More investors are taking a hands on approach to building a diversified investment portfolio, with some seeking to align their values with their objectives through environmental, social and governance, or ESG, exchange traded fund strategies.
Investors can 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), among others, which screen companies of various market capitalization and asset categories for environmental, social and governance principles.
“ESG or responsible investing is really looking at a way of investing that aligns investors’ values with their portfolios,” Martin Kremenstein, Head of NuShares, Nuveen’s ETF business, said at the Inside ETFs 2018 conference.
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.
“So what you are doing or what we do in particular is we are scoring all the companies or securities within a certain sector or asset class, and we’re scoring the ESG characteristics, such as waste management, water usage on the environmental side. On the social side is how they treat their employees, how do they treat their customers. And then on the governance side, it includes things like share structure, board structure, but also diversity on the board as well,” Kremenstein said.
Investors have shown a growing affinity for ESG-themed investments, especially if the responsible investment themes can achieve similar or better returns compared to traditional equity exposure. More are looking into competitive investment options that have a positive impact on society without negatively impacting their diversified portfolios.
“We feel that these are ways to really score companies for quality factors but in a non-financial way,” Kremenstein added.
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