TIAA-CREF Asset Management. Responsible Investing Primer

Transcription

1 TIAA-CREF Asset Management Responsible Investing Primer

2 Responsible Investing Primer This document explains responsible investing, its four primary approaches, and potential benefits for investors. Executive summary The many facets of responsible investing An expanding investment discipline that recognizes the importance of environmental, social and governance factors across asset classes Assets committed to responsible investment approaches are increasing rapidly, with $6.57 trillion in the U.S. at the beginning of 2014, an increase of 76% since the start of Primary approaches include: funds that explicitly incorporate ESG criteria in the investment decision-making process active ownership, where investors use their formal rights and informal influence to encourage companies to address ESG-related issues impact investing, usually private market investments that are made with the dual intention of generating financial returns alongside measurable social or environmental benefits ESG integration, incorporating relevant ESG risks and opportunities in conventional investment analysis and decision making Investor demand for market-based solutions that can promote financial and nonfinancial value creation continues to grow Responsible investing: Promoting financial and nonfinancial value creation Responsible investing covers a wide range of investment decision making and active ownership approaches that apply environmental, social and governance (ESG) factors across asset classes. Many other terms and phrases are associated with responsible investing, including ethical investing, socially responsible investing, green investing, impact investing, sustainable investing and active ownership. Most of these terms refer to the ways that ESG information is integrated into investment analysis, portfolio construction and monitoring processes. Responsible investment concepts and principles are often used by investors with a long-term horizon. Responsible investing has become the globally recognized umbrella term for this discipline, in part due to the United Nations Principles for Responsible Investment (UN PRI 2 ), a global institutional investor network that has gathered steam since its launch in UN PRI now has over 1,350 signatory firms, including TIAA-CREF, representing $45 trillion in assets under management. This is a rapidly evolving and multifaceted discipline, using a number of different strategies sometimes singly, but often in combination. 1 Report on U.S. Sustainable, Responsible, and Impact Investing Trends 2014, US SIF Foundation, The Forum for Sustainable and Responsible Investment, pg UN Principles of Responsible Investing website: 1 TIAA-CREF Responsible Investing: Primer

3 TIAA-CREF: A leader in responsible investing TIAA-CREF believes that considering ESG criteria in our investments can produce competitive, long-term financial returns for our clients, while also promoting broader economic development, positive societal outcomes and a healthier environment for future generations. For over 40 years, TIAA-CREF has been committed to the practice and continuous advancement of responsible investment and its key approaches. As a signatory to the UN Principles for Responsible Investment, TIAA-CREF is committed to incorporating ESG issues into investment analysis and decision-making processes. With more than $17 billion under management across the Social Choice product suite, TIAA-CREF is one of the largest U.S. managers of portfolios that reflect explicit ESG criteria. 3 Through its TIAA General Account, the firm also makes social impact investments, which are private market and real estate investments in projects, companies and funds with the dual intention of generating a financial return and measureable social and/or environmental benefits. TIAA-CREF is committed to active ownership practices across all asset classes. 3 Assets under management are as of March 31, TIAA-CREF Responsible Investing: Primer 2

4 Responsible investing on the rise Responsible investment isn t a niche strategy. The principles and practices are used in a variety of ways and by a broad range of global investors. More than one in six dollars under professional investment management in the U.S. was invested in responsible investment strategies, according to a study by the Forum for Sustainable and Responsible Investment (US SIF Foundation) at the start of This represents $6.57 trillion in responsible investment assets up 76% since the start of 2012 and includes both assets subject to ESG incorporation strategies and shareholder engagement. Rapid growth in PRI signatories $35 1, , , The number of UN PRI signatories has grown rapidly since 2006, representing $45 trillion in assets under management. W Assets under management (US $ trillion) Number of Signatories Beyond public equity, responsible investing is increasingly applied in fixed-income strategies, directly in real-asset classes, such as timber, agriculture, and real estate, and alternative asset classes, such as private equity. ESG incorporation $6.2 Trillion Shareholder resolutions $1.7 Trillion Sustainable and responsible investing in the United States reaches $6.57 trillion at the start of 2014 Most investment strategies incorporate several approaches to responsible investing. This graph shows the overlap between ESG incorporation assets (applying ESG factors in investment decision making) and those involving active ownership. Source: US SIF Foundation Note: ESG incorporation assets in this figure include those in Community Investing Institutions 3 TIAA-CREF Responsible Investing: Primer

