Environmental, social and governance, or ESG, related exchange traded funds are moving away from the fringe and gaining traction as a mainstream investment opportunity.
On the recent webcast (available on demand for CE Credit), The Evolution and Expansion of ESG Investing, Jordan Farris, Head of ETF Product Development for Nuveen, outlined the evolution of responsible investing, which started out in the 1970s as investors align around key social concerns such as Apartheid in South Africa and the Vietnam War. As the industry matured, we now see responsible investment opportunities across various asset classes, with ESG going mainstream with more up-to-date data and reporting.
“PRI signatories agree to integrate ESG into their investment process, be active owners, seek appropriate disclosure on ESG issues, promote acceptance and implementation of these issues through initiatives like this webinar, work together and report on our activities and progress towards implementing the principles,” Max Mintz, Financial Advisor at Common Interests, said.
Farris explained that responsible investments can incorporate ESG factors into investment decisions. Specifically, the strategies have systematic and explicit inclusion of material environmental, social and governance factors into investment analysis, portfolio construction and enact ongoing monitoring.
“ESG is not an asset class, but is the guiding principle behind the portfolios we build,” Mintz said. “By implementing strong ESG screens, we believe we can add an additional layer of risk management to our portfolios to hedge against the risks posed by the [sustainable development goals].”
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 – ESG investments have even shown to generate improved risk-adjusted returns over time.