In less than a decade, Rekha Unnithan invested $1 billion in a niche part of the market that was once so small most people on Wall Street hadn’t even heard of it.
Unnithan is co-head of impact investing at Nuveen, which oversees more than $1 trillion of assets, including over $5.8 billion in impact strategies. She joined the firm in 2012 to develop a business for investments that can both make money and leave a measurable positive impact on society and the environment. Just last week Nuveen attracted $150 million from institutional investors for a strategy focused on combating income inequality and climate change.
Yet for all her success, she cautions against what she sees as reckless growth. That’s a prescient warning as more and more managers pile into her growing enclave.
“Impact investing is now all of a sudden having its moment,” said the 38-year-old Unnithan. “It’s cool now and is getting a lot more attention. We must be very mindful though that this is done correctly to actually have impact as opposed to just moving capital around and calling it impact.”
Investments that are simultaneously socially and financially rewarding have a natural appeal at a time when the deadly coronavirus pandemic and racial unrest in the U.S. have highlighted inequalities and heightened social tensions. Nuveen’s investments focus on low-income consumers’ access to health care, education and housing, all of which can be prohibitive in a system that disproportionately favors those at the top.
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Impact funds differ from so-called ESG investing by targeting specific outcomes, such as reduced carbon emissions or disease eradication, rather than simply avoiding companies that pollute or make cigarettes, or seek to persuade corporate executives to become more sustainable by adopting better governance practices.
While fund managers have been investing with a social purpose for decades, impact investing has gained in popularity in recent years, with many of the biggest names in finance now boasting impact funds. Germany’s Allianz Global Investors and U.S. private equity giant KKR are among managers that have recently raised impact funds. Nuveen says it made its first impact investment in the private markets, where most deals take place, in 1989.
Impact funds managed $715 billion at the end of December, up from $8 billion in 2012, according to the Global Impact Investing Network, or GIIN, and there are reasons to expect the numbers to to keep going up.
The International Finance Corporation, the private-lending arm of the World Bank, last month sized the potential impact market for private assets north of $2 trillion; in public markets, where it is “more difficult to credibly invest for impact,” $10.6 trillion of stocks and bonds have the potential to contribute to positive impact.
New York-based Unnithan focuses on impact in private equity and real estate. She said a typical impact investment for Nuveen ranges from $20 million to $60 million.
Nuveen wrote a $31 million check to Mumbai-based Aavishkaar Group, which invests in startups and early-stage companies in sectors including financial services and food processing in the emerging markets. It invested $50 million in View, a Milpitas, California-based company that makes glass used for energy-efficient windows that changes its tint depending on the brightness of the sun to reduce glare. (The Teachers Insurance and Annuity Association of America, which owns Nuveen, has said it plans to install View windows in its midtown Manhattan headquarters).
Other impact investments include about $30 million of financing for an affordable housing project for low-income seniors in Brooklyn and a $10 million investment in Oakland, California- based Revolution Foods, which provides chef-designed meals using fresh ingredients to schools in underserved communities.
Nuveen said in a report detailing its impact-investment activities from 2009 to 2018 that, by its count, the firm has preserved 20,000 affordable housing units across the U.S., allowed 14 million low-income patients to receive medical treatment and helped avoid 1.8 metric tons of carbon dioxide from being emitted.
The decade’s top performers also outpaced broader markets over the short term.
Unnithan declined to provide information on the performance of Nuveen’s impact funds, though she said they have been “in line with expectations on a risk-adjusted basis.” While Unnithan says her funds seek both social and financial rewards, she’s aware of certain misgivings traditional investors have about the sector.
“A lot of criticism of impact investing, in particular private equity, is yeah you can invest the money, but are you going to get any return of capital,” Unnithan said.
The boom in impact investing — a term coined by the Rockefeller Foundation — also reflects the proliferation of ESG investing. For some ESG managers, impact investing is a natural progression of their sustainability work; for others, it’s an opportunity to win more clients by offering differentiated products.
Schroders CEO Peter Harrison said on a podcast in March that “ESG won’t exist in five years time — it’ll be what people are expected to do.” Instead the “puck is going” towards impact, he said, with investors asking what’s the effect of what they’re doing, are they making a positive contribution to the world, and how can they measure it. For firms that successfully offer impact investing, “it becomes genuinely differentiating,” Harrison said.
ESG is now a minimum standard for investors, says Emma Hunt, who has run responsible investment teams at St. James’s Place Wealth Management and Hermes Investment Management. Impact, by comparison, is likely to be a “deal maker” since it’s a way of demonstrating positive contribution and offering clients something different, she said.
When it comes to selling products, lines can blur.
“If I’m being cynical, there’s an element of getting ahead in that everybody is now beginning to use impact instead of ESG, and so it just becomes another codification of public equities to help you sell more products,” said Andrew Parry, head of sustainable investing at London-based Newton, a $57 billion investment manager owned by BNY Mellon Investment Management.
Axa Investment Managers, which oversees $1.4 billion across eight impact funds, distinguishes between three types of funds:
- ESG integrated, where certain sin stocks like tobacco producers and companies with poor ESG scores are screened out
- Sustainable funds, which take further steps to refine the investable universe, in some cases by adjusting the portfolios to target a specific key performance indicator such as companies’ carbon footprints
- Impact funds, which are designed to have a direct bearing on society and often focus on one of the United Nations’ Sustainable Development Goals
With such a plethora of investing styles and funds on offer, not to mention a growing catalog of buzzwords, it’s important that the impact market “scale with integrity,” said Unnithan, citing a quote from GIIN’s CEO.
“Impact investors will be held to a higher standard,” she said. “We have to be even more careful so that we’re not accused, because we’re the do-gooders, right? We can’t get it wrong.”
