Looking for value in the ESG ecosystem with Nuveen

Nuveen launched a dedicated ESG strategy back in 1990. How did that come about?
AOB: Nuveen – and TIAA more broadly – has been involved in investment-related activities leveraging ESG factors since the 1970s, when the first shareholder proposals on social issues began appearing on company ballots in the US. We launched our first ESG-focused funds in 1990, in response to growing client demand for such options.

For us, responsible investing is not an asset class or product line. We see it more as a horizontal: you look at the [Nuveen] principles of ESG integration, engagement and impact as horizontals that run through and connect all asset classes. We still have funds dedicated to that, but the majority of our efforts over the last couple of years have been to connect across all investment teams and [ensure] the adoption of these principles across the organization.

We’ve done a lot in terms of how we organize ourselves around the three principles [and] how we’re all connecting through technology. When we launched our first focused product in this space, the kind of data points we had about companies were what they made and where they had operations! Now the whole ESG ecosystem has changed dramatically, so we’ve had to look to see whether we are set up optimally to digest information and… make sure we’re partnering appropriately with investment teams.

How does that work operationally?
AOB: We are a multi-boutique model [so] we are trying to address how we get the most material and relevant ESG information to our investment teams, partnering with [them] on those three principles to develop strategies that are based on value creation and risk management. We had to invest in our internal infrastructure to ensure our portfolio manager teams and analyst teams had that information at their fingertips.

Despite all the progress that’s been made in the ESG ecosystem, it’s still hard for mainstream investors to pull it into their models and leverage it in the normal course of investment decision-making. We’ve tried to work on that internally and combine our own insights with some of the information we receive from research providers, which still play an important role in this field, particularly because ESG information is still not standardized or consistent across issuers.

One of our most recent hires was a data scientist who could help us think through how we consume this information, how we push it out to our own engagement teams and how clients want to see information about what we are doing across the board, not necessarily just for ESG-branded funds.

There are various challenges with data collection in this area, such as a lack of tangibles. What do you take into account when looking for ESG data providers?
PR: We went through an intensive due diligence process to find data providers that would not only provide information we could rely on but also get us the coverage we need. But it’s true that some of these E and S issues don’t have specific data points. Take culture, for instance, where you’re talking about a human capital issue. There’s no culture score out there investors are relying on.

There may, however, be underlying data points that could point to cultural issues bubbling up within a company. Does it have a high turnover rate? For companies that operate in more dangerous industries, what does the accident rate look like? You can look at general policies around diversity, discrimination, stuff like that. There are definitely data points you can look for.

Do you as a firm tend to set priority ESG topics, or do you address them as they apply at specific companies?
PR: We try to leave room in the program to focus on the things that bubble up during the year, the headline stuff. We have, however, chosen some key themes over the past couple of years to do a more targeted outreach on. What we attempt to do is look at the issue through a different lens from that used by others previously.

One example around board quality is… diversity, which other investors have looked at. But what we thought would be a different approach was to look at the small and mid-cap companies in our portfolio to see where those boards may be lacking gender diversity.

The rationale is that at small and mid-cap firms, their board and directors are essentially a pipeline of directors to graduate onto larger companies. If we develop that pipeline of younger directors at some of these smaller companies, we’ll hopefully help tackle a systemic issue around gender diversity on boards in the US.

We also thought this issue wasn’t unique to the US, so we looked at how to expand it globally and settled on Japan, which historically has had boards that are very insular, lack independence and lack diversity – specifically gender diversity.

We’ve been long-time institutional investors in that market, and we have a reputation for being rational, respected and progressive on certain ESG issues, so we wrote a letter to our top 50 companies that lacked any gender diversity, asking to speak with them. We had a great response and we’ve been meeting with those companies and explaining the value of diversity, as well as revisiting the process by which these firms identify and nominate director candidates.

In terms of engagement, many companies are trying to up their game by – for example – meeting with investors outside the proxy season. What do you see companies doing better?
PR: Engagement is happening year-round, not just during proxy season. In fact, some of the better, more in-depth discussions happen outside of proxy season because we don’t have the bandwidth to do it during the heat of things.

Companies are still trying to get their bearings, but it’s clear there are internal teams coming together across organizations that participate in outreach so they can be informed and talk about how their company is approaching ESG issues. You’ll often get somebody from [the] corporate secretary [office], somebody from investor relations, often somebody from a sustainability function, somebody who deals with compensation and benefits.

One of the biggest trends is boards participating in many of these meetings. My team meets with hundreds of companies throughout the year and often those conversations will include board leadership so we can get a sense right from the board as to how it is looking at environmental and social risks and how [it thinks about] those themes of governance around accountability, transparency and ethics.

Those conversations are invaluable: they have opened up a lot of discussions between our analysts and portfolio managers and the board leadership.

To what extent do you look at the opportunities that some of these ESG issues raise?
AOB: That’s very much part of what we’re trying to achieve. For a long time, the industry was focused on risk management and I think some firms still are, but our analysts and portfolio managers want to focus on the opportunity side. Companies want to talk with us about their overall growth strategy and how these issues fit into that.

This interview appeared in Corporate Secretary’s special report on ESG engagement, reporting and integration