Opportunities and positioning
Broadly speaking, we see solid opportunities as investors are increasing their focus on finding investment solutions to social and environmental challenges together with attractive financial returns. The range of opportunities for institutional investors in terms of asset class, investment size and desired risk-return profile has increased over recent years.
The inclusive growth theme is pursued via a private equity strategy that is global in nature and primarily targets emerging markets. The thesis is that low-income customers are paying customers and that those customers are underserved. We look at areas like financial services — credit, savings, insurance, remittance — and find companies that are exclusively targeting that low-income demographic. The products need to be designed differently. The approach to customer acquisition needs to be tailored. Healthcare and education also form subsectors of this strategy as well. We believe there are ample profitable and sustainable businesses that can have significant inclusive benefits.
Another area of interest and focus is an affordable housing real estate strategy focused on preserving affordable housing stock in the U.S., keeping rents affordable for existing tenants and implementing energy retrofits to reduce costs and benefit the environment. The idea is to provide housing stability for working Americans.
Resource efficiency is an additional private equity investment strategy that brings efficiency to value chains in multiple sectors, ranging from real estate and agriculture to manufacturing. It can either involve companies providing services to those value chains or disrupting the value chains themselves.
Risks to our outlook
At a macro level, we recognize that many problems cannot be solved by impact investing alone. Governments, or other public sector stakeholders, need to want to address these issues too.
A challenge, rather than a risk, is measurement. As an industry, we need to ensure that investment decisions are based on evidence and the investment activities are making the right impact. While many managers do this individually, we need to come together to establish measurement standards. This will underpin the credibility of impact investing.
A portfolio’s exposure to impact investing is a function of many wide-ranging factors. It could be defined in a trust’s investment objectives, driven by demand from beneficiaries, or a strategy set by an investment committee, to name just a few.
As it seeks different objectives from the risk and return metrics offered by many traditional investments, impact investing is often considered an alternative asset class or strategy. At Nuveen, however, we can, and do, apply this approach across all asset classes, pursuing positive social and environmental impact alongside competitive financial returns.
The wide variation of risk-return profiles across the asset class spectrum for impact investing means that institutional investors should be able to include it in portfolios whether they are seeking income, capital growth or other goals.
This variety of risk-return options has advantages and disadvantages. It requires additional layers of due diligence, which involve a deep dive into the investment’s ability (and that of the investment manager) to deliver on the specific impact, the desired returns and the expected risks. But on the plus side, there are now many more options for institutional investors to improve outcomes in terms of impact and their portfolio’s risk and return characteristics.
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