Nuveen: Are ESG and impact on a collision course?

This article is sponsored by Nuveen

What are the fundamental differences between impact and ESG and how does each sit within the broader responsible investment landscape?

Amy O’Brien: The responsible investment landscape has expanded significantly over the past few years and that means we have ended up with all these different terms, which can sometimes seem as though they are in opposition with one another. Here at Nuveen – where responsible investing is integral to our approach across all asset classes – we see ESG integration and impact as working hand in hand.

For us, ESG integration is about incorporating material ESG factors into the investment process itself. We believe that doing this enhances performance and better manages risk. Impact, meanwhile, is more about how we measure, manage and drive positive environmental and social outcomes through our investment practices. So, these are two distinct approaches, trying to achieve different aims, yet they are partners rather than competitors.

Rekha Unnithan: I would add that intentionality is critical when it comes to impact. My team and I focus exclusively on identifying the big problems facing the planet and society and thinking of ways to use private equity and real estate as tools to provide solutions. But, at the same time, we are also coming at these problems from the perspective of an institutional investor and so we are looking for opportunities to both create sizeable impact and strong, risk-adjusted returns.

Rekha, would you agree then that ESG and impact are complementary forces?
RU: Absolutely. Nuveen systematically incorporates ESG factors into investment processes across the entire organisation. And our impact practice certainly has a very strong foundation in ESG. The basic premise of taking care of the environment and of society and having strong governance in terms of how investments are structured and managed, is critical to us as an investor.

This is particularly true in a private equity context, where asset management tends to be more hands on. The key difference when it comes to impact is this issue of intentionality, as well as the way in which we report to our clients about our performance in terms of achieving our impact objectives.

What is your responsible investment approach, when it comes to private equity specifically?
RU: From an impact perspective, we are growth investors. We look for companies with established economics and market fit, that are looking to grow in scale. We take minority stakes, with very strong governance rights, which means we sit on boards alongside management, setting the strategic agenda from both an operational and impact perspective. In fact, we believe the two go very much hand in hand.

When it comes to ESG, meanwhile, operating in the private domain typically means the disclosure requirements are considerably lower than for public companies. In our work, we require potential portfolio companies to share a high level of information in advance of any deal. The level of due diligence can vary by market and sector, but we place a great deal of scrutiny on ESG practice as we are putting risk capital on the line, after all.

How does that approach differ to other asset classes?
AO’B: I think each asset class does require its own customised approach when it comes to how best to integrate ESG and engagement activities. The tool kits required for imposing change can certainly differ.

But there is a lot of common ground, as well. We are always looking to use critical ESG data factors to exert our influence in whatever way we can. We may not have a board seat on a public company, for example, but we do take active ownership through proxy voting and dialogue very seriously. From due diligence, through ongoing monitoring, reporting and accountability, ESG is integral to our investment lifecycle here.

What is your approach to ESG due diligence in a private equity context?
RU: We really try to identify plans for ESG evolution as part of our due diligence and underwriting. We do base line assessment of where the company is currently from an ESG and impact perspective, and then look carefully at how it needs to progress as it scales, in order to be successful. We clearly identify areas of risk, or any gaps that may exist, and develop a game plan for management teams to tackle those.

Some of those challenges may, in fact, be highly operational. For example, if a financial services business serving low income customers doesn’t have an adequate data strategy in place, that could seriously hinder its future expansion. If it doesn’t know who its customers are, what their income levels are, where they are located, or how many of them are women, those things can become very material to operational and financial performance over time. And these metrics also have a bearing on impact, of course: there is a clear overlap. If we ask a company to measure things that seem irrelevant to them, that company is probably not a very good fit for us.

How is the private equity impact ecosystem evolving?
RU: When I first joined Nuveen, this market was very much still nascent and most of the key players were managing early-stage funds. Potential target companies that identified with a broader purpose were just starting to emerge. Ideas were being formed. Since then, there has been a natural progression. Those ideas have become businesses. They have raised capital and now we are seeing significant opportunities for companies to scale. The market is becoming louder and prouder and more diversified.

As a result, we are starting to see more large buyout investors taking an interest. However, this has left a real gap in the growth and mid-market space. Early-stage investors have validated the investment model and supported these businesses for three to five years but they are not yet ready for the mega-funds.

