INTERVIEW: ‘Now is the moment for impact investing’

First there was responsible investing (RI), then attention shifted to environmental, social and governance (ESG) principles, and more recently there has been a buzz around impact investing.

A growing desire to make a positive impact on people and the planet – and an increasing recognition that real estate has a role to play in this – has spawned a distinct investing style that proponents say goes beyond traditional ESG metrics.

Whether spurred by the pandemic, climate emergency or a generational shift driving young people to seek more purpose in their lives, the urge to actively contribute to a better world and society is gaining momentum. And tapping into it are some of the world’s biggest investors and asset managers, with strategies that intentionally seek to forge positive change alongside financial returns.

One such asset manager is Nuveen Real Estate, which recently launched a global impact investing ‘sector’ focused on sustainable communities and residential wellbeing, with aspirations to reach $15 bn (€14.9 bn) in real estate assets under management by 2026. The US giant, a pioneer in the field through investments carried out on behalf of its parent company, the Teachers Insurance and Annuity Association of America (TIAA), says the new strategy will seek to address ‘some of the most pressing social and environmental challenges in the US, Europe, and the Asia-Pacific region’.

Although the bulk of the targeted AUM is likely to be realised in the US, steps are already under way to get the strategy going in Europe, where it could reach $3-4 bn in due course. An impact living platform backed by institutional investors is taking shape in Germany, while groundwork for similar impact-led strategies is being carried out in the UK.

The overriding objective of the new global venture is to increase the supply of social and affordable housing for low-income and disadvantaged populations, while also focusing on regeneration projects within healthcare, education, and transport services.

At the same time, the investments are intended to support Nuveen’s goal of making its property portfolio net zero carbon (NZC) by 2040.

‘ESG cuts across all asset classes and all strategies, it’s just good business. However, impact investing goes further than that, it specifically aims to generate solutions for people and the planet via a distinct approach. It deserves its own strategy,’ says Tanja Volksheimer, senior portfolio manager at Nuveen who leads the recently launched German strategy.

Both Volksheimer and Ainslie McLennan, who oversees UK Balanced Funds at Nuveen and is involved with setting up the UK and European strategy, believe the time is ripe for impact investing to go big in Europe. ‘It’s a perfect time bearing in mind what’s going on around us from a climate and a societal perspective, and the UK is a particular situation in that regard because it has so much social inequality,’ says McLennan. ‘The time is now from a global perspective and in terms of a shift in mindset about what we all mean by having intention in our investments.’

‘We’re seeing a lot of demand from both investors and from stakeholders, including ourselves, the employees, wanting a purpose-driven company,’ adds Volksheimer.

Proactive approach
At the heart of impact investing is a proactive approach that seeks to produce direct benefits for people and the planet while generating market-rate returns. These benefits or impacts must be clearly defined at the outset – referred to in the jargon as ‘intentionality’.

Strategies must also stipulate how they intend to create additional positive impact above and beyond that which would have occurred as a matter of course – known as ‘additionality’. Importantly, the impact has to be measurable (‘outputs’ and ‘outcomes’) and sustained over a meaningful period of time.

Nuveen’s 30-year track record of impact investing in the US on behalf of a socially conscious and vocal parent company is an important driver of the global real estate push, says Volksheimer. ‘The teachers behind TIAA have always questioned us about our ethical and sustainable approach, how we were deploying their money. Some specifically asked how real estate can help provide solutions to varied global problems.’

For both the German and UK strategies, Nuveen’s European teams are drawing on the firm’s experience of investing in affordable housing in the US. While the target audience and regulatory environment – including legal and taxation regimes – differ strongly, the same key performance indicators (KPIs) and metrics can be used to measure impact objectives.

Says McLennan: ‘It’s all different per country, and it’s for us to become detectives and experts in all these different areas to make sure we’re getting it right for investors. But we’re very well represented in Europe in terms of our office footprint and that is a very good first filter of how different systems work in different countries.’

