As more money managers embrace sustainable investing, it's vitally important for investors to hold firms accountable for the transparency and efficacy of these strategies.
Last month, as part of Laurence D. Fink's annual letter to corporate CEOs, BlackRock Inc. announced plans to increase its sustainably managed assets more than tenfold to $1 trillion over the next decade. BlackRock is not the first, and will be far from the last, to make an all-in bet on investing with environmental, social and governance factors taken into account. But while the pace of managers shifting to an ESG focus has accelerated rapidly, the tools for measuring whether those strategies invest and perform the way they are marketed are still in relatively early stages.
The massive shift to passive investing in recent years has largely focused on market-cap-weighted indexes where a passive manager does not have any input on what companies to invest in, and the only role it can play in ESG is through proxy voting. As BlackRock and other managers build out alternative index products that focus on ESG investing, investors should monitor what companies are included in indexes and the methodology a manager is using. Investors can also keep a check on managers by monitoring their proxy votes — both in strategies tied to ESG indexes and broad market-cap indexes — to ensure consistency in a manager's approach.
This shift to sustainable investing also provides an opportunity for managers and index providers alike to differentiate themselves, and transparency will be instrumental in their success.
Last month, the Church of England Pensions Board shifted its £600 million ($784 million) passive global equity portfolio to the FTSE TPI Climate Transition index from the MSCI World index, which the board said will have a 49% lower carbon intensity. The board noted that a scarcity of indexes compatible with the fund's climate strategy led it to develop the new benchmark with FTSE Russell in collaboration with the Transition Pathway Initiative. That initiative aims to assess how companies are positioning themselves for the transition to a low-carbon economy.
That scarcity of indexes is expected to change, potentially quickly, and investors will need the ability to evaluate which indexes and strategies meet their objectives and which ones look more like window dressing.