ESG ETF Strategies to Address Today's Market Risks | ETF Trends

ESG exchange traded fund investing has the potential to uniquely manage risk and return and help investors meet their financial goals.

In the recent webcast, How to Use ESG Factors to Navigate the Recovery, Lauren Ferry, Managing Director, Head of Portfolio Strategists, Nuveen, argued that non-U.S. equity markets and Nuveen’s suite of non-U.S. ESG ETFs offer investors greater cyclical exposure for the ongoing economic expansion ahead. For example, the Nuveen ESG International Developed Markets Equity ETF (NUDM) includes a 43% tilt toward cyclicals and the Nuveen ESG Emerging Markets Equity ETF (NUEM) has 45% in cyclicals, compared to the 29% found in the S&P 500.

Megan Fielding, Senior Director, Responsible Investing, Nuveen, outlined the growing demand for responsible investments, with inflows into sustainable funds surging over the past year as the coronavirus pandemic highlighted the shortcomings of global society and the greater need to address these global issues.

According to Nuveen’s fifth annual responsible investing survey, participants highlighted the top reasons that investors have looked into responsible investments as being better performance, value alignment, better risk management, better management for climate change risks, and better shareholder rights to keep boards accountable.

Meanwhile, investor interest and familiarity concerning responsible investing continues to grow, with all age groups, notably Generation X, exhibiting interest for responsible investing.

Fielding highlighted Nuveen’s ESG investment methodology that implements ESG integration, engagement, and impact investing. Additionally, the company measures, manages, and drives positive environmental and social impact through investing practices, along with accelerating investor demand and the reallocation of capital to areas that contribute to the UN Sustainable Development Goals (SDGs).

After COVID-19 broke out, we have witnessed a shift in ESG priorities. Fielding underscored 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 a lack of business continuity planning and poor human capital management, all leading to greater and more extended business disruptions. Fielding 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.

Jordan Farris, Managing Director, Head of ETF Product Development, Nuveen, outlined Nuveen’s approach to providing a more transparent delivery of ESG exposure. For example, at Nuveen, the money manager employs several other ESG criteria to better target companies that exhibit socially responsible characteristics. Nuveen applies an ESG rating to capture an issuer’s performance on significant ESG risks relative to its peers, a controversy score that captures an issuer’s exposure and response to event-driven controversies, a controversial business investment component that captures an issuer’s activity in industries that may cause significant social harm, and a low-carbon criteria that captures the carbon intensity of an issuer based on its involvement in specific industries.

Along with the two international ESG ETFs mentioned above, investors can fill out their equity portfolios with U.S. ESG equity-related ETFs, including the Nuveen ESG Large-Cap Value ETF (BATS: NULV), the Nuveen ESG Large-Cap Growth ETF (NULG), the Nuveen ESG Mid-Cap Value ETF (NUMV), the Nuveen ESG Mid-Cap Growth ETF (NUMG), and the Nuveen ESG Small-Cap ETF (NUSC), which screen companies of various market capitalizations and asset categories for environmental, social, and governance principles.

There is yet another option for fixed income investors who are interested in socially responsible investments. The Nuveen ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD) and the Nuveen ESG High Yield Corporate Bond ETF (NUHY) help these investors pair their bond investment needs with ESG principles.

Financial advisors who are interested in learning more about ESG investing can watch the webcast here on demand.