“Just as, in the Renaissance era, art was revolutionised when new types of paint were developed, so it is with the technology, we need to implement cost-efficient, standardised and scalable ESG methodologies,” said EJ Shin, a Portfolio Manager & Sustainable Investing Specialist at BlackRock. “This is a truly exciting time and perhaps we are witnessing one of the major financial innovations of our generation,” she added.

Distance to travel

There is still some distance to go before these goals can be reached. “We surveyed our clients about the biggest challenges they face, and overwhelmingly they highlighted a lack of data and analytics to measure portfolio sustainability in a uniform fashion across asset classes,” noted Ewa Jackson, a Director in Sustainable Investing with BlackRock. The survey also found that only 20% of clients were already translating net zero considerations into specific quantitative metrics in portfolios. “It’s something which the industry hasn’t yet managed to crack, and there’s a lot of thinking going on here,” she added.

Moreover, clients are very demanding, seeking data on private markets as much as for publicly listed assets. Often, it is about : product substitution, investing in a specific sector or asset area, carbon emission intensity, or alignment with Paris agreement goals. “We see climate risks – as measured by carbon intensity by enterprise or country and the green transition – as persistent drivers of asset returns and being fundamental to making strategic investment decisions,” said Ms Shin. With this reinforced by changing supplier preferences and climate change regulations.

Sophisticated analytics

BlackRock works both on capabilities and the product offering, Ms Jackson explained. For instance, there is the “Aladdin Climate” tool “which gives the ability to look underneath the hood of a portfolio at issuer level, and run scenario analyses to isolate physical and transition risk, with the impact on corporate earnings.”

On the investment side, they have constructed a framework called Black Pearl “which is as close as we can come to having a systematic in-house view on an ESG score,” Ms Jackson explained. It is data driven, using inputs from standard sources, and from employer review sites like Glassdoor, as employee engagement sentiment figures correlate with long-term earnings and profitability.

Otherwise, MSCI has just launched an implied temperature rise metric tool. This measures how companies are aligned with a temperature pathway, and give a net zero tracker about a company’s progress in reducing climate risk.

Managing climate risk

Mitigating climate transition risk is a key question for Ms Shin. “Climate risk is an investment risk during the move towards a green economy. It will create winners and losers, and we would like to tackle this for our clients by creating a future-proof portfolio, working in concert with government, companies, shareholders and other private individuals.”

Yet she is confident that the industry will be able to react. “Until recently, integrating climate risk into strategic asset allocation was difficult. We could only do it at the security selection level or at the fund selection level. But with the BlackRock climate aware capital market assumptions, we can create a truly holistic multi-affiliation portfolio, both at the top-down level as well as at the bottom-up level.”

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