This Earth Day, A Reminder that Climate Risk is Investment Risk

#EarthDay2021 is today, and it is prime time for sustainable investing content.

Anyone tracking the headlines could easily tell you that 2020 was a watershed year for ESG funds, with investors around the world more than doubling inflows. At BlackRock, we’ve long held that a transition to a more sustainable economy is on the horizon, and we are encouraged that more and more investors are coming to see climate risk as investment risk.

This is not a question of values. This is about outcomes. In the first quarter of 2020, 94% of a globally-representative selection of widely-analyzed sustainable indices outperformed their parent benchmarks. You would think it’d be full-steam ahead on ESG, and – for some – it has been. But we should be asking: Who has access to the transition to a more sustainable economy?

While many institutional and high net worth investors are flocking to ESG investments ($17T, or about one-third of all professionally managed assets, is sustainably invested), 401(k) plans – often the only investments for many Americans – are missing out. Of the $9T held in defined contribution plans as of last year, just 1% of assets were sustainably invested and just 3% of plans even had an ESG fund on their plan menu.

This muted response is due, at least in part, to ESG rules issued by the Department of Labor (DoL). But, as we look toward a presidential administration that is sustainability-minded, I’m hopeful that the regulatory environment will follow suit, helping to democratize access to ESG funds for retirement savers. We may already be headed in that direction (see the DoL’s recent announcement regarding the enforcement of ESG rules issued under the prior administration). 

Broadening ESG access to 401(k) plans could have other positive spillover effects on the retirement system, too. It’s a commonly held belief that interest in sustainable investing is mostly concentrated in millennials and women, but research from Morningstar debunks these assumptions. Instead, they’ve found that ESG investing appeals to a wide swath of investors, potentially fostering greater engagement on investments and encouraging participants to stay the course for the long-haul.