s 2015 Energy Transition Law, will each have widespread implications on portfolio allocations and future investment decisions for both institutional and individual investors. 4 INVESTING IN A SUSTAINABLE FUTURE
Indeed, failure to incorporate regulatory risks can have an immediate, often negative effect on investment performance. Regulations raise the cost of doing business and increase the risk of compliance failures, which can trigger fines, legal bills and sudden changes in asset prices. Energy companies, for instance, that violated regulatory requirements and were involved in oil spills suffered both financial and reputational damage. These regulatory risks can also have cross-border implications, as shown by the curbs on nuclear power in Germany following Japan s 2011 tsunami. IMPORTANT INFORMATION 1 DB Climate Change Advisors, Deutsche Bank Group, Sustainable Investing: Establishing Long-Term Value and Performance (June 2012), available at https://www.db.com/cr/en/docs/sustainable_ Investing_2012.pdf. 2 Teresa Czerwińska and Piotr Kaźmierkiewicz, ESG Rating in Investment Risk Analysis of Companies Listed on the Public Market in Poland, ECONOMICNOTES, Vol. 44, Issue 2, at 211-248 (Jul. 2015), available at http://dx.doi.org/10.1111/ecno.12031. 3 U.S. Department of Energy, Energy Savings Forecast of Solid-State Lighting in General Illumination Applications, September 2014. 4 UN Environment, the Frankfurt School-UNEP Collaborating Centre and Bloomberg New Energy Finance (April 2017). Available at: https://www.bloomberg.com/news/articles/2017-04-06/with-more-bang-forthe-buck-renewables-providing-most-new-power. 5 Climate Analytics, as of August 2017. A FRAMEWORK FOR CHARITY INVESTORS TO TRANSLATE INTENTION INTO IMPLEMENTATION 5
Moving from intention to implementation Step two: Know what you own To mitigate the risks and exploit the opportunities associated with sustainability factors effectively, it is important for charity investors to understand what they own. The increased availability and overall quality of ESG data enables more investors to diagnose potential areas of sustainability risk and opportunity. Two basic sustainability metrics can be used to evaluate these possibilities: ESG ratings: These calculate each company s exposure to key ESG risks, based on a granular breakdown of the business. The ESG ratings model is industry-relative and uses a weighted average approach. The data can be used to evaluate companyspecific risk exposure and management practices. Figure 1: sample sustainability analytics Carbon intensity: These evaluate the exposure to carbon-intensive businesses to mitigate climate-related risk and capture new investment opportunities. Sustainability analytics alone are clearly not sufficient to steer portfolio allocation decisions, but they can be meaningful additions to the traditional financial risk analysis. Typically, comparing a current allocation to a standard benchmark with a widely accepted ESG or carbon scoring system does this. Figure 1 highlights these sustainability metrics, exposing potential areas of risk and opportunity. This sample portfolio, for example, has a lower aggregate ESG score and greater carbon emissions intensity than the benchmark with 80% of the carbon emissions generated within the equities allocation. With this information, charity investors can make more informed asset allocation decisions to both reduce risk and maximise investment opportunities, although it is important to remember diversification and asset allocation may not fully protect investors from market risk. ESG ratings Carbon emissions intensity 1 Carbon emissions intensity decomposition 2 ESG score 3 5.5 5.0 4.5 0 5.3 4.9 Carbon emissions intensity 300 200 221.4 178.8 100 0 Portfolio Benchmark Portfolio Benchmark Fixed income (40%) Equity (60%) 2 Asset allocation Fixed income (20%) Equity (80%) Percent of total emissions by asset class IMPORTANT INFORMATION Source: BlackRock for illustrative purposes only, as at September 2017. 1 Carbon emissions intensity: Tonnes of carbon emissions emitted per million dollars of revenue. 2 Shows that while equity exposure makes up 60% of net asset value, it accounts for 80% of total portfolio emissions intensity. 3 Score 0-10, the higher the score the better. Emissions Intensity: Emissions normalised by total sale. With every million dollar revenue x tonnes of emissions are financed. 6 INVESTING IN A SUSTAINABLE FUTURE
Step three: Put into practice It is important to recognise that there are more opportunities for charity investors to take action and implement sustainable investment solutions across asset classes in line with their financial goals. Once investors know what they own and understand their sustainable exposures, they can set targets to improve their portfolio s sustainable allocation. That said, there are a variety of ways to implement sustainable strategies (see Figure 2). Suitable approaches will vary according to a specific charity s objectives, time horizons and current exposures to traditional risk and sustainability factors. Investors can and do rely on various combinations of the three investment approaches within a portfolio. For example, investors might apply exclusionary screens while investing in companies with relatively high ESG scores within a sustainability theme such as clean energy or education technology. Figure 2: sustainable investing approaches Exclusionary screens Remove industries or companies that fall within a predetermined set of exclusion criteria such as tobacco, firearms and fossil fuels ESG factors Overweight companies that have strong environmental, social and governance considerations such as companies with lower carbon footprints and a diverse workforce Impact targets Target defined and measurable impact outcomes across social and environmental issue areas including alternative energy, health and empowerment Objective: Mitigate risk Seek opportunity A FRAMEWORK FOR CHARITY INVESTORS TO TRANSLATE INTENTION INTO IMPLEMENTATION 7
