A Closer Look into the Socially Responsible, ESG ETF Theme
Global, June, 20 2019 -
Potential investors, though, should not categorize socially responsible investing as some kind of feel-good strategy without any real returns.
Responsible investing matters to the investment process and investors can look to exchange traded fund strategies to incorporate them into a diversified portfolio.
On the recent webcast, How to Better Understand ESG Investing for Your Clients, Jordan Farris, Managing Director, Head of ETF Product Development, Nuveen; and Manica Piputbundit, Senior Director, Responsible Investing, Nuveen, delved into the responsible investment theme, including the quickly growing environmental, social and governance, or ESG, category.
Responsible investing is an investment philosophy that incorporates environmental, social and governance factors into the portfolio management process with the objective of enhancing long-term performance, managing risk and aligning client values.
Environmental, Social, and Governance, or simply ESG, typically refers to the factors and issues investors consider regarding a firm’s sustainable business practices. ESG factors provide an additional way to assess and influence company or issuer performance that may enhance long-term value or help to mitigate downside risk.
To help investors better understand ESG investments, the environmental factor covers criteria like climate change, greenhouse gas emissions, resource depletion, including water, waste and pollution, and deforestation. The social factor covers working conditions, including child labor, community & indigenous populations, operations in conflict zones, health and safety, employee relations and diversity. Lastly, the governance principles relates to corruption, political lobbying and donations, board diversity and structure, and tax strategy.
Looking ahead, the millennials demographics could be a major factor in responsible investing ahead. Over the next three decades, around $30 trillion will be transferred to millennials, whom are two times as likely to adjust their investment decisions based on values as compared to the older generation.
Potential investors, though, should not categorize socially responsible investing as some kind of feel-good strategy without any real returns. Responsible investing provides the potential for enhancing long-term performance through incorporating material ESG factors into investment decisions; addresses changing client preferences related to exclusions, best-in-class emphasis, thematic priorities and positive impacts; increases the understanding and management of material ESG-related risk factors; and fulfills growing market requirements, including policy tools and market initiatives covering the relationship between finance and ESG issues.
For example, when considering the impact of climate change to global financial markets, institutional investors are now asking how climate change risks and opportunities are managed in investment portfolios. Regulators and advocacy groups are already scrutinizing fossil fuel investments, carbon asset risk, and proxy voting record on climate change. Looking at the long-term, climate change creates potential financial performance risk for carbon-intensive assets in the transition to a low carbon economy, as well as physical risks and macroeconomic risks over the long term. Consequently, investors may look to renewable energy and other clean technologies that are swiftly becoming cost competitive.
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.