- Sustainability has become a hot topic for the financial industry, with asset managers increasingly making investments driven by their corporate values.
- Environmental, Social and Governance (ESG) investing is a growing focus for many business publications, and financial services providers are eager to communicate
corporatepurpose and social responsibility.
- BlackRock dominated the recent media discussion around ESG investing, followed by BNP Paribas, Goldman Sachs and Morgan Stanley.
As any avid consumer of the news media would have noticed, sustainability is a burning issue in the recent conversation around pretty much any major industry, from fashion and food to Big Oil and automobiles. Companies in these sectors try to focus their corporate messaging on their contribution to environmental causes and to position themselves as socially responsible brands.
In the cacophony of ever greener campaigns, one industry is beefing up its sustainability credentials in order to catch up and make its voice heard: financial services. Its latest hit is what the business media calls sustainable finance or Environmental, Social and Governance (ESG) investing – a way of investing which takes into account not only the potential financial returns of an investment but its social impact as well.
This investment strategy has grown 107.4% annually since 2012, and new exchange-traded funds (ETFs) tracking sustainable and responsible investments have thrived since last year. Around a quarter of all professionally managed assets around the world, and about $12 trillion of the $46.6 trillion dollars professionally managed in the US right now, incorporate ESG criteria.
BlackRock estimated that ESG investment funds had grown 50% in the past five years to more than $750 billion in assets in the US and Europe. Climate activists are now well-organised and motivated investment managers, while environmental groups like Climate Action 100+ and Follow This have hundreds of institutional investors on their side.
Values = profit
The growth of the ESG investment philosophy builds on the older Socially Responsible Investment (SRI) movement, which is based on ethical considerations such as not investing in alcohol, tobacco or firearms.
But unlike SRI, ESG investing goes beyond its social purpose and presumes that it has actual financial relevance, even though it takes into account aspects which traditionally are not part of financial analysis. For investors, ESG credentials communicate corporate values and strong reputation relating to issues which are more and more often in the public eye, which in turn can improve the performance of both active and passive risk-factor portfolios.
ESG investing really took off around 2013 and 2014 when a couple of studies found that good corporate sustainability performance correlates with good financial results. The growing awareness of such academic research has been a decisive factor for the encouragement of more and more investors to practice ESG integration into the
Another important factor for the rapid growth of ESG investments are millennials, whose investment preferences always circle around their personal values: a survey by First State Investments found that more than 80% of millennials are interested or very interested in sustainable investing.
A recent EY study found that when assets change generations, firms typically lose 70% to 80% of them. And since millennials are meant to receive more than $30 trillion of inheritable wealth, fund managers are eager to position themselves as the right fit for this emerging client segment by capitalising on the marketing value in offering ESG-powered financial products.
A recent notable development was the introduction of the first investment fund designed for animal rights advocates and environmentalists.
As with many environmental initiatives, the ESG investing trend has been particularly strong in Europe, where not only asset managers but also policymakers and regulators are actively engaged with the topic. Germany in particular aims to promote itself as a sustainable finance hub.
In March, the European Parliament and
Money is getting greener
ESG investing has become a major topic for the specialised business media and for the financial pages of mainstream daily outlets. Analysing the top-tier English language publications from October 2018 to September 2019, we found that BlackRock, the world’s largest asset manager with $6.32 trillion under management, has been dominating the conversation:
BlackRock intends to position itself as a global leader in sustainable investing, with a range of ETFs in the US and Europe that incorporate ESG criteria. The company has nearly 25% of the market segment with $7 billion of assets and its research indicates that its ESG ETF assets will grow to $250 billion by 2028.
Commentators noted that the asset manager tries to exploit two of the dominant themes in the global investment industry — the growth of low-cost, passive ETFs and the preferences of investors, particularly millennials, for making socially conscious investment decisions.
