The shooting at the Marjory Stoneman Douglas school in Parkland, Florida earlier this year seemed to be another in a long line of incomprehensible tragedies. Yet amid the grief and debate, BlackRock, the world’s largest investment manager, decided it was time for action.
Soon after, BlackRock announced it was creating two exchange-traded funds that will exclude civilian firearms makers and large gun retailers. The company is also making the criteria for the underlying indexes of its existing environmental, social and governance (ESG) ETFs more explicit, to exclude holdings of civilian gunmakers and sellers. Meanwhile, BlackRock’s institutional investors will be able to screen firearms stocks out of their endowments, and include the choice of gun-free index funds in their employees’ pension plans.
It’s not just gunmakers in the investment industry’s firing line either. Socially responsible funds have long excluded companies across a range of fields, from munitions manufacturers to the tobacco giants. But now ESG investment policies are extending their reach, as private and institutional investors step up demand for more forms of ethical and impact investing.
Nordics forge ahead on ESG
Across the Nordic region – which has long been at the forefront of the ESG debate – we are seeing divestments from fossil fuels become a particular area of focus. The 2015 Paris climate accord, introduction of the United Nations Sustainable Development Goals in 2016, and a growing global awareness of the need to transition to a low-carbon economy are all playing a part.
For instance, last year Norway’s sovereign wealth fund proposed dropping oil and gas companies from its benchmark index. According to a Reuters survey, the fund has already reduced the proportion of its holdings invested in the biggest greenhouse gas emitters.
Norges Bank, the central bank of Norway, is another leading the way on climate change and wider ESG issues. It has a long exclusionary list, which includes a host of companies associated with thermal coal mining or coal-based power production.
But good policies demand transparency
The goals are laudable. And the returns can be impressive (the $11+ billion Norges Bank invested in environmental equity investments this year is reported to have earned a return of 21.7%).
But applying and maintaining an ESG or socially responsible policy can be tricky.
The investment manager needs comprehensive and up-to-date information on the companies it invests in, or plans to buy, to ensure its criteria are met. And investors of all descriptions increasingly want a transparent view of their portfolios, so they can see and understand what the fund is actually investing in.
- detailed look-through reporting, based on
- accurate and granular data.
More in-depth corporate disclosures of, for instance, companies’ climate and environmental-related performance are one component – giving investment managers the information they need to accurately analyse the risks and opportunities in their portfolios. The formation of the G20 Task Force on Climate-related Financial Disclosures is a step forward here.
The investment managers then need to provide similar levels of transparency to their investors, so they can see the individual holdings in a fund and what that means on an ESG basis.
Look-through demands intensify
The quality of look-through reporting, and the data that supports it, will be crucial to the ongoing success of ESG and socially responsible investment strategies. But they are not alone. Demand for look-through reporting – with the transparency it affords – is sweeping through the investment management industry, driven by:
- Regulatory requirements – for instance, Solvency II’s Solvency Capital Requirement is calculated based on the risks arising from the underlying assets of a fund in which a (re)insurer has invested. Asset managers are being tasked with providing the look-through information to the underlying assets, with a breakdown by asset category, country of issue and currency.
- Risk and exposure control – more broadly, look-through reporting enables private clients and institutional investors to monitor exactly where their asset class, sector, country, currency and liquidity exposures sit – information that is increasingly important in Norway, for example, as part of the government’s push to encourage more private stock market investment.
- Digital natives’ service expectations – millennials and the succeeding generations have come to expect fingertip access to the information they want, presented clearly and in one place. With trust in the industry at a premium, investment managers will need to meet these demands for faster and more comprehensive insights.
And these are ongoing trends. Look-through reporting, and the data that feeds it, will only become more important.