BlackRock expects sustainability to influence how future investment portfolios shape up

BlackRock, the world’s biggest asset manager, expects sustainability to play an increasing role in how investor portfolios will shape up as environmental, social and governance standards become an important consideration in investment decisions.

The shift to sustainable investments had manifested before the UN’s Cop26 summit in Glasgow and its importance will continue to grow, Stephen Cohen, BlackRock’s head of Europe, Middle East and Africa business, which manages $2.5 trillion in assets, told The National in an interview.

“Sustainable transition has become very central to the way most investors are thinking in most regions, whether its asset managers or the clients we manage money for,” Mr Cohen, who is also a member of the company’s global executive committee, said.

“I think there has definitely been an acceleration – prior to Cop26 – in terms of focus on how to make a sustainable transition.” The appetite among BlackRock global client base to invest in sustainability-related opportunities is growing.

“There has been a huge change in the last two years. If we were sitting here three years ago, it would be a very interesting discussion but we would not have necessarily seen money moved, but [now] we are seeing a lot of money move,” he said.

At the end of the third quarter of this year, BlackRock’s AUMs through its sustainable investment platform, including ESG and thematic and impact funds across equities, fixed income, multi-asset, liquidity and alternative investments, reached $434 billion. The company manages an additional $674bn of assets across its broader platform of investments that utilises ESG screens.

BlackRock AUMs account for over 10 per cent of the overall estimated $4tn sustainable investing industry globally, through its more than 200 sustainable mutual funds and exchange-traded funds solutions for its clients.

In Europe, about 50 per cent of industry flows have gone into sustainable investments and “I think investors are very focused on how they evolve their portfolios to be more sustainable”, Mr Cohen said.

BlackRock, which manages about $9.5tn in assets globally, this month raised $673 million for an infrastructure fund with backing from the French, German and Japanese governments to invest in climate-focused green projects in emerging markets.

“We feel that we can play a central role in helping to bring government and private money together … which was the central discussion at Cop26,” he said. “It will only happen if you bring private and government money together. We have to work in concert, it can’t be one or the other.”

In October, the International Monetary Fund urged the $50tn global investment funds industry to step up efforts to finance the transition to a greener economy and help mitigate the effects of climate change.

The transition to net-zero emissions, the main agenda at this year’s Cop26, requires an unprecedented change in strategy by companies and governments, as well as investment of as much as $20tn over the next two decades, the Washington-based fund said at the time.

The combination of sustainability and building back better after the coronavirus will transpire into a “big structural shift for economies” and will present investment opportunities.

BlackRock is bullish on infrastructure investments, including in the Middle East, where governments are investing heavily in green infrastructure.

The broader Middle East is a very important to the asset manager’s growth strategy and it has increased its physical presence in the UAE and Saudi Arabia – the two largest Arab economies – in the past two to three years.

The company, whose client base includes institutional investors, banks, sovereign wealth funds, family offices and individual investors, among others, is looking to expand further as its business grows in the region, Mr Cohen said, declining to say which other markets are on the company’s radar.

“It’s a really interesting time for us, it’s a really interesting time for the region”, where sovereigns are driving economic diversification. “We see that as an area where we can help that transition," he said.

Last month, Saudi Arabia’s National Development Fund (NDF) set up a an infrastructure investment fund with BlackRock as an adviser to support projects worth up to 200bn riyals ($53.4bn) in "vital" sectors of the kingdom over the next decade.

BlackRock is helping the kingdom to create a strategic framework. However, at a later stage when the NDF seeks external private capital, BlackRock will evaluate each investment opportunity on a case-by-case basis and might choose to invest in some of the projects along with other investors.

In August, BlackRock’s Secondaries and Liquidity Solutions (SLS) and a group of global institutional investors made a “significant” investment in private equity assets managed by Mubadala Capital. The group of investors also committed $400m to Mubadala Capital’s private equity Fund III, which exceeded fundraising target to close at $1.6bn.

The company is looking for more such deals in the region, Mr Cohen said, declining to give further details.

In terms of asset classes and sectors, BlackRock is bullish on healthcare, health sciences and renewable energy sectors, infrastructure, private credit market and private lending.

“Healthcare, health sciences, there’s a huge amount of innovation going on, and as a result of Covid-19, we will see more spending going forward, particularly in the leading edge of the healthcare,” Mr Cohen said.

“We are also seeing a lot of opportunity in the private credit market [and] private lending … as a lot of companies are looking for financing to do innovative things.”

BlackRock is also closely monitoring the developments of crypto assets and their associated markets, infrastructure and regulatory landscape over the last few years, he said.

“Our views continue to evolve as the market matures,” Mr Cohen said.

“Some of our investors believe Bitcoin is at a point where it could be considered as a portfolio position, in very limited circumstances, for alpha generation, though it remains a speculative asset.”

The company, however, does not currently hold the same view for other crypto assets, and Mr Cohen said BlackRock’s actions in digital assets space will be “guided by what is best for our clients”.

BlackRock, which is “positive on emerging market” where valuations support investment case, expects monetary tightening by central banks "to be measured".

“We don’t expect dramatic tightening over the next couple of years as we stand,” he said.

Central banks will try to make sure it is “not a shock to market”, he added.