Podcast: Episode 9

Responsible investing: where performance meets impact

Learn why today’s investors are choosing a values-based investment approach. 

Podcast: Aligning purpose with performance in your portfolio

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TIAA Perspectives Podcast Episode 9: Aligning purpose with performance in your portfolio Hosted by Jim Daniello, CFP®, Wealth Management Director for TIAA. Joined by Megan Fielding, Senior Director of Responsible Investing at Nuveen. - [Jim] Hi everyone, I'm Jim, Daniello, a Wealth Management Director for TIAA. Thank you for joining me for another installment of TIAA's Perspectives Podcast, where we'll talk about financial planning strategies, money management tips, and steps you can take now to remain on track towards your goals. Today, we're talking about responsible investing, an approach that incorporates environmental, social and governance factors with the objective of enhancing longterm performance, managing risk and creating opportunity. We'll talk about why a growing number of investors are electing to align their investments with their values and why for the first time returns have overtaken values as their primary motivation for choosing this approach. We're fortunate to have one of the industry's foremost subject matter experts on this topic, Megan Fielding, joining us today. Megan, is the Senior Director of Responsible Investing at Nuveen, a TIAA company, and she's the Head of Strategic Partnerships and Stakeholder Engagement. With more than $1 trillion dollars in assets under management, Nuveen is one of the world's largest investment managers and has been a leader in responsible investing for five decades. Great to have you with us, Megan. - [Megan] Thanks, Jim, I'm happy to be here. - [Jim] Now, Megan, I know many of our listeners may be familiar with this concept of responsible investing, but there are also a lot of misperceptions about this approach, which I hope we can clear up today. Can you begin by defining the term responsible investing for our listeners? - [Megan] Sure, Jim. Responsible investing is an investment philosophy that incorporates a broad range of environmental, social and governance factors into the investment analysis, portfolio construction and ongoing monitoring across asset classes with the objective of enhancing long-term performance, managing risk and creating opportunity. - [Jim] Megan, I know many of our listeners have probably heard the term ESG in regard to responsible investing. For those who may not be familiar, ESG refers to environmental, social and governance factors. Megan, can you give us a few examples of some of the factors that you take into consideration under each of these categories? - [Megan] Sure, examples of environmental factors are deforestation, climate, water, and waste. Examples of social factors include employee relations, supply chain, diversity, health and safety, and examples of governance factors include compensation, public policy, ethics, and corporate boards of directors. - [Jim] And Megan, a common misconception about responsible investing is that investors have to make a choice between performance or making an impact. We know that has not been the case for some time now, in fact, you addressed this in Nuveen's fifth annual responsible investing survey, which was released in June. - [Megan] Yes, and in fact, the headline of our fifth annual survey is Performance Tops Investors Motives for Responsible Investing. And what we found was that the top-three reasons investors participate or would participate in responsible investing are better performance at 53%, alignment with values at 46%, and then better risk management at 38%. - [Jim] And Megan, what do you attribute these findings to? - [Megan] Over the last five years of our responsible investing surveys, investors have consistently expressed a strong desire for both competitive returns and positive societal outcomes through their investments. This was 79% this past year, which has really only up slightly from 76%, five years ago in 2015. These results may suggest that we find ourselves at or possibly past the tipping point where investors recognize the investment attributes found in ESG, such as improving financial performance, managing risk and creating new investment opportunities by the use of relevant non-financial data in the investment process. - [Jim] Megan, you also know in the survey that U.S. investors poured $20.6 billion dollars into funds focused on ESG themes back in 2019, which is four times as much as in 2018. What do you believe is behind this significant increase in flows? - [Megan] Well, Jim, investors continue to express a strong desire for both competitive returns and positive societal outcomes. And climate change is another driving force. In fact, 3/4 of investors say that companies are risking their future if they fail to plan for a low-carbon economy. And 88% agree that environmental catastrophe has the potential to be devastating to a company's stock value. And finally, 91% of investors said that companies need to enact more policies to make them more accountable to shareholder concerns with 85% of investors indicating that companies with strong governance practices can reduce risk. So the combination of focus on return, positive outcomes and risk management is driving investors into ESG funds. In summary, we've seen that responsible investing has gone from the fringe to more forward thinking for investors. - [Jim] Those are really interesting results, Megan. You know, years ago, when responsible investing was not considered a mainstream approach, investors were often willing to accept a trade off if necessary between pursuing their values and investment returns. Now we're seeing data that supports the fact that many investors feel that environmental, social and governance factors are actually critical for helping to drive the return that they're seeking. I wanna talk more investment performance in a minute, but first I wanna ask you about something else that you addressed in the survey, specifically how financial advisor perceptions have changed. As you know, responsible investing is something that TIAA and our advisors have embraced for many decades. However, I don't believe that's been the case for the financial advisor community at large. Am I correct about that? - [Megan] Yes, you are correct, Jim. In fact, we've learned that there has been a clear jump by eight times in advisors perceptions about responsible investments. Returns that are perceived to be above market have gone from just 4% of advisors in 2017 to now 