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Responsible investing: combining ESG with financial outcomes

Nicholas Liolis
Chief Investment Officer, TIAA General Account
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Pursuing E, S and G

Interest in responsible investing among governments, policymakers, asset managers and investors of all stripes shows no signs of slowing. By the end of last year assets under management with environmental, social and governance (ESG) objectives reached a record high of nearly $37.8 trillion, according to Bloomberg analysis. But we’re finding that the evolution and use of different factors has been somewhat uneven.

When it comes to ESG investing, the G – the governance aspects – appear well in hand. Institutional investors are long practiced at proxy voting and engaging with company boards and management. The E – or environmental factors, especially climate change – are currently in sharp focus as governments, seeking to limit global warming, consider different policy options and as investors and society increasingly make the connection from the science and evidence of climate change to the capital markets. Strategies to decarbonize businesses, portfolios and the economy, including commitments to net zero carbon targets, are garnering attention and generating action. The S – the social component – however, looks less clear cut.

Seeking social and financial outcomes

It seems that the market’s attitude and approach to the social side of responsible investing is changing. For many years, U.S. insurance companies were encouraged by some state regulators to have a small portion of their portfolio in socially oriented investments. In the past, this was often perceived as “doing good,” while potentially sacrificing return potential. But over time, we found that these types of investments can deliver compelling risk-adjusted returns for our portfolios.

The TIAA GA has invested over $1 billion in social impact projects, across private equity, real estate and real assets, over the past decade. We’ve focused on themes such as affordable housing, financial inclusion and broadening diversity. We’ve done this not only because we want to be a responsible investor but, more importantly, because it contributes to our fiduciary duty of delivering retirement income to our participants. It has allowed us to diversify and spread risk across a wider range of assets while generating attractive returns.

Social factors can help expand the investment universe

Just as investors have made the connection between climate change and investment returns, and are directing capital to solutions, we expect similar connections to be made for social inequalities and underserved areas of the market. Helped by the fact that many of these inequalities have become increasingly apparent during the pandemic.

Underserved and previously excluded groups represent a growing majority of consumers and an untapped market. Inclusion and diversity in investee company leadership and portfolio management teams should lead to better financial performance and better outcomes for clients. An increasingly broader understanding of these factors should create a virtuous cycle in which capital markets can attract funds for investments with social goals as well attractive risk-return profiles. Eliminating disparities in wealth will grow the economy and the opportunity set for all investors not just those with a focus on responsible investing. Social impact investments will no longer be categorized just as “doing good,” but will be judged on returns to capital as well as social outcomes.

As an investor, we want to be able to identify these trends and capitalize on them. This allows us to drive capital to profitable projects that benefit society, offer appealing returns and diversify our portfolio.

The market’s attitude and approach to the social side of responsible investing is changing.

As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.

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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services
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