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ESG and impact: Are they on a collision course?
As featured in PEI, Amy O'Brien, Head of Responsible Investing, and Rekha Unnithan, Co-Head of Impact Investing, chart private equity's responsible investment journey.
Q: 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.
Q: Rekha, would you agree then that ESG and impact are complementary forces?
Rekha Unnithan: 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.
Q: What is your responsible investment approach, when it comes to private equity specifically?
Rekha Unnithan: 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.
Q: How does that approach differ to other asset classes?
Amy O'Brien: 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.