When Amy O’Brien, global head of responsible investing (RI) at Nuveen, spoke at Barron’s 2018 Top Women Advisors Summit, the “conversations, energy and kinds of questions” were completely different from four years earlier. “Instead of legal, fiduciary questions, advisors now want to know how to implement RI,” O’Brien told me. “They’re saying RI is critical to their future, to transition management and to attract younger people to work in the practice. The plea I heard in the room was not just that we need better products, but to simplify the message: ‘Can you all just get on the same page on how you report out?’”
Early this year O’Brien and I spoke at length about RI and the role her team at Nuveen has in being a catalyst both for the development of differentiated ESG and impact products and for addressing a persistent communication gap about standards for measuring material ESG data across the economy. As O’Brien pointed out, Nuveen, as a universal owner and microcosm of the industry, is in the perfect position to lead the way.
Connecting The Dots: Going Beyond KPIs
When O’Brien joined Nuveen’s parent company, TIAA, in 2005, she was the first person dedicated to focus specifically on responsible investing. Today, she is tasked with developing a holistic RI vision and unified framework across Nuveen and TIAA. She brings more than 20 years of experience in RI research and CSR reporting. Her work at the Council on Economic Priorities (CEP), a pioneering public company research organization that carried out analysis of the social and environmental records of corporations, makes her the ideal person to act as a bridge between the earlier, more mission driven part of the industry and the more mainstream, ESG metrics driven phase of RI growth in recent years.
Based on her experience with both investors and advisors, retail and institutional, she knows the industry doesn’t make it easy for anyone to connect the dots around RI. So when O’Brien says, “We have a taxonomy problem,” she understands the complexity of the issue: “What do we mean by responsible investing? Is it exclusionary screens? Shareholder activism? Impact investing strategies? Dedicated mutual funds?”
Her team at Nuveen is addressing this communication gap internally in two ways: First, by focusing on client RI needs and working with key partners on streamlining and clarifying all marketing and informational material that goes out to investors and advisors; and second, by working with the Nuveen investment teams to systematically embed material ESG factors within investment decision making processes.
For example, using a traditional industry approach, advisors would focus on key performance indicators (KPIs) when talking to clients about investments. O’Brien is clear, however, that KPIs alone don’t capture the conversations that many clients want to have. “People come to RI with many different motivations,” she explained, “and we need to focus more on that client journey: better education and understanding of what options are available.”
After conducting extensive surveys and focus groups and learning that clients often don’t understand the technical jargon around investments and major RI initiatives, O’Brien built out part of her team to work exclusively on translating high-level conceptual language to be clear to the end user: “We’re aiming for a consistent narrative, streamlining what we mean by RI, getting a handle on the taxonomy and working really carefully with distribution partners so we’re speaking the same language.”
How Better Metrics Can Change Reporting And Drive RI
When I asked O’Brien how CSR and ESG reporting has changed in the last 20 years, she pointed out that although we’ve made progress as an industry in identifying key ESG metrics, we still have a global public policy gap in what is considered material and what companies are reporting against. In her view, this calls for multistakeholder engagement: getting companies, policy makers and investors to collaborate on what metrics matter. Her team at Nuveen acts as what O’Brien calls “the middle child,” identifying connections and matching information that investors most want while working across the board to embed metrics in core research processes.
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.
Nuveen’s investor clients are still demanding values alignment as their starting point, while also expecting ESG integration. O’Brien believes an important next step in the industry is to segment and understand more clearly why clients come to ESG mission aligned investing. An engineer might buy into into ESG risk management protocols, whereas a public policy wonk might like the way that values-first investing aligns with global impact frameworks like the U.N. Sustainable Development Goals (SDGs). “We have to show them how ESG matters across the board and how we’re making progress on measuring impact.”
For O’Brien, how to measure impact is the next big wave for our industry. “I think we’re in early days,” offered O’Brien. “You can invest in a company with a high ESG rating, but how does that translate? How were carbon emissions reduced based on your investment?” If ESG is about evaluating a company or investment issuer, impact is about measuring “what’s really changed in the world or in a community because this investment was made.” These are the kinds of proof points, according to O’Brien, that are going to win the hearts and minds of a broader range of clients that might be attracted to this field, but still misunderstand or don’t yet believe that investors can create real change and also achieve their financial objectives.
O’Brien is convined that more constructive dialogue and collaboration between companies, investors and policy makers will go beyond the current polarization around policy issues like climate change. For O’Brien and her team, these are investment issues. And as more dollars flow into RI investment strategies, more green bonds are issued, more low carbon standards get traction, O’Brien will continue to lead, “to connect the dots and show investors we are taking action on these issues and we’re trying to bring these conversations together."
Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.