BlackRock has just named seasoned climate expert Paul Bodnar as the global head of sustainable investing. The former Obama climate advisor and head of strategy at Rocky Mountain Institute, a sustainability think-tank, broke the news in a tweet late March. The move comes in after the world’s largest asset manager pledged in an open letter last year to put sustainability at the heart of its investment process by making it a standard offering in its products.
In 2020, BlackRock achieved 100% ESG integration in active and advisory portfolios. Last November, it launched what it presents as the first European environmental, social and governance (ESG) high yield bonds exchange-traded funds. It plans to double its ESG ETF products to 150 and add sustainable versions of flagship indexes.
And they are not the only giants to foster responsible investment. Credit Suisse, Deutsche Bank and Standard Chartered have all deployed similar efforts into policy and products.
ESG in finance
Environmental, social and corporate governance issues (ESG) have steadily risen as a fully-fledged criterion for investment decisions, as finance is becoming greener and leaders in the sector reflect more values than before. Integrating ESG into your investment decisions helps mitigate long-term risks, which include climate change, corporate governance standards or labor-management.
The pandemic has led most of the financial sector to rebalance portfolios and acted as a catalyst in the transition to more sustainability. The new belief is that a good ESG score means good performance over time.
Investment research firm Morningstar shows that demand to invest in ESG funds jumped in 2020, driving a 29% AUM increase the fourth quarter to $1.7 trillion. And according to a Bloomberg Intelligence report ESG assets may hit $53 trillion by 2025, a third of global AUM, with equity funds remaining the most popular asset class for ESG investors.
Integrating ESG in the currency markets
When it comes to currency markets, the biggest challenge with integrating ESG factors lies in a contradiction. The relatively short timeframe of day trading is in sharp contrast with the inherently long-term identity of ESG. But leading firm JP Morgan has developed a currency scoring model by using a set of ESG factors. Their quantitative model narrowed down data to the factors that were found to equally and optimally drive currency performance.
As an example, their report illustrates how social factors showed that two currencies were undervalued: “The Israeli shekel and Korean won. Both of these currencies are issued by countries where highly educated workforces are driving technological progress. Israel and South Korea also both run significant trade balance surpluses in goods where their economies have significant competitive advantages”.
The case of ENEL and Credit Agricole
In January this year the investment banking arm of Credit Agricole Group and Italian green energy giant ENEL signed sustainability-linked FX derivatives agreement. The deal provides for the accumulation of a sustainability premium based a specific formula that links Enel’s forex derivatives transactions to the company’s Sustainability KPIs. This is yet another case where major players in the financial sector are deploying efforts to create a nexus between sustainability and the innate short-termism of forex.
Modern brokerages and ESG
Brokerage firms are increasingly responsive to emerging sustainability-linked needs and actively aligning to the values clients seek in their choice of investment products. Investors and clients pay more attention to a company’s social dimension and expect them to give back more to the community. Therefore, engaging communities, building sustainable portfolios and partnering up with climate warriors are now the mainstay of responsible finance.
A sustainable broker will integrate ESG indicators through its various derivative instruments and crunch big data to provide traders with actionable insights. But the bigger goal is to empower clients in better understanding the link between sustainability, risk and long-term financial performance. One of the latest players to engage in the trendsetting is global investment firm ICC Group through the launch of its new brand Axiance. The strategy is twofold: rebalance portfolios and explore sustainability-liked investment products.
Cyprus Investment Funds Association VP and ICC Group CEO Panikos Teklos explains: “The ethical behavior that we wish to trade and portray as far as our brokerage firm is concerned is present in the advisory we offer and already embeds elements of ESG compliance such as the type of investment sectors and within the analysis we perform we look to source the relevant ESG criteria such as they form part of any modern portfolio that we build as well as any new strategy we develop.”
Within the already decades-old transition to a sustainable economy, derivatives have the profile to serve a purpose. In point of fact, they enable more influx of capital towards sustainable investments, they allow to hedge ESG related risks and lead to more transparency through price discovery, altogether making long-termism more attractive.