Ask the Expert with Nuveen: Impact investing in fixed income

Stephen served on the ICMA Green Bond Principles Advisory Council and was a member of the initial executive committee. He is a member of the UN Capital Development Fund’s working group on Climate Insurance Linked Resilient Infrastructure Finance and serves on the UN’s Joint Sustainable Development Goals Fund’s Blue Economy Investor Advisory Group.

Chipo Muwowo: In your view, why should fixed income managers create impact bond investing frameworks?

Stephen Liberatore: In today’s investment product landscape, a dedicated impact bond investing strategy is probably the easiest way for an investor to control how their capital is being deployed. In my view, it’s a natural extension of the risk-reward discussion. It’s especially incumbent upon fixed income managers to know what’s in their portfolio and be able to explain their capital allocation decision making process to investors. Additionally, many topics within “ESG” and “impact investing” are ultimately subjective, which makes having a framework vital for both managers and investors.

Chipo Muwowo: Tell me more about Nuveen’s approach to public fixed income.

Stephen Liberatore: Put simply, we combine the concept of ESG Leadership with impact investing. Our focus is a core fixed income portfolio with higher ESG quality that includes direct and measurable impact investing aims. While we also have pure impact mandates such as green and social bonds, we manage a combination of the two for certain investors. Our ESG Leadership process starts with the Bloomberg Barclays Multiverse Index as the widest possible subset of the fixed income universe. My team then works with Nuveen’s separate Responsible Investment team to identify any issues or controversies we believe are relevant to ESG quality on a sectoral basis. We then work with third-party data providers to create an eligible universe that incorporates both our views and theirs. This process allows us to obtain broad-based fixed income exposure, as well as valuable opportunities to engage with various kinds of issuers.

"Our focus is a core fixed income portfolio with higher ESG quality that includes direct and measurable impact investing aims."

Chipo Muwowo: Talk me through how you incorporate “impact” goals within your framework.

Stephen Liberatore: We’re a “use of proceeds” impact investor which means that we’re looking for opportunities that have a direct and measurable social and/or environmental outcome based on our proprietary impact framework. We focus on four thematic areas: affordable housing, community & economic development, renewable energy & climate change, and natural resources. What we’re looking for in each of these areas is, first and foremost, attractive total return potential. We then want to see if there’s alignment with one or more of these four thematic areas. We also need to be able to show how the proceeds are being deployed, as well as be able to receive back from the issuer and/or appropriate third-party relevant impact metrics.

Chipo Muwowo: What are some common misperceptions you hear from investors and how do you go about engaging them on these?

Stephen Liberatore: The main misperception we hear from investors is the idea that you sacrifice performance to be a responsible investor. That’s just not true and we have the data to show it, including our own performance metrics over a 10-year period. What we’re trying to demonstrate is that the process has changed. When I first started in this space, we were just ending the concept of exclusionary screening. Bond issuers were either good or bad. Now, while we certainly have some restrictions around things like alcohol, tobacco, and firearms, we’re not excluding entire sectors. Back then, you might’ve decided not to invest in oil and gas. But when commodities rallied, your portfolio was structurally deficient.

In our view, that approach is outdated as it doesn’t allow for us to deploy capital to those issuers who are maximizing their opportunity set to become more sustainable while building a diversified portfolio. It also creates little incentive for issuers to engage with managers like us. Given that today our focus is on best-in-class opportunities, we’re now able to get broad market exposure. It’s also led to a change in the discussion because everyone – issuers, managers, and investors – is focused on maximizing the opportunity to become more sustainable. Last year, our team had 115 engagements with issuers where we talked to them about our approach, what we’re looking for, and how to structure a transaction that we care about. Overall, I think that makes us better stewards of our assets, and a better representative for our investors.

Chipo Muwowo: What challenges have you faced when creating and working within your framework?

Stephen Liberatore: We’re working in an area where definitions are somewhat subjective and that’s a challenge. It’s meant that we’ve had to really define the process we’re utilizing and continually evaluate it, ensuring that we’re also achieving third-party validation. On the impact side, we had a thirdparty validate that our framework was aligned with the International Finance Corporation’s Operating Principles for Impact Management. It’s a very rigorous process that’s primarily targeted towards private equity. So, we’re constantly trying to be in a place where we’re at the forefront of the market. But that means continual work, evolution, and focus.

"We’re working in an area where definitions are somewhat subjective, and that’s a challenge. It’s meant that we’ve had to really define the process we’re utilizing, and continually evaluate it."

Chipo Muwowo: Impact bond issuances have risen sharply in recent years. What is one major risk associated with this?

The article continues on page 9 of our Special Report: 'Bond Investing: Innovating for impact'