32% in 2019. A further breakdown shows that advisors perceive 60% of responsible investing to offer average market returns. So currently we are seeing advisors move past what previously was a discussion solely based on a client's values alignment to one that is now focused on the investment case, risk management and performance. - [Jim] And Megan, there are also quite a few options available to investors in this space now as well. Can we spend a few minutes talking about how Nuveen in particular approaches, responsible investing? - [Jim] Sure. Our holistic approach to responsible investing at Nuveen is built upon three key principles that are applied across all asset classes. Those principles are ESG integration, engagement and impact. - [Jim] Now, Megan, let's start with integration. How does Nuveen integrate ESG factors into the investment process? - [Megan] ESG integration speaks to how we incorporate material ESG factors into our investment processes, using ESG data, research and tools. The reason we do this is because we believe that consideration of environmental, social and governance factors can enhance long-term performance and lower risk over time. - [Jim] And Megan, let's talk about the second principal, engagement. Can you tell us why engagement is such an important part of Nuveen's process? - [Megan] Sure. For Nuveen engagement with portfolio companies has long been a core tenant of our responsible investing practice going all the way back to 1970 when we first started to engage with companies in response to our investors concerns around social justice and apartheid. Today, we partner with companies to influence their policies and work where needed and with a long-term view and focus. For example, scrutiny of social and governance factors might highlight a need for a company to embrace longer term thinking with a sense of responsibility to their stakeholders, not simply shareholders. And by stakeholders, I mean employees, customers, supply chain partners and the communities that that company services or where they operate. Based on our experience, we believe that a thoughtful long-term engagement program can strengthen a company's financial performance and mitigate its downside risks. - [Jim] Megan, that's a great point you bring up, it's not just about creating value for shareholders, but driving positive change that may impact other stakeholders and partners such as employees who work for the company, the vendors, and even the customers. What are some of the tools and resources that Nuveen brings to help accomplish this? - [Megan] Companies face a diverse set of challenges dependent on its industry, its sector and financial fundamentals. In managing and engaging with our portfolio companies on issues, we don't take a one-size-fits-all view. The way we view ESG issues and the way we engage with our portfolio companies is based on financial materiality and creating that longterm shareholder value. As practitioners of responsible investing, we seek to eliminate the connection between ESG issues and financial performance. And we encourage transparency and carefully considered actions at the government, market and issuer levels. To drive long-term change at companies that will benefit its stakeholders, such as employees and investors, we look to use proxy voting, shareholder proposals and board interactions to influence company policies and practices on ESG issues. We also work to influence legislation, public policy, global standards to positively impact all investors in this space. - [Jim] And in recent months issues like inclusion and diversity have really become increasingly relevant since the senseless and tragic deaths of, George Floyd, Breonna Taylor, and Ahmaud Arbery, and the protests that followed, we've seen a number of companies announcing policy changes or actions they're taking around inclusion and diversity. While many of these represent steps in the right direction, we acknowledge that corporate America and the country as a whole still has a long way to go. I'm curious as to how Nuveen approaches these issues at the individual company level. Megan, can you give us an example of how you're able to engage with companies to help drive change around these issues like inclusion and diversity? - [Megan] Sure, let's look at the issue of inclusion and diversity. That will typically include company disclosure on their employee demographics and equality, as well as diversity on boards, executive leadership and the talent pipeline. So for example, if we consider an information technology company, an IT company, an issue might be inclusion beyond equal pay for equal work. By narrowing in on this, firms are identifying root causes of business units most at risk of talent loss, especially among underrepresented groups when looking at gender or race. And why that is material to the outcome it has on the company is because it can really affect a number of things, such as an improved employee morale, the aligned compensation practices, it's recognition as an industry leader or even its strength and a pipeline for future talent. - [Jim] Thanks, Megan. I think that that really helps our listeners understand how these resources contribute to the third principle in your approach, which is creating an impact. This gets to the core of why so many people are choosing to invest in companies whose practices align with their beliefs and values. - [Megan] That's right, Jim. Nuveen is committed to investing to create an enduring impact on our world from the micro impact of generating lifetime income for a single person to the macro impact of creating better long-term outcomes for everyone and the planet. - [Jim] And how does that impact enter into the investment process? - [Megan] At Nuveen we measure, manage and drive positive environmental and social impact through our investing practices. If you think about it, all investments have an impact, either positive or negative. We want to be conscious of that impact. Measuring and managing impact provides new insights, reveals future opportunities, and it helps investors and clients make informed decisions to reach both their financial and nonfinancial portfolio objectives. Additionally, some investors look at frameworks such as the United Nations Sustainable Development Goals or the SDGs to see how their investments align with those universal global goals. - [Jim] And Megan, in addition to having a positive impact on the world around us, how could investing in companies that are taking steps to adopt or incorporate ESG principles and behaviors into their business practices help to manage