Shawn McNinch: Hello, I’m Shawn McNinch, Head of Brown Brothers Harriman’s (BBH) ETF servicing business. BBH provides custody administration service to both mutual fund and ETF clients. As part of our client insight series, I’m here with Martin Kremenstein, head of Nuveen’s ETF business. Thanks for being here, Martin.
Martin Kremenstein: Thanks for having me here.
Shawn McNinch: Martin, BBH recently completed an advisor survey where we went out and asked a number of advisors different questions around product usage. 37% of the respondents stated they use some type of Environmental, Social, and Governance (ESG) screening methodology when selecting ETFs. I thought that number was pretty high and as I dug in a little bit more I realized that ESG products in socially responsible investing is a large market, totaling over $20 trillion globally and over $8 trillion in the US market. Now, I know Nuveen is a very big player in the ESG space. Could you help me define what ESG is?
Martin Kremenstein: I think ESG does suffer a little bit from the abbreviation side whether it’s ESG, RI, or SRI. I think broadly, it’s implementing a set of principles around your investing. And it doesn’t have to necessarily have to be a zero sum game in terms of if you’re looking to implement ESG, then you don’t need to give up returns. It’s all about how do you implement some kind of environmental, social, governance criteria within your asset selection in order to build the portfolio.
Shawn McNinch: What role do ESG products have in investors’ portfolios today?
Martin Kremenstein: I think there are a couple of ways that investors and advisors are using ESG products. The first and most simple, possibly the one that the 37% of respondents you surveyed said, is really kind of thematic type ESG plays. Clean water investing, clean energy investing, and things like that. I think more broadly applying an ESG principal overlay to your portfolio is harder for retail investors and advisors to use because everybody has their own view on what ESG is. Unless you have enough money to put it to work at scale and maybe do an Separately Managed Account, you’re going to be relying a little bit on someone else’s off the peg product.
Shawn McNinch: In 2016 I saw that 18 new ESG ETFs came to the market, bringing the total up 31 ETFs. What is attractive about the ETF wrapper as it relates to creating ESG products?
Martin Kremenstein: There are a couple of things. First of all the ETF wrapper has been the fastest growing wrapper now for the past few years. We tend to see innovation happen in growth areas. It’s also because of the tendency for issuers to put out new strategies, techniques, asset classes with an ETF is natural fit that if someone is looking to get into the ESG space, they would want to try and to it in an ETF. Finally, I think the fact that ETFs are nearly all index based, and certainly most of the assets are indexed, you can sell an index strategy based on its methodology and framework and you don’t necessarily need to wait for a track record. When it comes down to active strategies, people want to see two or two three years of track record. So it’s easy to build up a business with the ETF wrapper, or it can be quicker. So that’s why I think we’ve seen issuers kind of start to come to the ETF market with ESG strategies.
Shawn McNinch: Finally, what should investors be thinking about when evaluating different ESG investments?
Martin Kremenstein: I think there are a couple of things investors should really be thinking about. The first one is who is providing the product? Do they have a track record in ESG or are they just kind of jumping on the bandwagon because it seems to be the hot thing at the moment? There are a lot of providers that have actually been in this space for a long, long time, and they have deep research teams and expertise.
I think the second thing is they need to understand is how it’s going to fit in with the rest of their asset allocation. If they are just buying one off ESG products, what’s that going to do to the rest of their portfolio? Are they going to have concentrations, overweights or underweights? And so they need to think about if it is going to be the core part of the portfolio, a sleeve of the portfolio, or is it going to be an overlay with which they can actually run the whole portfolio and manage it that way?
Shawn McNinch: Well, thank you, Martin for sharing your insights on ESG as a way to achieve positive long term returns for investors, as well as to provide a positive impact to society. Thank you very much.
Martin Kremenstein: Thank you very much.
The positions expressed in this material are those of the author as of January 4, 2017 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only. Furthermore, these positions are not intended to predict or guarantee the future performance of any currencies or markets. This material should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision.