Investing in impact bonds

One of the key questions that family offices and high-net-worth investors ask during their dialogue with private banks and investment managers is whether they must sacrifice competitive returns in order to achieve sustainable outcomes.

US-based Nuveen is one of an increasing number of asset managers trying to convince the investment community that this trade-off is no longer necessary.

“We have shown our clients that you can have both financial returns and positive, environmental and social impacts,” says Jessica Zarzycki, portfolio manager, ESG/impact fixed income at Nuveen.

With environmental, social and governance (ESG) strategies now able to be incorporated into traditional asset allocation models, investors can gain comfort from measuring their risk profiles and financial performance against a much broader peer group. This comparison allows them to view the evidence of how an ESG-linked strategy performs compared to old school approaches.

Investors seeking a manager with a robust framework in the ESG arena should first seek a team with experience and a strong track record, says Ms Zarzycki.
“Our impact framework is based on two simple criteria,” she says. “Direct use of proceeds means we are able to control how our capital is being allocated toward specific environmental and social projects. And the second element is being able to measure the outcomes from those projects.”

Last year, her fixed-income impact team engaged  with 115 bond issuers. “We want to do upfront due diligence so that we know what we’re putting into the portfolios, and so that they make sense for our frameworks as well as our clients,” she says.

One of the key trends Nuveen is witnessing is diversification beyond the mainstay of windfarms and solar energy providers into areas such as electric vehicle programmes and environmentally friendly commercial real estate. The next significant development, believes Ms Zarzycki, echoing current industry thinking, is that of social and environmental factors reinforcing each other.

“When you’re thinking about women-led business in certain areas, such as agriculture and healthcare,” she says, “issuers are starting to blend some of these social and environmental outcomes, which is always great to see.”

Fixed income, she believes, is better suited to impact investment than equity strategies. “From a size and scale perspective, when you think about fixed income, we can drive a significant amount of change through impact investing with  use of proceeds and our direct and measurable approach,” she says. “And then we can work with issuers to bring these innovations to the marketplace and do that in scale. From a measurability standpoint, we strive for greater granularity and disclosure in impact reporting than current market norms.” 

For more information, please visit: www.nuveen.com/impact