Investors interested in socially responsible ETF strategies may consider the quickly developing segment of ESG investing and the opportunities the theme may provide.
On the recent webcast (available On Demand for CE Credit), The Evolution and Expansion of ESG Investing, Jordan Farris, Managing Director and Head of ETF Product Development at Nushares from Nuveen, explained that environmental, social and governance, or ESG, investments come with their own set of risks and opportunities.
The environmental aspect covers factors like climate change, natural resource usage, waste management and deforestation. Social covers employee relations, diversity, supply chain management and health and safety. Lastly, the governance portion includes board quality, executive compensation, public policy and business ethics.
Modern culture is being shaped by the increased emphasis on environment and societal impact. Farris pointed out that investors are incorporating ESG behaviors into everyday activities, with millennials and women among the major adopters. The political environment, regardless of affiliation, is sparking increased investment action in the ESG theme as increased awareness is contributing to an increasing amount of attention to ESG investments. From 2016 to 2017, there was a 15 percentage-point increase in participation in ESG investments.
“Investors want to make a positive impact without sacrificing opportunity for diversified growth,” Brian Griggs, FRM Vice President and Solutions Specialist at Nuveen Solutions, said.
Millennials & Responsible Investing
Griggs pointed out that millennials have exhibited an increased demand for responsible investing, with 92% showing a desire for investments to to deliver competitive returns while promoting positive social and environmental outcomes and willingness to put all of their investment holdings in responsible investments.
However, there are some misunderstandings that have impeded the growth of the ESG theme. For example, some of the more prevalent myths or misconceptions include integrating ESG criteria means sacrificing performance, ESG integration means only excluding controversial companies from portfolios, and for the average investor, large-cap equities are the only asset class available for investment. ESG investments are not confined by these myths.
To help investors better access the ESG investment theme, Nuveen’s Nushares has adopted an investment methodology that follows a four fundamental element ESG strategy, 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.
Nushares ESG-focused ETFs
Nushares is also the only ETF sponsor offering ESG-focused ETFs across the domestic equity market by market cap and style, international equity and fixed income markets. The ESG ETF suite includes the NuShares ESG U.S. Aggregate Bond ETF (NYSEArca: NUBD), 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), NuShares ESG Small-Cap ETF (BATS: NUSC), NuShares ESG International Developed Markets Equity ETF (BATS: NUDM) and NuShares ESG Emerging Markets Equity ETF (BATS: NUEM).
“The Nushares suite of ESG ETFs seek to increase ESG Score, decrease carbon footprint, provide return and risk profile of non-ESG parent benchmark over time,” Farris said.
Financial advisors who are interested in learning more about ESG-related strategies can watch the webcast here on demand.