Interest in Environmental, Social and Governance (ESG) strategies is growing within the investment community as more clients look to integrate ESG characteristics into their portfolio mix. But experts say a marked shift in clients’ attitudes towards ESG investing is taking shape that looks set to transform the industry for good.

Speaking at an expert roundtable, entitled ESG integration from “why” to “how”, hosted by BlackRock on 17 November, Ursula Marchioni, Managing Director, Head of BlackRock Portfolio Analysis and Solutions in EMEA, said based on her conversations with clients about ESG and sustainability over the last 12 to 18 months it was very clear the industry had reached a tipping point. “An overwhelming number of clients I speak to not only believe that ESG strategies are good from a values perspective, but that they are paramount going forward,” she said.

Sustainable surge

Sustainable strategies performed well during the COVID crisis, particularly flows into active strategies and exchange-traded products. In the first quarter of 2020, BlackRock saw $44 billion in net inflows globally into , their largest-ever quarterly inflow.

Marchioni believes this has helped dispel some of the myths around ESG investing such as the investment value vs. moral values oxymoron. “Investors are buying into ESG strategies with great conviction and are voting with their feet,” she said.

Moreover, investors increasingly want to integrate broad based ESG strategies into their portfolios, not just exclusionary ones. “The focus is no longer on whether ESG strategies are resilient, but how to build an ESG portfolio that meets client needs,” said Ewa Jackson, Director, a member of the BlackRock Sustainable Investing team. Jackson said commitments from some politicians and industry bodies to move towards a net-zero carbon emission economy had strengthened the case for ESG investing and could pave the way for ESG methodologies to be implemented at scale.

ESG asset diversification

The enormous interest in ESG strategies extends across asset classes, according to Aurélie Ratte, Head of Editorial Governance, MSCI ESG Research. “It’s not just limited to equities. Investors are integrating ESG into fixed income, real estate and private assets,” she said, adding that new players like hedge funds, central banks, wealth management, corporate, capital markets, were also joining the ESG game.

Real impact under scrutiny

Victor van Hoorn, Executive Director of Eurosif, the European Sustainable Investment Network, said the pace of regulation may need to accelerate to keep up with the massive growth in investments pursuing ESG strategies. Van Hoorn said Europe was taking a leadership role by moving from voluntary labels to laws like the Sustainable Finance Disclosure Regulation (SFDR), which comes into effect in March 2021 and will impose new transparency obligations and periodic reporting requirements on investment management firms.

Van Hoorn said the SFDR sought to protect investors from greenwashing and provide transparency and comparability across different products. He said it would also be the first piece of legislation that seeks to look at real world impact, not financial impact. “This is a big game changer,” he exclaimed.