ESG ETFs Can Help Investors Manage Risk, Enhance Long-Term Returns

Socially responsible investing and exchange traded funds that track environmental, social, and governance, or ESG, principles can help investors manages risk and enhance returns in a diversified investment portfolio.

In the recent webcast, What Advisors Need to Know About ESG During Volatile Times, Stephen Noll, Managing Director, Nuveen, helped frame the current market environment formed by an “intentional” economic downturn caused by the coronavirus pandemic. The world is in recession, with the nature of the recovery still uncertain. He argued that the depth and duration of the downturn is not economic in nature but rather a healthcare policy question. The speed and trajectory of the recovery is an economic policy question. Meanwhile, stocks could retest a bottom if we experience another round of shutdowns to contain a new outbreak, and rates remain depressed due to the high global demand for safety and income.

As a way to better position for the long-term, Margaret Leung, Head of Specialist Distribution, Nuveen, argued that investors should consider responsible investments, notably ESG integration, engagement, and impact.

“ESG factors provide an additional lens to assess company performance that may help enhance long-term value or manage downside risk,” Leung said.

The environmental factor corresponds with aspects like raw material sourcing, water stress, product carbon footprint, and waste management. The social factor covers aspects like human capital development, health, safety, privacy, data security, and supply chain labor standards. Lastly, the governance principle is comprised of factors such as board quality, executive compensation, public policy, and business ethics.

Nuveen incorporates material ESG factors into their investment process to enhance long-term value and manage downside risk. They use their influence to help companies and issuers innovate and operate more effectively, which drives change and helps to mitigate corporate risk. Lastly, the money manager is committed to the measurement of outcomes and impact across all asset classes, which they believe accelerates investor demand and the reallocation of capital to areas aligned with UN Sustainable Development Goals.

“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,” Leung said.

Leung also pointed out that despite the downturn, many have turned to socially responsible or ESG-related ETFs for core market exposure. Looking ahead, she argued that strong company ESG management, specifically around “S&G” factors, should play an essential role in mitigating downside risk and preserving long-term value during this current outbreak. On the other hand, poor ESG management could lead to negative consequences, such as lack of business continuity planning and poor human capital management leading to greater and more extended business disruptions.

To put this in perspective, about 84% of the market value of the S&P 500 is now comprised of intangible assets affected by ESG factors. Seven of the top 10 global risks identified by the World Economic Forum are ESG related issues. ESG could be big business, with $12 trillion in market opportunities that could be achieved in meeting the UN Sustainable Development Goals by 2030.

Leung also argued that socially responsible investing is more than just exclusionary ESG criteria. Better quality and availability of ESG data has increased the areas in which companies can be evaluated, and the reliability of data allows more flexibility for product development. For example, Nuveen’s ESG rating is based on issuer’s performance on key ESG risks relative to peers. A controversy score measures an insurer’s exposure and response to event-driven controversies. The controversial business involvement score tracks an issuer’s activity in industries that may cause significant social harm, like tobacco. Lastly, the low carbon criteria cover the carbon intensity of an issuer based on involvement in certain industries.

These screens may be found in Nuveen’s suite of ESG-related ETFs, including the Nuveen ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD), Nuveen ESG High Yield Corporate Bond ETF (NUHY), Nuveen ESG Large-Cap ETF (NULC), 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), Nuveen ESG Small-Cap ETF (NUSC), Nuveen ESG International Developed Markets Equity ETF (NUDM), and Nuveen ESG Emerging Markets Equity ETF (NUEM).

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