“We wouldn’t be putting all these resources into a responsible investment strategy if we thought that returns would suffer”
Amy O’Brien

Where is the majority of private equity capital being targeted? Is the focus primarily environmental?
RU: I think there is significantly more overlap between the environment and societal challenges than is often acknowledged. When you think about economically driven mass migration, for example, climate change often has an important role to play. Nuveen, certainly, takes both the environment and social issues into account. Our strategies are focused on both people and planet.

AO’B: That’s an important point. A lot of the issues we see broadly across the ESG sector cannot be neatly contained within purely the E, or the S, or the G. In fact, we have recently revamped our entire responsible investment policy, purposefully, to get away from that rigid framework. Instead, we think about these things in terms of, what we call, business ethics, transparency and discipline.

Where are we currently in terms of the debate around responsible investment and its impact on returns?
RU: We certainly wouldn’t be having any of these types of conversation if we felt there was a trade-off. While I don’t think it is fair to hold ESG or impact investment to higher standards than “regular” investments from an absolute returns perspective, I do think they perform at least as well.

AO’B: I agree. We wouldn’t be putting all these resources into a responsible investment strategy if we thought that returns would suffer. That debate does still prevail in certain parts of the market, but I think that comes down to education. The way that this whole area has developed has been a little messy.

Isolated strands of responsible investment have evolved independently, and we are only now trying to bring them all together. In particular, the impact spectrum ranges from philanthropy to a highly returns-driven approach, and that can be confusing. Equally, responsible investment has evolved differently in different asset classes. There was very little talk about ESG in private equity 10 years ago. The focus was more on impact. ESG, meanwhile, grew up in the public markets and that is where we are now starting to see conversations around impact emerge.

Given this complex start in life, how do you expect responsible investment to develop going forward, particularly in the private equity industry?
RU: I think any private equity investor not fully taking ESG into account is very much behind the curve because, quite simply, there is huge value in doing these things properly. I think impact will also continue to evolve in the private equity space, where it first began, although that is not to say, it won’t be adopted in the public markets as well.

AO’B: I think the UN Sustainable Development Goals have played a critical role in bringing people from all asset classes together. The SDGs have received more global attention than any other classification system in the past – and there have been dozens. Investors are looking at those goals, not just in terms of problems to be solved, but as investment opportunities. And there are some very big numbers being floated around, in terms of market potential.

View with an impact
In 2017, Nuveen’s impact investment arm backed View, a company which produces and installs smart windows that automatically adjust to sunlight.

Each blue-tinted windowpane has its own IP address and can be controlled from a smartphone app. “Architects love to use glass in buildings, but developers hate it because the energy cost is so high,” says Nuveen’s Rekha Unnithan. “Now you can use glass that still provides all the health and wellbeing advantages of that connection to the outdoors, and also reduces your energy footprint by between 20 and 40 percent.”

Since Nuveen’s initial investment, View has increased the number of projects it has completed from around 200 to more than 500. It has also gone on to raise $1.1 billion from Softbank Group’s Vision Fund. In addition to reducing energy consumption, the glass significantly increases the amount of useable space in a commercial property by reducing glare and heat from the sun. It also eliminates the needs for blinds altogether. Indeed, Nuveen has become one of View’s biggest customers. TIAA’s New York office has undergone a $200 million renovation, including the replacement of every window with View Dynamic Glass.

Supporting India’s smallholder farmers

In 2019, Nuveen led a $55.6 million Series D funding round, supporting Chennai-based Samunnati Financial Intermediation’s mission to provide financial and agricultural support services to India’s smallholder farmers.
Nuveen came in alongside fellow impact investors Elevar Equity and ResponsAbility, as well as early-stage venture investor Accel. Meanwhile, Dutch development bank FMI and Swiss investor Symbiotics have provided debt financing.

Samunnati has now expanded to 14 states and provided 16 billion rupees in loans. It offers working capital loans to community-based organisations and receivables financing to small and medium-sized enterprises, indirectly supporting two million farmers. The latest round of investment will allow it to expand its expertise into fruit and vegetables and food processing.