5 Responsible investing encompasses diverse goals Investors adopt responsible investment principles for different reasons and sometimes seek to meet several goals simultaneously. Some investors would like to see their beliefs reflected in their investment portfolios; this approach is often referred to as values-based investing. Others are motivated by financial goals and seek the enhanced returns that they think can be achieved. Still others are driven by economic goals and believe that addressing sustainability megatrends will benefit the economy overall. The practice of responsible investing has been gradually evolving for decades and in recent years, has been refined with new approaches. One of the earliest expressions of responsible investing principles involved excluding investments in companies associated with certain business activities, such as tobacco or firearms. This practice, known as negative or exclusionary screening, is typically a values-driven approach and may represent the desire to apply moral or personal values to portfolio construction. Exclusionary screening is still used in many religious-based strategies or to fulfill mandates against investing in specific companies or industries. In many cases, this approach is used in combination with other strategies. Over time, the field has evolved to encompass approaches that acknowledge the relevance of ESG factors to long-term value creation. By seeking solutions for some of the world s sustainability megatrends climate change, resource scarcity, health and income inequalities investors are striving to build a more solid, sustainable foundation for future growth. Identifying how to benefit from these opportunities requires dedicated commitment from the investment management firm in resources and analytics. It is best to view responsible investing as a continuum of approaches that uses ESG criteria in investment decision making. In some cases, the application will be quite direct; in others, the consideration of ESG factors will be part of a larger matrix of information used to inform investment research and decision making. This diversity of implementation appeals to investors who may have different motivations for engaging in responsible investing. What these reasons have in common is a desire to incorporate the consideration of ESG factors and a long-term view, both in terms of economic return and demonstrable ESG impact. TIAA-CREF Responsible Investing: Primer 4

6 Responsible investing approaches ESG-focused funds ESG-focused funds, historically referred to as socially responsible investment (SRI) funds, explicitly include ESG criteria in their investment decision-making process. This is one of the more established responsible investing strategies with a history spanning several decades. Many early SRI funds initially focused on exclusionary screens. Over time, the application of ESG criteria expanded as ESG-related company research improved and client expectations changed. Many funds continue to apply some degree of exclusionary screening. However, wider adoption of a best-in-class, ESG leadership approach favoring companies that are industry leaders in managing relevant ESG risks and opportunities is becoming more prevalent. For example, a company leading its industry in natural resource usage may have more proactive policies and programs to protect biodiversity, and commitments to source raw materials from areas of lower ecological impact, compared to its peers. Additionally, select funds now emphasize thematic ESG-related criteria, for example, focusing on investments in companies primarily involved in clean technology or renewable energy. Impact investments Impact investments in companies, organizations, and funds are intended to generate measurable social and environmental impact alongside a financial return. This approach builds on a long history of community investing, which seeks to create positive social outcomes and financial return in areas such as affordable housing. Based on the core principle that market-based solutions have the potential to play an important part in addressing global social and environmental challenges, the sector has broadened to encompass additional areas, including: sustainable agriculture, affordable and accessible healthcare, clean technology, and financial services for low-to-moderate income communities and underserved populations. More capital is flowing into this area of responsible investing, leading to the identification of new opportunities across emerging and developed markets, sectors, and asset classes, with a wide range of investment return expectations. Impact investments can include private equity, private debt, real estate, cash or deposits. Growth of responsible investing, $7,000 6,000 5,000 US $ Billion 4,000 3,000 2,000 1, W ESG Incorporation Only W Shareholder Advocacy Only W Overlapping Strategies Although responsible investing began with emphasizing shareholder advocacy, it has evolved to include other approaches, such as ESG incorporation. Source: US SIF Foundation 5 TIAA-CREF Responsible Investing: Primer

