Nuveen on maintaining integrity in impact

As the impact investment ecosystem continues to expand, players must be held accountable for delivering on their promises, say Rekha Unnithan and David Haddad, co-heads of impact investing in private markets at Nuveen.

This article is sponsored by Nuveen 

How have you seen impact investment evolve over the past decade?

Rekha Unnithan

Rekha Unnithan: In addition to a massive increase in assets under management, there has been a real diversification in the types of players involved. Ten years ago, the market was primarily dominated by development finance institutions, alongside a handful of institutional investors like us, who believed in the investment case for both impact and returns. Today, there are 10 times as many participants of every shape and size.

The publication of the United Nations Sustainable Development Goals has been an important driver of this growth, allowing the market to coalesce around a framework and to articulate a thematic investment approach.

I would also point to the maturity of the impact businesses themselves. Ten years ago, these business models were just being conceived and so a lot of the capital supporting them was early stage in nature. Now many of those companies have scaled successfully and are serving mainstream value chains. They therefore require more capital – and knowhow – as they proceed along their growth journey.

What about developments in the challenges being addressed by impact investment themselves?

RU: Absolutely. There is an acknowledgement now that climate change is real – that temperatures are rising and extreme weather events are increasing in severity and number. Income inequality also continues to increase and is something that is happening right in front of people’s eyes. It is evident in big cities and in the refugee camps of Europe. It is no longer something that can be ignored. So yes, while the supply of impact capital has certainly grown, so too has the demand.

What role has technology played in the growth of impact investment?

RU: Technology has helped bring business models to consumers that previously would not have been possible. Big data, for example, can be used to provide services such as credit, insurance and access to healthcare to underserved, low-income populations. All of that has been facilitated by tech transformations.

What makes private equity particularly well suited to impact investment?

David Haddad

David Haddad: The way in which private equity can identify and amplify impact through direct influence of the management team allows it to improve the strategy and growth of a business – whether that pertains to financial performance or impact. Private equity is very tactile and its ability to be there at the table is a real advantage.

I would add that it is a patient asset class and very flexible in terms of how investments are structured. Those longer-term investment horizons, compared to the public markets where the focus is on quarterly results, make a lot of sense in the context of impact investment.

We are now seeing a number of mainstream big buyout houses coming into the asset class. Is that a good thing?

RU: There is unequivocally a need for aligned capital that can drive further impact in that larger company space. That is a very different strategy to ours, however, where we are investing $20 million to $60 million in built-for-purpose impactful businesses. What is really important, is that the capital that goes into those big organisations, does actually drive access to affordable housing, access to healthcare and education or improvements in climate change. When you call yourself an impact investor, you owe it to your limited partners to support those goals in a meaningful way.

I think it is vital to distinguish between observing impact and driving impact. Everyone knows that if you invest in a big enough company, that company is going to create jobs and provide access to products and services. But what additional impact are you creating with that capital – are you reaching more customers or helping the business innovate in order to be more inclusive or to reduce its carbon footprint. Those are the objectives that should unify any impact approach. New entrants need to be accountable.

What can impact investment ultimately achieve and what has its success been so far?

RU: In terms of our own portfolio, over the past 10 years we have supported 129 million low income borrowers and reached 14 million low income affordable healthcare patients. We also know that 67 percent of our low-income beneficiaries are women, and that we have reduced 1.8 million tonnes of carbon emissions and recycled 80,000 tonnes of waste, in addition to providing 20,000 units of affordable housing. We are armed with great information about the past which gives us the tools to be diligent about the future.

What is needed to facilitate the asset class’s continued growth?

DH: I think it will be important to continue driving more and more institutional capital towards meeting these global goals. I am relatively new to the impact industry and it still feels fairly nascent to me. We do see a great deal of institutional appetite, particularly from certain geographies, but we need to make sure we catalyse that capital, if we are to have a chance of solving the world’s problems.

How is the covid crisis affecting the impact industry?

RU: Impact business models appear to be weathering the covid environment pretty well, due to their focus on basic products and services fulfilling the core needs of customers. Make no mistake, if the crisis drags on and we have a prolonged recession, impact businesses will suffer, along with everyone else. But because impact investment strategies are underpinned by organic demand growth, they are relatively well positioned.

If not covid, what could disrupt the impact narrative?

RU: One thing that could really impede the growth of the sector would be serious missteps in acknowledging risk. For example, if you were to bring a new product or service to the low-income population, but only focused on the benefits and not on potential unintended consequences, that could lead to real shortcomings in customer safeguarding. And that, in turn, could undermine trust in the asset class. You need to provide the right level of education, transparency of pricing and ethics alongside these innovative business models, and it is in the collective interest of the industry to be sharing best practice.

Could a prolonged recession lead to new tensions between impact and profit in day-to-day decision making?

RU: For the businesses we invest in, impact is the very reason they exist. There is no trade off. Having said that, for those investors looking to create impact in existing companies, that could be an issue.

DH: I agree. The fundamental reason for being for these businesses has not changed and I don’t think it will, even in a downturn. What is changing, as for all of private equity, is perceptions of value. There is a recognition that valuations need to recalibrate.

What about resource efficiency? Is there a danger that covid has shifted priorities and climate change has fallen down the agenda?

DH: Our resource efficiency strategy is all about making better use of the natural resources that exist and, in many ways, the covid crisis is actually focusing attention on the impact climate change is having and the ways in which it is exacerbating global income disparities.

We look to back businesses that leverage technology in order to reduce waste and use resources more efficiently – that encompasses things like agricultural technology and smart buildings. Fundamentally, it is about recycling more, particularly petrochemicals, plastics and resins, and finding value chains that make more circular usage of those resources.

Will impact investment ever become the norm, and cease to be an asset class in its own right?

RU: The idealist in me would like to think so, but we are not even close to reaching that point yet. This sector has been established by market participants who believe that mainstream capital markets and financial systems are failing to take important externalities into account. We have been successful in addressing these externalities and delivering strong returns and I believe we will continue to be so. But we need to innovate in order to keep pace with what is happening in the economy as a whole.

How can impact investment help to ensure inclusive growth and an inclusive recovery?

RU: The inclusive growth investment thesis is tied to the fact that the low-income customer is a paying customer. For example, we are invested in a company that provides working capital loans within India’s agricultural value chain. Farmers in India are typically small holders. Many earn less than $100 a month. But that income makes up 67 percent of Indian GDP.

Pre-covid, that business was generating 40 percent annual growth in it its loan book and was profitable. Through covid, it has continued to lend and service its farmer base, because food is an essential service. It has continued to service its customers using enhanced ways of thinking around risk and is now back on its growth trajectory as markets open up.

In addition to supporting the farmers, meanwhile, it is also helping the large buyers of these soya beans, potatoes or milk, to acquire input to their production lines in a way that is fair and transparent to the farming community. It is a ripple effect, leading to huge benefits to the entire ecosystem.

Looking to the future, I believe there are large numbers of business models just like this, in SME finance, vehicle finance, healthcare, and education, for example. Even in a covid environment, these companies are positioned to grow either organically or through consolidation.