Making an impact with fixed income

Impact investing is an increasingly compelling consideration for core bond allocations

The market for publicly traded bonds that provide intentional, direct and measurable social and/or environmental impact has evolved significantly.

Investors seeking to incorporate impact goals into their fixed income portfolios now have a deeper and more diverse opportunity set.

Over the past ten years, the impact bond market has grown rapidly to approach or even exceed the size of many established bond markets. The breadth of issuers has multiplied substantially, the range of tenors increased, and the uses of capital have broadened across social and/or environmental concerns.

Recent developments include blue bonds that focus on ocean preservation and restoration, and orange bonds that raise funds to support initiatives related to gender equality. Social impact investment has grown with areas such as racial justice and even vocational training generating significant interest and activity. COVID-19 relief bonds funded the manufacturing of personal protective equipment, increased staffing at hospitals, expanded access to vaccinations and other health services, and, in some countries, unemployment benefits for workers displaced by COVID shutdowns. In 2022, the World Bank issued the first-ever Wildlife Conservation Bond — dubbed the Rhino Bond given the endangered animal population the proceeds will support.

Improvements in reporting and the development of frameworks and regulations across the industry have also helped investors allocate capital and track the real-world results of their investments with more precision.

Today, there are ample opportunities for investors seeking compelling risk-adjusted absolute and relative returns while financing initiatives that are driving positive environmental and/or social outcomes. At Nuveen, we have been refining our impact bond framework for more than 15 years with a focus on transparency and disclosure. We have identified several best practices for investors focused on expanding their exposure to impact bonds.

1. Start with intentionality

Identify the specific causes or areas of social and/or environmental impact your institution wants to focus its efforts on. In developing our fixed income impact framework at Nuveen, we engaged our clients in discussions and evaluated the opportunities across bond market sectors. We then decided to direct impact capital across four themes: affordable housing, community and economic development, renewable energy and climate change, and natural resources.

2. Make impact direct and measurable

An institution needs to provide clarity on how it will deliver on its impact intentions. At Nuveen, we use the following guidelines for impact bonds:

• Direct: The capital raised must fund specific projects or initiatives that deliver a clearly defined environmental and/or social benefit, including pure-play issuers; typically, general purpose debt does not meet this standard.
• Measurable: The issuer must be able and willing to disclose key performance indicators through impact reporting for the project or initiative. Such disclosure enables investors to assess efficacy on a financial and outcome basis.

3. Prioritise engagement with issuers

Engagement with issuers is an essential aspect of Nuveen’s approach to responsible investing broadly and impact investing particularly. As one of the world’s largest fixed income managers, we maintain strong relationships with issuers, underwriters, policy makers, ratings agencies and asset owners. We use these relationships to engage in ongoing dialogues about how to structure bonds, what characteristics are needed to satisfy investor demand and the appropriate level and quality of impact disclosure and reporting.

We explore these steps and the trends that are shaping the impact bond market in more detail in our latest paper: Innovation in impact bonds | Nuveen

Stephen M. Liberatore, CFA, Head of ESG/Impact, global fixed income at Nuveen

Nuveen

Nuveen, the investment manager of TIAA, offers a comprehensive range of outcome-focused investment solutions designed to secure the long-term financial goals of institutional and individual investors. Nuveen has $1.1 trillion in assets under management and operations in 27 countries. Its investment specialists offer deep expertise across a comprehensive range of traditional and alternative investments through a wide array of vehicles and customised strategies.

With more than 30 years of experience in impact investing, Nuveen has deployed over $10 billion in impact investing strategies that deliver measurable social and environmental benefits to people, communities and the planet. Nuveen’s strategies pursue positive social and environmental impact alongside competitive financial returns across a broad range of asset classes, offering a range of investment opportunities that support positive outcomes, in both private and public markets. For more information, please visit www.nuveen.com/impact

Source: Nuveen, 31 Dec 2022

Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.