7 ESG integration ESG integration considers relevant ESG risks and opportunities in conventional investment analysis and portfolio construction. Investment managers use different techniques to facilitate the incorporation of ESG information within their research and decision-making processes. These include expanding access to ESG-related research and tools to analysts and portfolio managers, modifying existing due diligence processes to include relevant ESG risks, and developing asset class or sector-specific ESG policies. Tactical and technical considerations are often specific to an institution or fund manager as well as an asset class. For instance, in assessing commercial real estate investments, an investment manager may consider how environmental initiatives, such as reducing energy and water consumption, may enhance the value of the asset. ESG factors may be a source of opportunity for investors. The increase in the quantity and quality of ESG metrics and data available to investors is promoting greater adoption of ESG integration in the market. Investment managers are developing new frameworks for promoting disclosure and assessing the effects associated with ESG factors. Improving ESG impact measurement supports investors efforts to extend responsible investing practices across all asset classes. Active ownership One of the most familiar responsible investment approaches is shareholder advocacy, usually expressed as engagement with publicly traded companies. The practice of active ownership is longstanding, encompassing proxy voting, filing or co-filing shareholder proposals, and dialogue with companies on ESG-related issues, such as executive compensation, environmental behavior, social responsibility and other industry-specific issues. Investors often use this approach, whether or not they have applied explicit ESG criteria when constructing portfolios. Many institutional shareholders believe they have a fiduciary duty to engage with the boards and management of their holdings. Increasingly, investors apply active ownership across asset classes. The specific activities differ depending on the assets involved. In public companies, most institutions focus on proxy voting and other more formal methods of engagement. If the investment is in a private company, the institution may use board seats to advocate for ESG-related principles. In the fixed-income arena, institutions may provide guidance to green bond issuers on characteristics needed to satisfy investor demand and disclosures on usage of proceeds. An investor in real assets, such as real estate, can engage with property managers on sustainability issues. Conclusion Responsible investing is now a globally recognized investment approach, gaining momentum among all kinds of investors. Although initially focused on shareholder engagement and community investing, the practice of responsible investing is now combining the full range of approaches into an overarching framework of investment activity. Globally, the emerging emphasis on responsible investing is facilitating more and better ESG research and tools to aid implementation. The overriding goal is long-term value creation, so that economic, social and environmental sustainability are delivered as an outcome of the investment management process alongside opportunities for robust, long-term investment returns. Learn more at Nuveen.com or call Nuveen operates as an independent subsidiary of TIAA-CREF. TIAA-CREF Responsible Investing: Primer 6

8 Resources For more information about responsible investing: UNPRI: UN Principles for Responsible Investment The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors practicing the PRI s six Principles for Responsible Investment. ILG: Investment Leaders Group Formed in 2013, the ILG is a three-year project designed to promote understanding of how investors can realize positive long-term investment returns by managing environmental and social factors. USSIF: Forum for Sustainable and Responsible Investment The Forum for Sustainable and Responsible Investment is the US membership association for professionals, firms, institutions and organizations engaged in sustainable and responsible investing. GIIN: Global Impact Investing Network The Global Impact Investing Network is a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing. Learn more at Nuveen.com or call Nuveen operates as an independent subsidiary of TIAA-CREF. The initiatives described in this material involve risks that could result in loss of principal. Because social screening criteria exclude some investments, any products using these strategies may not be able to take advantage of some market opportunities or trends available to other products that do not use these criteria. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value. TIAA-CREF products may be subject to market and other risk factors. See the applicable product literature, or visit tiaa-cref.org for details. TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products. Each is solely responsible for its own financial condition and contractual obligations. Nuveen operates as an independent subsidiary of TIAA-CREF. TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association of America (TIAA). Teachers Advisors, Inc., is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association of America (TIAA) Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF), 730 Third Avenue, New York, NY C (05/15) MBR-CRIPRMR-0315D