ICD on ESG and S-T Investing
Since the coronavirus lockdown began 7 weeks ago, we haven't heard a word about ESG investing, which previously had been one of the hottest topics in the money markets. While not the most timely topic, online money fund trading "portal" ICD nonetheless hosted a webinar this week entitled, "ESG For Short Term Investing." Hosted by ICD's Justin Brimfield and featuring BlackRock's Eric Hiatt and Principals for Responsible Investment's Ophir Bruck. On the drivers of ESG, Bruck comments, "There are a few prominent drivers.... The first is what we refer to as materiality, which refers to the increasing recognition within the financial community that ESG factors play a financially material role in determining the risk and return characteristics of investments.... The third driver is market demand. So, whether that's changing investment preference among millennials, pension beneficiaries calling on funds to address issues like climate change, or asset owners incorporating ESG criteria into RFPs and manager mandates, there's a growing demand for greater transparency about how and where money is being invested.... The fourth and final primary driver for ESG adoption is growing policy and regulation. Globally, the number of regulations that have come online to either mandate or encourage investors to incorporate ESG factors into investment decisions, and we see that in the U.S. as well with the Sustainable Investment Act passed in Illinois." Discussing corporate cash, Hiatt explains, "There's really been a tremendous interest on the investor side, and an increasing percentage of professionally managed assets which pay some consideration to ESG -- upwards of 25 percent. When we think of cash.... it's really just a natural extension of this. Cash investors tend to be focused on minimizing ... risk. So, if we can take a company or industry and develop conviction that sustainability related factors are material then we really should be looking at these risks in addition to the traditional financial analysis that we're performing." He adds, "There are some challenges that we have in cash, such as, we have no investable benchmarks, it's a more limited investable universe, and then obviously a shorter investment horizon. So, I think materiality and relevance might take on a slightly different meaning.... For any commingled cash products we feel that they should have really three attributes. One is broad appeal, two are innovative features and then three, attractive performance, because we don't think investors are ready to sacrifice much in the way of performance for access to ESG. They really have to maintain all of the utility of the cash product. " Hiatt also says, "We've had discussions with corporate clients around different options that we, at BlackRock, might offer clients to invest some of their balance sheet cash in various ESG efforts. Many clients have really come to recognize that the ESG factors tend to play out over a longer term, but many provide useful insights as well to cash investors.... Cash is really an unexpected, but simple way at the same time, to gain exposure at middle or very little cost to assets or products that might be forward looking with respect to ESG."