investment risk. - [Megan] Simplistically, ESG issues are investment issues. They aren't segregated in their own silo. Incorporating ESG factors into our investment processes across asset classes is a priority because ESG information further informs our assessment of a company and helps us to more effectively manage risk associated with that company and or its sector. And as we've discussed, the investment benefits of responsible investing are enhanced performance, risk mitigation, and opportunity creation. - [Jim] Megan, the benefits you just stated, enhanced performance, risk mitigation, and opportunity creation really changed the conversation from why consider this approach to why not. Let's talk about performance for a minute because I think some of our listeners may be surprised to learn that many ESG funds have outperformed their non-ESG peers in recent months. In fact, according to CBS Money Watch, as stock markets around the globe were plummeting, most ESG funds were offering better investment returns during the coronavirus pandemic than their conventional counterparts. Of course it's important to remember that past performance is not a guarantee of future results. - [Megan] That's right, Jim. Additional studies from Morningstar in the first quarter of this year indicate overall for the trailing one year, the median ESG fund did better than its non-ESG peer group, losing less during the turbulence of that quarter. As a result, the median ESG fund outperformed the average fund in its Morningstar category by 6.5%. And to that point, I'd love to share a segment of Morningstar's commentary, which is the following. "Investors are showing by way of investment choices that they now understand that you can do well financially by doing good. Responsible investing products continue to perform at benchmark levels or greater. And during the recent market tumult, they outperformed their non-ESG peers." - [Jim] And Megan, how does Morningstar's commentary relate to what Nuveen experienced during the first half of the year? - [Megan] Well, Jim here at Nuveen, we saw eight out of 10 of our Nuveen ESG branded ETFs outperformed their benchmarks through June. - [Jim] That's really impressive. It's also important information for those who may be thinking about incorporating responsible investing into their planning. However, this is an area where investors can often make mistakes if they're not working closely with an advisor. That's because people often view responsible investing as an add-on to their existing strategy rather than a core component. Can you explain the pitfalls of this approach, Megan? - [Megan] Many investors looking to incorporate ESG factors into their portfolios, limit themselves to either excluding specific industry sectors, or they simply add a fund which can result in misaligning their portfolio asset allocation or negatively impacting their diversification because of the potential to duplicate holdings across companies, sectors, industries, or regions. We believe an alternative approach and one that is most likely to produce an optimal financial and societal outcome is for investors to seek total portfolio solutions that embed ESG factors throughout the investment process, across strategies and across asset classes. I want to emphasize that while this is our philosophy, no investment approach can guarantee results or eliminate market risk. - [Jim] Megan, I'm glad you mentioned the concept of a total portfolio solution. In our planning process, one of the first and most important conversations we have with clients is about their values and their preferences. We wanna make sure their personal values are reflected throughout the planning process from goal planning, all the way to asset allocation. This often leads to discussions about how strategies that incorporate ESG factors may or may not align with their values and their desired outcomes. I wanna pause here for a moment to remind our listeners about the importance of the planning process and working with an advisor to make sure your plan reflects what's most important to you. In recent months, I've spoken to a number of clients who are rethinking their priorities due to the pandemic and the climate of uncertainty that it's created. In many cases, they're concerned about their health, the economic impact on family members or changes in their risk tolerance due to the expectation of ongoing volatility in the markets. So touching base regularly with your advisor and discussing any changes relative to your goals, preferences or risk tolerance is really important right now. Your advisor can help you make any needed adjustments to your plan to ensure you remain on course towards your goals. Megan, before we wrap up, can you talk about any new trends that you're seeing in the marketplace and how these may influence responsible investing going forward? - [Megan] I think you just hit on it, Jim, we are living in unprecedented times, which have led to two trends we're seeing in the marketplace right now. One, given the current social discourse stemming from COVID-19 and the focus on race and equality, We have a heightened focus on the trends emerging from the current climate, such as social factors stemming from ESG, such as human capital management, diversity and inclusion. And second, the impact of these times on populations across the country and world has been and continues to be high, stemming from these impacts. There are new investment opportunities coming to market to address COVID-related global needs such as social impact bonds, where the proceeds of those bonds will be used to expand healthcare access or the purchase of much needed supplies. - [Jim] Megan, thank you so much for joining me today and for sharing your insights with our listeners. This is an area where we continue to see growing interest among investors. So we really appreciate the opportunity to bring this valuable information to our listeners. If you're interested in learning more about responsible investing, I encourage you to contact your TIAA advisor. Your advisor can meet with you to discuss your needs and help you determine if a strategy emphasizing environmental, social or governance factors aligns with your goals, values, and desired outcomes. Thank you for listening today. Have a great day, everyone. [END] Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances. TIAA-CREF Individual & Institutional Services, LLC and Nuveen Securities, LLC, Members FINRA, distribute securities products. Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. 1254728

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