Post-investment: Measure your performance* Once sustainable investments are allocated, charity investors can measure and report on their sustainability impact over time. These measurements can occur at both the fund and portfolio level. For example, environmentally-focused charity investors can measure and report on clean energy produced at the fund level and track overall emissions reductions at portfolio level. See Figures 3 and 4. Others may look to track investment exposure to ESG performance. Existing standards such as the World Bank s Green Bond Impact Report, the Global Impact Investing Network s IRIS framework or MSCI Sustainable Index metrics provide useful guides for charity investors interested in specific outcome metrics. New standards will become available as international communities collaborate. They increasingly allow investors to track and measure the effects of more sustainable investments alongside traditional financial performance data. This will enable charity investors to continue to improve their exposures over time, taking advantage of the growing opportunities to have a positive impact. Figure 3: sample global renewable power fund level impact report Impact metric Increase renewable energy produced Displace Greenhouse gas (GHG) emissions Reduce water usage Impact outcome 2,554,875 1,761,842 2,133,321 Tons of GHG Cuml. MWhs produced 1 Cubic water metres reduction emissions avoided 3 2 Impact equivalent At capacity, that could power over 315,000 homes for a full year 4 That is equivalent to removing over 370,000 cars off the road for a full year 5 By comparison, the average American family of four uses 1.5 cubic metres of water per day 6 Important Information 1 Total production multiplied by fund ownership percentage. 2 EPA Conversion Guideline: 0.6896 metric tons of C02 per MWh. 3 World Energy Outlook Conversion Guideline: alternate water use for Combined Cycle Gas Turbine production of 0.835 m3/ MWh. 4 EPA Conversion and UK Government Guideline: US and UK average household usage of 8.09 MWh/ annum. 5 EPA Conversion Guideline: 4.75 metric tons of CO2 emissions/vehicle/year. 6 EPA and Water Sense Conversion Guideline: 400 gallons of water/day. For illustrative purposes only. 8 INVESTING IN A SUSTAINABLE FUTURE
Figure 4: sample portfolio s reduction of carbon emissions, 2011-2016 7 Carbon emissions intensity reduction over time (Mt C02/Sales) 250 200 150 100 50 0 221.4 13.25% annual improvement 178.8 150.1 138.2 110.3 108.8 2011 2012 2013 2014 2015 2016 Past Performance is not a reliable indicator of current or future results. 7 Carbon emissions intensity: Metric tons of carbon emissions emitted per million dollars of revenue. Emissions Intensity: Emissions normalised by total sale. With every million dollar revenue x metric tons of emissions are financed. Annual improvement: Annualised reduction in carbon emissions intensity from 2011-2016. A FRAMEWORK FOR CHARITY INVESTORS TO TRANSLATE INTENTION INTO IMPLEMENTATION 9
A guide for investing in a sustainable future Whether by targeting specific environmental, social and governance objectives or safeguarding long-term financial performance by mitigating the risk potential associated with poor ESG standards, charity investors are increasingly considering the role of sustainable investing in their portfolios. To identify suitable sustainable investment solutions, charity investors should know what they own by leveraging the sustainability analytics that BlackRock can provide to measure current ESG fund scores and form a baseline of sustainability exposures. From there, charity investors can take action through a combination of exclusionary screens, ESGfactor optimisation or impact investing. Lastly, in order to track progress, investors can monitor and report on the relevant sustainability impacts, over time. Although charity investors may have varied portfolios and objectives, these three basic steps can help inform an appropriate sustainable investment strategy. Many charity investors are evolving their policies from purely using exclusionary screens to measuring ESG impact, credentials and investing for long-term positive outcomes. The BlackRock Charities and Endowments team is happy to assist in navigating our ESG focused fund offering. We continue to develop our product range with these goals in mind, leveraging BlackRock s research capabilities and investment platform to meet the investment needs of charity investors. There is no guarantee that research capabilities will contribute to a positive investment outcome. 10 INVESTING IN A SUSTAINABLE FUTURE
The BlackRock Charities team Your dedicated relationship team is ready to talk though your options Candida de Silva candida.desilva@blackrock.com +44 (0) 207 743 1084 Gemma Gooch gemma.gooch@blackrock.com +44 (0) 207 743 2567 Luke Twyman luke.twyman@blackrock.com +44 (0) 207 743 1415 A FRAMEWORK FOR CHARITY INVESTORS TO TRANSLATE INTENTION INTO IMPLEMENTATION 11
Why BlackRock for charities? BlackRock helps people around the world, as well as the world s largest institutions and governments and we have been investing on behalf of charities and endowments for nearly 30 years. Today we manage more than 4.2 bn* for over 3,000 charities in the UK and over 14bn* globally. That s why we ve built a family of charity-focused strategies to give investors the breadth they need to meet their specific needs, as well as a dedicated relationship management team. Our unique offering: Client focus: As an independent asset manager, BlackRock works solely on behalf of our clients. We have extensive experience in working with charity clients of all sizes and across all sectors; which we apply to fully understand and help clients with the challenges they face today. Group resources: Our clients benefit from our size and position in global markets as well as investment insights and thought leadership we produce. Investment solutions: BlackRock has a broad suite of investment solutions, both active and passive, from traditional asset classes to alternatives, covering all markets, while there is no guarantee that a positive investment outcome will be achieved, we pride ourselves on providing innovative sustainable investment solutions. Culture of risk management: All our clients benefit from our sophisticated risk tools and the independent oversight provided by our risk teams. BlackRock s independent risk management group works closely with portfolio managers. That means that risk managers are unbiased in their recommendations and portfolio managers can make more precise and informed decisions, although while proprietary technology platforms may help manage risk, risk cannot be eliminated. * As at 30 September 2017 Important information Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Past Performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. 2017 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ishares, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. 61037_DEC17_EN