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Managers offer new strategies to answer ESG call

U.S. investors now in fast lane, and firms work to maintain pace

Sandra Carlisle
Sandra Carlisle said it took a long time for U.S. investors to embrace ESG investing.

Environmental, social and governance issues, already prominent among European investors, are no longer held in niche status with U.S. investors.

In the past 18 months, U.S. investors have been putting much greater emphasis on ESG factors when creating their portfolios, and some of the biggest money managers — including BNY Mellon Investment Management, BlackRock (BLK) Inc. (BLK), Goldman Sachs Asset Management and J.P. Morgan Chase & Co. — are responding.

“The U.S. market has really come to grips with the importance of ESG. It's taken a long, long time,” said Sandra Carlisle, head of responsible investment at Newton Group, a London-based global asset management affiliate of BNY Mellon Investment Management.

But now that U.S. investors have shifted their attentions toward ESG issues, “the shift has been very fast,” she added.

Newton, a specialist in ESG investing since it was founded in 1978, is looking to move into more sustainable global equity positive-impact strategies.

BlackRock, the New York-based money management giant that last year launched BlackRock Impact, a sustainable investing division, also launched an exchange-traded fund that tracks the MSCI ACWI Sustainable Impact index to coincide with Earth Day in April. And J.P. Morgan's investment bank launched ESG platform Ethos in February.

Not to be outdone, Goldman Sachs acquired ESG money manager Imprint Capital Advisors in July and also worked with New York state to create a low emission index for one of the state's retirement funds.

ESG investing among institutional asset owners jumped 61% between 2012 and 2014, according to US SIF: The Forum for Sustainable and Responsible Investment, Washington. By early 2014, US SIF found, institutional assets in ESG strategies in the U.S. reached $4.04 trillion.

Janine Guillot, director of capital markets policy and outreach at the Sustainability Accounting Standards Board in San Francisco, noted “two related trends” within ESG “that have exploded in the last few years.”

The first has been a growing interest among a group of investors wanting to allocate assets to some specific goal, which has led to managers launching strategies to accommodate them. The second trend is integration of ESG factors into investment decision-making across all asset classes by large institutional money managers.

Ms. Guillot said added that “climate change and climate risk are also big drivers” of these growing trends.

On Earth Day — April 22 — BlackRock expanded its suite of socially responsible ETFs with the launch of the iShares Sustainable MSCI Global Impact ETF, otherwise known as MPCT. MPCT seeks to track the investment results of the new MSCI ACWI Sustainable Impact index.

Daniel Gamba, a managing director at BlackRock in New York and head of BlackRock's iShares Americas institutional business, said the index is composed of companies that derive a majority of their revenue from products and services that address at least one of the world's major social and environmental challenges, as identified by the United Nations' 17 sustainable development goals.

Themes targeted in the index include energy efficiency, sustainable water, sanitation, nutrition and education.

Faster than anticipated

Deborah Winshel, managing director and global head of impact investing at BlackRock (BLK), said in a separate interview that the level of interest among U.S. investors in ESG and impact investing is growing faster than she had anticipated when she took control of the BlackRock Impact platform last year.

“One of the drivers is the elevation around conversation on climate,” she said in explaining why interest in the U.S. is growing so rapidly. “When you have the pope and (President Barack) Obama talking about climate in the U.S. in the same week, it's really driven a lot of investors to better understand the operations of the companies they invest in.”

She added that some of this increased attention also is demographic. “We see the interest among millennials and women who are inheriting significant assets,” Ms. Winshel said.

“These topics are absolutely fundamental.”

J.P. Morgan in February launched the J.P. Morgan Ethos Investments platform, designed to enable institutional investors to choose investments among a range of benchmark indexes and bespoke portfolios across asset classes.

Nicolas Robin, head of equity derivatives specialist structuring in J.P. Morgan's investment bank division, said that although sustainability-focused investing is an area J.P. Morgan has been working in for many years, the bank noticed its clients recently were developing a growing awareness of ESG-focused investments.

“ESG and its many aspects were becoming incredibly important to many of our clients. And increasingly, most of our large clients were getting much better organized internally around their sustainable investment demands,” Mr. Robin said.

Through its relationship with index providers, Ethos can provide a full range of ESG indexes; one example is a Standard & Poor's climate change index.

ESG investing is an area within the U.S. that “is blooming right now. It's still in its infancy, but it's growing very quickly. There's a wide array of meanings of ESG, which means a high degree of tailoring is required,” Mr. Robin added.

GSAM's acquisition in July of Imprint Capital, an institutional impact investing firm, was done to augment Goldman's ESG capabilities, said Hugh Lawson, global head of institutional client strategy within Goldman Sachs Asset Management, New York.

“Impact and ESG investing is an important priority for many of our clients,” he said. “Rarely is there a one-size-fits-all answer. Imprint had built its business advising clients on how to operationalize their ESG goals.”

Mr. Lawson said GSAM started offering ESG services about five years ago but has expanded its offerings dramatically over the past two years.

In December, GSAM also worked with New York state Comptroller Thomas P. DiNapoli to create a $2 billion low emission index for the $173.5 billion New York Common Retirement Fund that gives greater exposure to companies that have low carbon emissions while excluding or drastically reducing exposure to companies with large carbon emissions.

“The plan believes climate change is a serious issue, one with serious financial implications,” said Mr. Lawson.

GSAM also helped the Albany-based fund determine the carbon footprint of its global equities portfolio. A review found that the fund's global equity portfolio has a 15% lower total emissions profile than its performance benchmark.

The new index is designed to reduce the carbon footprint of the fund's overall equity portfolio even further. n

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This article originally appeared in the May 2, 2016 print issue as, "Managers offer new strategies to answer ESG call".