“Coming capital reallocation” to sustainable assets will transform pricing, warns BlackRock

There is no trade-off between ESG and returns, concludes report from investor’s think-tank

The BlackRock Investment Institute (BII), the think tank of the world’s largest investor, has said it disagrees with the commonly held view that sustainable investing requires a sacrifice on returns.

In a paper entitled “Sustainability: The tectonic shift transforming investing”, BII says the notion that sustainable investing is a trade-off that sacrifices potential returns is the polar opposite of its own approach and one that provides “cover to those thinking it can be ignored”.

BlackRock’s Institute said this view holds that today’s prices should fully reflect the predictable component of future flows into sustainable assets.

 "Academic studies found the inability of financial markets to price in information about the far-off future, even when the structural shifts are well understood"

BII wrote: “We believe [this] is not just wrong but that the opposite will occur. The coming capital reallocation is not yet in prices: this long transition in sustainable preferences and practices will make some assets more expensive (those with high sustainability) and others cheaper (those with low sustainability).”

It added: “This means that assets with high sustainability will be rewarded through the transition period, the opposite of what others posit.”

A factor behind not getting pricing right is that historical data does not tell the full story of how society will care much more about sustainability in the future, the report claims.

BII quotes academic studies that found the inability of financial markets to price in information about the far-off future, even when the structural shifts are well understood. For example, one study found stock returns were predictable based on demographic-based changes in consumer demand, such as those prompted by the rise of the 1950’s ’baby boom’ generation.

“The impact to industry profitability was predictable decades in advance, yet stock returns did not fully incorporate that information until much later,” BII wrote.

In addition, BII said that while assets under managed in dedicated ESG funds have tripled in the last 10 years to about $1trn, “these remain a sliver” of the overall publicly-investable universe, and an even smaller fraction of private markets.

The authors of the study are: Philipp Hildebrand, Vice Chairman, BlackRock; Christopher Polk, Senior Advisor, BlackRock Investment Institute and Professor of Finance at the London School of Economics; Brian Deese, Global Head of Sustainable Investing, BlackRock; Jean Boivin Head, BlackRock Investment Institute.