Why sustainable investment is the path to corporate resilience

The company BlackRock explained that last year there was a strong inclination in society’s attitudes towards sustainable development, which has stimulated political pressure, regulatory impulses, and technological advances in this regard. That will translate into a change in investor behavior and will trigger a significant capital reallocation in a gradual way. 

“We believe there is a fundamental point that is often overlooked with sustainable investment. A long transition is likely to take place over years and decades, driven by investment flows, which will redesign all asset prices. Because these flows are in their early stages, we believe that the full consequences of a shift to sustainable investment are not yet in market prices, and a return advantage can be gained during this transition.”

In addition, the pandemic has accelerated this and other transformation processes, mainly in the field of technology. “This highlights the need for real resilience in portfolios, in order to protect against various risks, from the vulnerability of global supply chains, to the intensification of the effects of climate change,” the firm pointed out. 

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Water scarcity will soon affect several countries across the world

One of the problems affecting all regions, types of sectors and asset classes is water scarcity, which is intensifying with increasing climate-related risks, threatening not only the environment and health, but also production and supply chains, as well as causing geopolitical problems due to the possession of the precious liquid. 

According to the United Nations (UN), Mexico ranks seventh in the world in water extraction, and is considered one of the countries that will have a serious shortage in the coming years. This results in an obstacle to economic development. BlackRock pointed out that companies in water-stressed regions could spend more to obtain water, if they do not increase the efficiency of its use and comply with strict environmental regulations. 

Other environmental conflicts, such as poor waste management or high emissions of polluting gases, are already affecting companies’ long-term performance. However, real financial damages are not yet reflected in market prices, so “a strategic preference for assets with high sustainability scores could mitigate risks and help provide real resilience to portfolios,” BlackRock stressed.

The firm added that, currently, investors have more options to integrate sustainability into their portfolios, as well as new benchmarks that offer broad market exposure while leaning towards sustainability. 

An example of this is Citibanamex’s ESG BLKGLO3 fund, created jointly with BlackRock, whose objective is to invest in a sustainable manner, taking into account three key points: dynamism, since it seeks opportunities and has multi-active investments globally with a long-term focus; security, since it has diversified portfolios, built with liquid and transparent vehicles; and sustainability, since it considers companies with the highest scores with respect to their environmental, social and corporate governance practices. This investment strategy has been available in Mexico since July.

What are ESG practices? 

Rocio Canal, Sustainability Partner at Deloitte Mexico, detailed in the BlackRock “Encuentro” podcast, that the quality to select portfolios with sustainable investment opportunities, is that companies operate based on ESG (Environmental, Social and Governance) practices. The environmental aspect has to do with how they identify, measure, manage, and report their environmental impacts, in other words, what those impacts are, how they can be reduced, and how value can be generated through them. 

As for the social aspect, it has to do with how it contributes to the development of its human capital and the communities in which it operates. And finally, corporate governance, which refers to the way decisions are made and the way the company is run.

He also stressed that there are reports showing that sustainable companies are more resilient to risk, and that investors in times of uncertainty, such as the present, tend to take refuge in ESG investments. 

ESG in the real estate sector

In the real estate sector, ESG practices can be identified as follows:

Environmental, in models of energy efficiency and water management of buildings. Social, in the way a building brings value to its community and tenants. Corporate governance, in recognizing that real estate properties have an extensive supply chain in their different phases of development, so it is important that all those involved in them have good practices or are in the process of improving the way they operate.

Aberdeen Standard, a firm specializing in investment management, considers it crucial to have a clear and detailed policy that is supported by international rating standards, such as the Global Real Estate Sustainability Index (GRESB). Similarly, it emphasizes that the most modern and efficient properties tend to attract the best investors and clients, which contributes at the same time to secure transactions and guarantee rental income.

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(Featured image by ThorstenF via Pixabay)

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First published in IMMOBILIARE, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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