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.
The ESG theme is also growing in popularity in the investment community, especially among the maturing millennial demographic. Farris pointed out that over half of investors would put all of their investments in responsible investments and this percentage is much higher among millennials. Investor participation in responsible investments also increased to 49% in 2017 from 34% in 2015.
Potential investors interested in the ESG investment theme may consider Nuveen’s relatively new suite of ETFs, which covers a comprehensive mix of domestic equity, international equity and fixed income options.
For instance, the NuShares ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD) helps fixed-income investors pair their bond investment needs with environmental, social and governance principles.
Investors can also fill out their equity portfolio with U.S. ESG-related ETFs, such as the NuShares ESG Large-Cap Value ETF (BATS: NULV), NuShares ESG Large-Cap Growth ETF (BATS: NULG), NuShares ESG Mid-Cap Value ETF (BATS: NUMV), NuShares ESG Mid-Cap Growth ETF (BATS: NUMG) and NuShares ESG Small-Cap ETF (BATS: NUSC), which screen companies of various market capitalization and asset categories for environmental, social and governance principles.
Lastly, the NuShares ESG International Developed Markets Equity ETF (BATS: NUDM) and NuShares ESG Emerging Markets Equity ETF (BATS: NUEM) also align investors’ international equity investments with their values.
Nuveen’s ESG ETF methodology follows four key components, including ESG rating or captures an issuer’s performance on key ESG risks relative to peers;, controversy score or an issuer’s exposure and response to event-driven controversies; controversial business involvement or issuer’s activity in industries that may cause significant social harm like tobacco; and low carbon criteria or the carbon intensity of an issuer based on involvement in certain industries.
Financial advisors who are interested in learning more about environmental, social and governance-related strategies can watch the webcast here on demand.