Investing for impact
"When traditional investors look at impact investing they sometimes think they have to sacrifice returns. Fortunately, there are many examples of impact investing that lead to both competitive returns and positive social impact. In fact, it can be a very competitive field of investing activities versus mainstream assets," says Scott Budde, head of the global social and community investing department at TIAA-CREF. This is why TIAA-CREF, with $440bn (€319bn) assets, has been involved in impact investing since 2006, and socially responsible investing since the 1980s.
While SRI focuses on avoiding industries such as tobacco or guns, impact investing is about proactive investments that "pursue financial returns while also intentionally addressing social and environmental challenges", explains Jed Emerson in his new book ‘Impact Investing'.
TIAA-CREF manages $11bn assets with three programmes that use environmental, social and corporate governance (ESG) factors, including the impact investing programmes. "Impact investing is becoming more mainstream," says Budde. "Large institutional investors are starting to look at it. Examples include the $139bn California State Teachers' Retirement System, the $542bn Government Pension Fund of Norway, and the two largest Dutch pension funds, PFZW and ABP."
Budde says: "The demand for SRI strategies comes from our clients, approximately 4m people working mainly in the higher education sector. Many of them are both aware of and involved in environmental and social initiatives, no matter their political opinions. These issues are a frequent topic of conversation with the 15,000 institutions we serve. We've had several RFPs with a specific request for impact investing."
TIAA-CREF has won mandates thanks to its impact investing strategy. Last year, the Board of Trustees of the Unitarian Universalist Association (UUA) ended a 10-year relationship with Fidelity Investments and chose TIAA-CREF as the new record keeper for its $178m retirement plan, because of a "growing commitment by the UUA to genocide-free investing coupled with its disappointment in Fidelity's persistent refusal to consider human rights in their investment choices", UUA explained. "When interest in impact investing gets to this level, large institutions pay attention," says Budde.
TIAA-CREF has around $800m committed to impact investing: its programmes in the US focus on affordable housing, community bank deposits and green building technology, while internationally they focus on microfinance - investing in private equity funds that specialise in this business. "We don't have a target relative to total TIAA-CREF assets but prefer to look at our position relative to the size of each investment opportunity," says Budde. "All the impact investing programmes are done out of the pool of assets behind our TIAA Traditional fund."
Budde's department is within the investment area of TIAA-CREF. "We use the knowledge and resources in other departments," he says. "For example, we have a large programme specialising in affordable housing and often rely on TIAA-CREF's expertise as a significant real estate investor."
Budde prefers not to quote specific return goals, but he claims that his department's results are competitive with private equity funds and that they have a risk level that is lower than the stock market. "In the last three years microfinance, for example, has been growing in economies that are not as connected to global markets as many developed market financial institutions are and, in general, this has resulted in more stable returns than those in the broad global banking system," says Budde.
TIAA-CREF has over $120m committed to microfinance globally: it is a very small portion of all TIAA-CREF equities, but it is big for the microfinance industry.
Budde's also invests in community developments (CDs) at community banks in low-income areas. "These CDs are guaranteed up to $100m, fully FDIC insured through the CD Account Registration Service programme," explains Budde. "Many of these banks can offer better rates than traditional banks while simultaneously serving their local communities. It's a good example of how impact investing can generate competitive returns and positive social impact at the same time"