Socially responsible exchange traded fund strategies that incorporate environmental, social, and governance principles are beginning to gain traction with the investment community.
“We’re starting to see that pick-up, and advisors and clients are accepting that incorporating ESG principles into your investments doesn’t take away from returns. We’re also seeing a number of these products hit key milestones – so, being in the market for three years or five years – and people see that the performance and the risk characteristics are in line if not better than non-ESG products,” Jordan Farris, Head of ETFs, Nuveen, said at the Inside ETFs conference.
For example, investors can fill out their equity portfolio with U.S. ESG equity-related ETFs, such as 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), which screen companies of various market capitalization and asset categories for environmental, social and governance principles.
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.
At Nuveen, the money manager employs several other ESG criteria to better target companies that exhibit socially responsible characteristics. Specifically, Nuveen applies an ESG rating to capture an issuer’s performance on crucial ESG risks relative to 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 involvement in specific industries.
Additionally, the three ESG factors cover three separate broad categories. Environmental refers to climate change, greenhouse gas emissions, resource depletion, including water, waste and pollution, deforestation. The social aspect covers working conditions, including child labor, community and indigenous populations, operations in conflict zones, health and safety, employee relations, and diversity. Lastly, the governance factor is based on executive pay, bribery, and corruption, political lobbying and donations, board diversity and structure, tax structure.
The ESG factors are an all-inclusive categorization, so investors should not see this as something like an exclusionary based investment approach. Furthermore, the responsible investment and ESG-related investment strategy is not indented to sacrifice performance or lower returns for the sake of achieving their goals. In essence, ESG investments have even shown to generate improved risk-adjusted returns over time.
Watch Jordan Farris Get Into ESG:
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