BlackRock also got in the media spotlight for becoming the first asset manager to publish ESG ratings of companies across its entire iShares investment portfolio. It also published a report on climate change, claiming that it’s a risk investors can’t ignore.
The company recently launched six new sustainable equity ETFs that target a 30% carbon reduction, which have gathered $800 million of assets, and introduced its first US ESG bond fund. The funds fall under the new iShares sustainable core brand. BlackRock has strived to promote ESG investing through CEO Larry Fink’s annual letter to CEOs, its stewardship processes and its direct engagement with over 1,000 companies.
However, it received some bad publicity this month when a report, published by the Washington DC-based Majority Action and the Climate Majority Project, asserted that the company, alongside the world’s second-largest ETFs provider Vanguard, have voted overwhelmingly against the key climate resolutions at energy companies, including a resolution at ExxonMobil’s annual shareholder meeting, and at Duke Energy. Majority Action said BlackRock ranks at the bottom of the list of fund managers using their voting powers to force companies to take climate-related action.
This led many media outlets to print that the fund managers whose promotional efforts concentrated heavily on sustainability issues have actually done little to support environmental and social shareholder proposals. This came after new reports filed with the US Securities and Exchange Commission revealed that funds labelled by BlackRock, JPMorgan Asset Management and Vanguard as sustainable frequently were against shareholder proposals on issues such as political spending to diversity disclosures.
BlackRock tried to explain the situation in a statement to the Financial Times: “We have the largest investment stewardship team in the industry and engage with companies even in the absence of shareholder proposals, which is one of the reasons why a year-over-year comparison of our voting record obscures the extent of our efforts to improve corporate governance.”
FT is one of the publications which closely scrutinises such controversial matters: in July, it reported that Vanguard was holding oil and gas companies in an ESG fund labelled as fossil-free, a problem which the firm explained with an indexing error. FT suggested that such revelations raise new questions about whether the expectations of value-driven investors are being met as they allocate billions of dollars into ESG funds.
Oil and gas companies are also a dominant presence in the sustainability conversation, as green energy seems to be winning in the court of public opinion. Even in the US, the hotbed of climate change denial, the majority of citizens across the political spectrum are in favour of expanding renewable energy sources, as the Pew Research Center has found. In the UK, the government’s Public Attitudes Tracker has indicated that support for renewable energy has climbed to 85%.
The prevailing opinion circulating in the media is that the “oil age” will come to an inevitable end and that the future low carbon economy will compel the oil giants of today to transform into the energy giants of tomorrow. When it comes to corporate messaging around environmental issues, oil giants have distanced themselves from their earlier dodgy communication practices and have put sustainability at the centre of their reputation management strategies.
French banking group BNP Paribas, one of Europe’s largest financial institutions, followed BlackRock in the sustainability conversation due to its announcement that it has transformed its entire active funds range to be 100% sustainable. The company’s messaging focused on the integration of ESG criteria being a significant milestone in the implementation of its global sustainability strategy.
Many media outlets presented BNP Paribas, which currently has nearly €10 billion of assets under management, as one of the pioneers in sustainable investment practices. The company’s fund range includes ESG integration guidelines, which are adapted for each fund according to the specific characteristics of its asset class, investment process and geographical area.
Meanwhile, Goldman Sachs‘ launch of a new “Sustainable Finance Group” to help Goldmanites across different divisions speak with one voice to clients was taken as a sign that sustainability in finance is booming. Goldman’s focus on this issue was driven by its clients, which have come to realise that sustainability is no longer a secondary concern.
John Goldstein, the new head of the Sustainable Finance Group, explained that “p
Moreover, Goldman Sachs‘ survey of opinions among its 2019 summer interns found that wannabe bankers are environmentally aware and keen for carbon taxes to mitigate the effects of climate change – a result which aligns with probably every Gen Z and Millennial opinion poll.
