Some advisors may view environmental, social and governance investing as a satellite holding, something that’s secondary to the core asset allocation. But as ESG becomes more popular among investors, many advisors may have the desire to build an entire portfolio around it.
“There still has been a concern about the performance sacrifice that you take, but now that the [ESG investing] industry has a track record, people are seeing ways that these factors can be used to manage risk, or better understand risk, as well as enhance an investment process,” said Amy O’Brien, head of responsible investment at TIAA Investments. “It’s taken a little while to get over those hurdles.”
Asset management firm Nuveen is on track to create an entire suite of exchange traded funds that employ environmental, social and governance criteria. The firm’s latest effort is the launch of the NuShares ESG International Developed Markets Equity ETF (NUDM) and NuShares ESG Emerging Markets Equity ETF (NUEM), which begin trading today on the Bats Exchange.
Nuveen broke into the ETF space last September with the introduction of the NuShares Enhanced Yield U.S. Aggregate Bond ETF (NUAG). The firm also added five ESG-focused funds, including the NuShares ESG Large-Cap Growth ETF (NULG), the NuShares ESG Large-Cap Value ETF (NULV), NuShares ESG Mid-Cap Growth ETF (NUMG), NuShares ESG Mid-Cap Value ETF (NUMV) and NuShares ESG Small-Cap ETF (NUSC).
“We’ve been talking for years as asset managers about removing that home country bias,” said Martin Kremenstein, senior managing director and head of exchange traded funds at Nuveen. “As we were building out the suite, the next step logically from domestic equity was international equity.”
The goal is to create an entire suite of ETFs to allow advisors to build a portfolio around ESG.
“This is a way that you can incorporate ESG in the core of the portfolio, without giving up your core asset management and core asset allocation discipline,” he said. It’s tougher to create fixed income products that employ ESG criteria because the data isn’t as clear. On the equity side, where shareholders are involved, there are clear rules around the data companies will share, and there are benefits to companies’ stock prices with greater transparency, according to Kremenstein.
That said, Nuveen will be looking at ESG fixed income.
While there may have been interest in creating an entire portfolio around ESG, the building blocks weren’t there previously, O’Brien said.
In addition, Nuveen has seen the growth of asset allocation as a performance driver over stock picking, Kremenstein said.
“It used to be that an advisor was picking funds based on performance, etc. Now they’ve moved more and more toward asset allocation," he said. "That’s why having the building blocks and looking at where their risk factors are and looking at where their exposures are has just become much more mainstream.”