To achieve this broad and deep analytical approach, O’Brien relaunched the entire RI function and is spearheading initiatives that bring together her team, portfolio managers, research analysts—with a vision ultimately of engaging every part of Nuveen’s multi-asset boutique organization. As O’Brien explains, this is connecting the dots throughout the company, from the vision at the top level to the analysts and investment teams, and getting clear on how ESG factors can be brought into the investment process. “We’re not coming in saying don’t invest in oil, stay away from this company or that one,” explained O’Brien. “Our role is to be a catalyst for the greater adoption and ownership of ESG metrics by the investment teams themselves. Because that’s where we’re going to get traction.”
I was struck again by the focus on communication and connecting the dots that runs throughout O’Brien’s approach to leading her team. At the foreground is learning how the portfolio managers and analysts think about ESG factors: “How do they consume information? What are the barriers they have in thinking about this field? How can my team recast the RI proposition so they better understand client motivation?” Because Nuveen is a global investor, O’Brien understands the differences between U.S. investors and the European investor base, which believes incorporating ESG factors decreases risk and offers investment opportunities. In O’Brien’s view, her team is a catalyst for bringing accessible, practical ESG education to Nuveen’s portfolio managers and analysts in ways that can change mindsets and increase RI adoption.
Active vs Passive Ownership Strategies: RI Needs Both
Because ETFs and other passively managed strategies are so popular in the industry, I was interested in hearing how Nuveen is managing the active vs passive conversation. O’Brien explained that as a large shop, Nuveen uses both approaches to give a balance in portfolio offerings. As O’Brien explained, investors and advisors can have strong ESG conviction, but depending on the investment will use the ESG data in different ways: “Passive strategies are more rules-based in addition to their index-tracking,” said O’Brien, “whereas active portfolio managers often integrate ESG data into more concentrated portfolios.”
O’Brien agrees with other thought leaders in RI that there is a significant role for passive investing. She points to the increasing demand for sector specific passive strategies by investors as a catalyst for her team: “You can’t just offer an S&P 500 or Russell 3000 indexed ETF anymore,” said O’Brien. “Advisors need more ESG-focused building blocks in their product offerings, especially for clients who want more of their assets invested in RI strategies.”
A big change for Nuveen over the past couple of years is working with key partners, including MSCI, to develop custom indices. Said O’Brien, “Based on the fact that companies aren’t yet required to report out on ESG metrics, working in collaboration with our core ESG research providers is critical. Nuveen wants to take more ownership of the recipe for how the company lists are created in the first place.” For their Social Choice Equity Fund, Nuveen designed a custom index that was offered in 2018 and included a higher overall ESG performance threshold for inclusion.
Also in 2018 Nuveen launched a suite of eight custom indices that were co-designed with MSCI. These include five domestic and two international equity ETFs and one fixed income strategy, all of which incorporate ESG data into their securities selection process. “With these new fund offerings we have expanded our coverage needs to thousands of companies globally,” O’Brien explained. “This customized, proprietary approach is Nuveen’s way of delivering the kinds of passive strategies that investors and their advisors are demanding going forward.”
Coming Full Circle: Back To Values And Investing For Impact
O’Brien and I talked about how Nuveen and the RI industry have changed over the past 20 years. O’Brien observes that as an industry we’re coming full circle, from starting as values driven to ESG ratings/performance driven and back to values. “Our parent company’s client base first brought the issue of apartheid to our board in the 1970s,” offered O’Brien. “The heavily academic board embraced the philosophy of finding a balanced approach linking social issues our clients cared deeply about through engagement and proxy voting.” In fact, then TIAA-CREF was one of the first to offer a Social Choice annuity option in 1990.
O’Brien explained that many firms in this part of the industry shied away from this priority for a while in an effort to go mainstream and professionalize portfolio management standards. When TIAA’s charter was changed in the late 1990s to expand outside of pensions and the academic base, the firm was able to offer retail mutual funds to a broader community of investors.