Investing in the future
Larry Fink, the BlackRock chairman and chief
Fink said in an interview with the FT that “sustainable investing will be a core component for how everyone invests in the future,” adding that “we are only at the early stages” and estimating that assets in ETFs that meet ESG criteria will grow from $25 billion to more than $400 billion in a decade.
Fink was also quoted for saying that sustainable investing didn’t mean investors had to sacrifice financial returns: “We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher,” he said.
Jessica Huang, head of Americas and APAC platform for Blackrock Sustainable Investing, remarked that not all companies publish data on ESG
Tim Buckley, director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis, was among those criticising BlackRock. He said that due to its enormous size and amount of influence, the company should demonstrate stronger leadership: “It has the power to lead globally to address climate risk, yet to
Claire Smith, the Switzerland-based chief executive of Beyond Investing, the firm which came up with VEGN, noted that selecting companies whose businesses do not test products on animals, in addition to being free from fossil fuels, plastic or agrochemicals, has led to excluding 43% of the top 500 companies, including many pharmaceuticals, materials and consumer-sector stocks.
Jamie Dimon, JPMorgan’s chief executive, was a leading voice in the Business Roundtable, a US lobbying group, which affirmed that companies should “protect the environment”, while Farnam Bidgoli, head of sustainable bonds in EMEA at HSBC, talked about the view that investors shouldn’t try and use a green bond to finance any kind of technology that might lock in the use of fossil fuels.
The promotional efforts relating to sustainability have increased the financial sector’s media presence due to the growing interest in climate change expressed by both liberal- and conservative-minded outlets. Climate change and global warming have become powerful coverage drivers not only in ecological and scientific discussions but also in political, economic and cultural analyses.
This is in large part due to a public debate over whether global warming is actually occurring, which has been fuelled primarily by right-wing US publications and conservative think tanks which deny the need for strong environmental regulations. Although there is a strong scientific consensus that global surface temperatures have increased due to human activity, climate change has been a controversial political subject since at least the Ronald Reagan presidency in the 1980s.
However, the recent tendency even among the most conservative high-profile outlets is to admit that climate change is indeed an issue which needs to be addressed. Thus, the main point of dispute between liberal and conservative publications is not whether climate change is real but what measures should be taken – the liberal ones tend to reiterate that governments and businesses are not doing enough, while the conservative ones think that they’re going too far.
Scientists and liberal politicians are increasingly using the language of risk to convey their messages about climate change and to shift the debate towards the need for timely action. This has been reflected in the liberal-minded media: for instance, the Guardian announced that it would start using “climate emergency”, “climate crisis” or “climate breakdown” instead of “climate change” to reflect the seriousness of the situation.
In the meantime, the years following the 2008 financial crisis have reinforced the public’s hostility towards Wall Street: for many consumers, the word “banker” became a synonym of a fraud. Research by management consulting company Gallup concluded that confidence in banks had dropped from 53% in 2004 to 21% in 2012, while 64% of the respondents in a Harris survey said that bankers didn’t deserve their huge paychecks.
The crisis posed unprecedented challenges to communication professionals working in finance – in the past 10 years, the lion’s share of their work has been revolving around the reconstruction of the shattered image of financial institutions and managing a growing distrust in the financial services sector as a whole and particularly in Europe, where the industry has struggled to grow because of its less active approach to the financial crisis
Finance brands continue to experience reputational setbacks, taking the last place globally for overall reputation, alongside telecoms, in Brand Finance‘s rankings: brand values have fallen and customer satisfaction is at an all-time low. The financial services sector remains the least trusted one, as per Edelman’s 2019 Trust Barometer, which found the technology industry to be most trusted.
In this regard, the sustainability push may be a good start for rebuilding the reputation of the financial services industry. If green is not just another trend to come in and go out with the seasons, and we are indeed in the middle of a paradigm shift, brands should be quick to strengthen their ecocentric communication strategies.
When positioning itself as one of the problem-solvers in the mission to tackle climate change, the finance sector might learn a thing or two from other global industries which are on the road to reinventing themselves.