Nuveen: Investing By Example

Jordan Farris
Managing Director &
Head of ETF Product Development
Nuveen

Nuveen, through its parent company TIAA, has a deep level of experience in the responsible investing space, with access to cutting-edge research expertise. Here, Jordan Farris, managing director and head of ETF Product Development, discusses the growth and evolution of environmental, social and governance (ESG) investing and how his firm is working to provide investors with the tools to produce whole portfo­lios that both reflect their values and exhibit competitive risk and return profiles. Nuveen’s key ESG ETFs include such funds as the Nuveen ESG Large-Cap Value ETF (NULV), Nuveen ESG Small-Cap ETF (NUSC) and Nuveen ESG U.S. Aggregate Bond ETF (NUBD).

How has ESG scoring evolved over time?
The industry has evolved substantially over the course of the past decade in that there are a number of firms that evaluate how companies are managing risks associated with the ESG pillars. This allows asset managers to shift from an exclusionary-only approach to a best-in-class approach. From the perspective of product development, we can compare IT companies against IT companies, or health care companies against health care companies, and select those that have been identified as industry leaders within an ESG framework.

Looking back, responsible investment products from several decades ago were generally branded as “SRI” or “socially responsible investments.” The primary approach was exclusionary, whereby asset managers would identify segments of the industry that they would define as a “sin” segment, such as tobacco, controversial weapons or alcohol. The asset manager would simply remove these companies from the portfolio and invest in whatever remained. This approach had the potential to cause several issues, including sector biases and performance deviations. The industry has come a long way in building out an ESG framework.

What sets Nuveen’s approach to ESG apart?
It’s critical to evaluate the asset manager behind the product when conducting due diligence. At Nuveen, not only do we have decades’ worth of experience in the responsible investing space, we also have a strong history of aligning proxy voting and corporate engagement with our stated company values. We believe this approach puts our Responsible Investment (RI) team, consisting of 20+ ESG-focused professionals, in a better position to fully consider the pros and cons of available data sets.

Because one of the most critical components of designing ESG products is the application of ESG criteria, we worked very closely with our team to provide expert guidance as to how the data should be applied to best align with investor needs and interests. For example, the team pointed out that high ESG scoring doesn’t necessarily translate to a low-carbon footprint. This analysis led to the integration of a distinct set of low-carbon criteria across our product set. In addition to the criteria that were already in place, this resulted in the creation of products that generally have a very-low-carbon footprint as compared to competing ESG-branded products, as well as to competing non-ESG-branded products.

Are there any kinds of industries that tend to be avoided in your own ESG products?
Yes, we avoid companies that generate a certain percentage of revenue from activities such as tobacco, alcohol, civilian firearms manufacturing and controversial weapons manufacturing, among others. However, the majority of our criteria utilize a best-in-class approach.

Within our set low-carbon criteria, we exclude proven owners of fossil fuel reserves—meaning oil, coal and natural gas that’s still in the ground. As we apply the inclusion criteria across the set of available companies, the sector weights can shift from where they began. Therefore, one of the final steps of the methodology is to optimize the sector weights so that they are representative of the starting universe. From the perspective of the investor, the sector exposure—and for the international products, the country exposure—will be very similar to non-ESG branded products, and that has helped us to deliver a competitive risk and return profile.

Would you talk about Nuveen’s use of a “controversy score” in its methodology?
A controversy is an event that happens at, or to, a company that does unnecessary harm to society or to the company itself. The controversy score is a numerical value that is applied to the controversy. A very severe controversy would be given a very low score, meaning a very bad score. An example of this is the scandal at Equifax, during which the personal data of 143 million people were publically exposed.

If the score is low enough, the company wouldn’t be eligible for inclusion in our products. And in order to become re-eligible for inclusion, the company would need to implement policies and procedures that would signal to our ESG data vendors that the issue had been resolved. The company would still be required to meet all other criteria inclusive of a high ESG score and a low-carbon footprint to become re-eligible.

A common misconception of ESG investing is that investors sacrifice returns to align their investments with their values. How do you counteract this argument?
We counteract this argument by pointing to our long history in responsible investing, both as investors and managers. In one of our recent studies, we concluded that over the last 10 years, responsible investment indexes have had returns comparable to broad market benchmarks without additional risk, despite using a smaller universe of securities meeting ESG criteria.1 To us, this indicates that investors shouldn’t have to feel as though they’re giving up performance, and we believe that our central thesis of incorporating the combination of ESG and low carbon into the decision-making process has the potential to add alpha.

Our current conversations with clients and prospects center on education, with a focus on the evolution that has taken place in the development of these types of products. We’re no longer just excluding entire industries. From a sector and country perspective, we’re providing a fully diversified product, while including companies that score well across the “E,” “S” and “G” pillars. That has allowed us to deliver the risk and return profile that we believe investors would expect from a traditional non-ESG portfolio.

Why do financial advisors remain skeptical of ESG investing? And what advice would you have for them if they want to incorporate ESG into their client offerings?
We believe advisors may still be skeptical because they’re associating ESG-branded products with SRI investing, or socially responsible investments, from 20 years ago. The key to understanding today’s products is education; learning about the evolution in ESG scoring and ESG data, and how that’s allowing us to deliver more compelling solutions to the market right now.

ESG and low-carbon values can now be used as part of an overall investment philosophy, while still achieving an investor’s long-term investment objectives. In terms of incorporating ESG investments into portfolios, we speak with a number of advisors who believe that their clients want to allocate a certain sleeve to ESG. We turn that around and position ESG as a core component of an entire portfolio that can be integrated without disrupting the risk and return profile that they have come to expect from non-ESG portfolios.

Advisors have told us that there is very high interest in incorporating ESG-type investments into client portfolios. At Nuveen, we conduct an annual survey that looks at the percentages of investors who want to incorporate their personal values into their investments. And in some demographics, the figure is over 90%.2 There still needs to be more education and more awareness so advisors can be empowered to engage with clients, saying, “If this is something you’re interested in, we can incorporate it into your financial plan without disrupting an existing asset allocation.” More often than not, the answer will be, “Yes, I’m interested in learning more.” 

Visit nuveen.com/etf to learn more.

Disclosures:

1 Based on daily returns for the period ending December 29, 2017. Sources: FactSet, Morningstar, MSCI, TIAA and “Responsible investing: Delivering competitive performance,” August 2018.

2 Nuveen, Fourth Annual Responsible Investment Public Release Survey, 2018.

This material is not intended to be a recommendation or investment advice; does not constitute a solicitation to buy, sell or hold a security or an investment strategy; and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.

Investing involves risk; principal loss is possible. There is no guarantee the Fund’s investment objectives will be achieved. ETFs seek to generally track the investment results of an index; however, a fund may underperform, outperform or be more volatile than the referenced index. In addition, because the indexes select securities for inclusion based on environmental, social and governance (ESG) criteria, the funds may forgo some market opportunities available to those that don’t use these criteria. These and other risk considerations are described in detail in the funds’ prospectuses.

Shares of ETFs are bought and sold at market price as opposed to net asset value. As a result, an investor may pay more than net asset value when buying, and receive less than net asset value when selling. In addition, brokerage commissions will reduce returns. Fund shares are not individually redeemable directly with the Fund, but blocks of shares may be acquired from the Fund and tendered for redemption to the Fund by certain institutional investors in Creation Units.

Before investing, carefully consider Fund investment objectives, risks, charges and expenses. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial advisor, contact Nuveen at 800.257.8787 or visit nuveen.com.

Nuveen, LLC provides investment advisory solutions through its investment specialists. Nuveen Securities, LLC, member FINRA and SIPC.