As Joe Biden transitions into the White House, investors should consider incorporating environmental, social and governance, or ESG, exchange traded fund strategies into a diversified portfolio for the new administration ahead.
“We think a Biden administration will create a friendlier regulatory environment for investors and issuers with policies focused on climate change, carbon reduction and income inequality,” Megan Fielding, Senior Director, Responsible Investing, Nuveen, said in the recent webcast, Positioning ESG Portfolios in the Next Administration.
Fielding also argued that the current global pandemic heightens the awareness for investment in mitigating other potentially damaging global threats, such as accelerated climate change, and pollution and waste, along with creating a more inclusive economy addressing inequality. Over the course of the past few months, we have witnessed how low-income individuals were among the hardest hit by Covid-19, further widening the inequality gap as the lack of access to quality and affordable services like education, health, and financial products is more starkly visible than ever before.
Nevertheless, companies are beginning to alter the ways they do business to meet these challenges. Investors are also taking notice. According to Nuveen’s Fifth Annual Responsible Investing survey results, the number of advisors who describe their clients as committed to social and environmental causes in their portfolio choices jumped to 74% in 2019 from 44% in 2018. When asked which demographic showed the most interest in responsible investing, 39% were attributed to Gen x, followed by 24% to Baby Boomers, and 22% to Millennials.
“These results suggest that advisors have a huge opportunity to proactively discuss RI with older clients,” Fielding said.
“We are seeing that financial professionals are engaging with clients of all ages on ESG, despite the perception that millennials are the only age cohort interested in ESG.”
Fielding also pointed out that in this year’s study is the increase in advisors who say that investors incorporating RI in their portfolios typically outperform those without responsible investments, with 68% indicating a performance benefit in 2019. Over time, responsible investing has the potential to enhance financial performance. For example, the MSCI KLD 400 Social Index, a well-known ESG themed index, may offer improved risk-adjusted returns to broad benchmarks like the S&P 500 and Russell 3000.
“At Nuveen, we believe that investing-long term means that we have to consider how the assets we’re managing impact the world, as well as deeply understanding whether those investments are sustainable over a long period of time,” Margaret Leung, Head of ETF & TIAA Wealth Distribution, Nuveen, said.
Leung explained that their responsible investing approach incorporates ESG integration, engagement and impact. Specifically, they incorporate material Environmental, Social, and Governance (ESG) factors into their investment process using ESG data, research and tools. They influence companies and issuers to help them innovate and operate more effectively, or partner with stakeholders across the market to set and follow responsible investing best practices. Additionally, they measure, manage, and drive positive environmental and social impact through their investing practices while accelerating investor demand and the reallocation of capital to areas that contribute to the UN Sustainable Development Goals (SDGs).
After the Covid-19 outbreak, we have witnessed a shift in ESG priorities. Leung highlighted strong company ESG management, specifically around “S&G” factors, which should play an important role in mitigating downside risk and preserving long-term value during this current outbreak. On the other hand, poor ESG management could lead to greater negative impacts, such as lack of business continuity planning and poor human capital management, all leading to greater and more extended business disruptions. Leung believes that investment in and management of the “S” factor now, and in the future, could lead to a greater competitive advantage over peers in the wake of the pandemic.
“Simply stated, we believe Responsible Investing is broader than a just a values conversation or a performance conversation. We believe Responsible Investing and ESG can be implemented in a way that informs better investment decisions – with the potential to create alpha, manage risk and uncover opportunity for better client outcomes,” Leung added.
Nuveen offers a suite of passive index-based ETFs that adhere to predetermined ESG, controversy, controversial business involvement, and low carbon criteria, including the Nuveen ESG Large-Cap Value ETF (BATS: NULV), Nuveen ESG Large-Cap Growth ETF (NULG), Nuveen ESG Mid-Cap Value ETF (NUMV), Nuveen ESG Mid-Cap Growth ETF (NUMG), and Nuveen ESG Small-Cap ETF (NUSC).
The Nuveen ESG International Developed Markets Equity ETF (NUDM) and Nuveen ESG Emerging Markets Equity ETF (NUEM) also align investors’ international equity investments with their values.
Lastly, there are options for fixed-income investors who are interested in socially responsible investments. For example, the Nuveen ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD) and the Nuveen ESG High Yield Corporate Bond ETF (NUHY) help fixed-income investors pair their bond investment needs with ESG principles.
Financial advisors who are interested in learning more about ESG investments can watch the webcast here on demand.