Nuveen, a division of investment giant TIAA Global Asset Management, has rolled out two new NuShares ETFs on Bats Exchange tracking indices employing environmental, social and governance (ESG) screening criteria.
Nuveen’s ESG ETF suite also includes five funds offering exposure to US equities across various market capitalizations and investment styles.
Drawing upon the long-standing ESG expertise of TIAA, the NuShares ESG International Developed Markets Equity ETF (NUDM) and NuShares ESG Emerging Markets Equity ETF (NUEM) complement the firm’s existing range of five ESG-focused ETFs which invest in US equities across various market capitalizations and investment styles. (See: TIAA’s Nuveen unveils suite of ESG ETFs)
“As we designed our latest ETF offering, we wanted to squarely address investors’ desire to diversify their core equity portfolio with investment options that not only provide key benchmark exposure, but also align their international equity investments with their values,” said Martin Kremenstein, senior managing director and head of exchange-traded funds at Nuveen. “To date, there have been limited ETF solutions for investors who value ESG principles, yet want to assemble a full equity asset allocation framework. When taken as a whole, our growing suite of ESG ETFs addresses this need.”
The funds track the performance of the TIAA ESG International Developed Markets Equity Index and TIAA ESG Emerging Markets Equity Index, which are based on the MSCI EAFE Index and the MSCI Emerging Markets Index respectively.
Each TIAA ESG index aims to increase exposure to positive environmental, social and governance factors and exhibit lower carbon exposure as compared to its respective MSCI index by utilizing ESG criteria initially established by the fund’s sub-adviser, Teachers Advisors, an affiliate of TIAA.
ESG performance is measured on an industry-specific basis, with assessment categories varying by industry. Environmental assessment categories can include a company’s impact on climate change, natural resource use, and waste management and emission management. Social evaluation categories can include a company’s relations with employees and suppliers, product safety and sourcing practices. Governance assessment categories can include a company’s corporate governance practices and business ethics.
The ESG criteria also considers how well a company adheres to national and international laws and regulations as well as commonly accepted global norms related to ESG matters. The indices generally exclude companies with significant activities in certain controversial businesses, including those involving alcohol, tobacco, military weapons, firearms, nuclear power and gambling, among others. TIAA has licensed its name to MSCI for use in the names of the indices.
NUDM’s largest country exposures are to Japan (23.0%), the UK (17.9%), France (10.7%), Germany (9.3%) and Switzerland (9.0%). Its largest sector allocations are to financials (20.4%), industrials (16.0%), consumer staples (11.9%), consumer discretionary (11.7%) and healthcare (10.9%) and naturally reduces its exposure to sectors which have traditionally scored poorly on ESG issues, including utilities (4.0%) and energy (3.1%). With over 220 holdings, the index has diversified away potential idiosyncratic risk and has a top holding in Nestle at just 3.2%. The fund has a total expense ratio (TER) of 0.40%.
NUEM has a quarter of its total allocation in Chinese equities, while Korea (15.7%), Taiwan (12.8%), India (9.3%) and South Africa (7.3%) make up the next largest exposures. Dominating the sector allocations are financials (24.8%) and information technology (23.8%) while consumer discretionary (10.7%), industrials (8.3%) and materials (7.6%) play a relatively smaller role. There are 328 constituents in the index with the largest holdings being Tencent Holdings (5.6%), Taiwan Semiconductor (4.5%) and Naspers (2.3%). The fund’s TER is 0.45%.
From a financial point of view, long-term portfolio risk/return characteristics may be enhanced through integrating an ESG framework to investment decisions. This occurs, in part, through a reduction in litigation and reputational risk. Quantitative analysis of various ESG-focused indices has thus far shown that alpha is repeatedly captured in these indices compared to broad equity benchmarks.
“We’ve certainly seen that investor motivations for adopting responsible investment approaches to managing their money are on the rise. Investors large and small are beginning to understand that the integration of environmental, social and governance factors within their investment portfolios actually has the potential to reduce risk and enhance long-term investment performance. Those advisors and consultants who can assist their clients in evaluating the significant differences among available ESG products and strategies in order to select those that are an appropriate fit, will prove themselves to be invaluable,” said Amy O’Brien, managing director and head of responsible investment at TIAA Investments.