For firms normally focused primarily on the financial performance of an investment, scouting assets and formulating a strategy with an impact lens often means entering new territory, particularly with regard to the societal aspects. Every investment is preceded by extensive research into the social make-up of the area and how it compares to other regions in terms of household composition, disposable income, demographics and a host of other metrics.

‘What we do is look for research material that underpins our strategy, that says: this is the challenge,’ explains Volksheimer. ‘For example, households which may not be exactly poor but which do not have any money on the side. Can they afford to live near their work, is there public transport close by, can they afford a car, do they need a car and so forth? Can we take that household and prove that they actually need access to affordable housing and that if they had it, they could actually spend more money on sending their children to a better school, or on better hygiene, or food and nutrition?’

Research tools
Several tools exist to help with answering these questions. The ‘Gini coefficient’, a measure of income inequality within a nation or social group, is one yardstick that can be applied. Says Volksheimer: ‘Germany is not an emerging country but we do have our problems, we have to make sure that inequality is reduced, so we’re monitoring cities for that.’

A widely used measure in the UK is the Index of Multiple Deprivation (IMD), which assesses local areas according to seven ‘dimensions of deprivation’, with indicators such as income and health, living environment, and barriers to housing and services. IMD datasets help investors like Nuveen understand the needs of local authorities right down to the granular detail of smaller subregions, and therefore provide a good snapshot of how deprived an area actually is.

Identifying locations for impact strategies also involves its own complexities, notes McLennan: ‘If you buy housing in an area of deprivation that already has a lot of housing, you’re not bringing as much to the party as you could. Whereas if you’re putting in healthcare in an area that’s really lacking it, that has a lot more additional impact.’

In the UK, the government’s ‘Levelling Up’ agenda – an ambitious programme to boost living standards and end geographical inequality – is also relevant. Its objectives tie in with many impact investing goals and although much of the detail still needs to be worked out, local pension funds and other institutional investors are keen to participate, says McLennan. ‘There’s a lot of interest, they want to be part of something really positive and need to meet levelling up agendas, particularly in their own locations.’

Public-private partnerships
Since affordable housing provision has traditionally been the domain of the public sector, forging partnerships with local authorities is key for private firms like Nuveen.

‘From a UK perspective what we’ve been working on as a kind of blueprint for how we should move forward is really working with local authorities,’ says McLennan. ‘It’s a really good time for the private and public sectors to get on the same page about what we can do to generate positive change.’

‘Getting on the same page’ means being absolutely clear about roles and intentions, she adds: ‘You have to burn away any misunderstanding there may be about what a landlord is. I think historically there may have been a bit of landlord arrogance – you came in with a business plan because of the financial return you were looking to get. If you set out objectives that are wider than that – so, there’s a financial return, a carbon return and a societal return – and they’re objectives of a fund, very quickly all that arrogance disappears because you have to really understand a community properly in order to deliver on those.’

In Germany, Nuveen teamed up with a non-profit foundation specialised not only in the development of multifamily housing, but also in dealing with disadvantaged households. ‘They have experience in bringing people who are on the edge of society for whatever reason – it could be financial or non-financial – back to the centre. This meets our objectives of urban inclusion and residential stability,’ says Volksheimer.

Like McLennan, she underscores the importance of establishing the right partnerships. ‘We have the tools to manage the funds, but we need the municipality, the developer and the property manager and operator on board to make things work. Alliances like the one we have set up with the foundation are crucial to the success of a strategy.’

In the UK, where Nuveen’s strategy is still at an early stage, the firm is looking to take a diversified approach that covers not only housing but also commercial buildings. Says McLennan: ‘We think there’s a benefit to straddling both and there’s a lot of impact to be made by doing that. You can be potentially more influential in a positive way in some of the locations targeted.’

The aim of the UK strategy is to work with existing footprints, she adds. ‘We’re very careful about where we choose to acquire assets, partly because of our carbon target – we don’t believe in creating lots of embodied carbon if we don’t have to. While we wouldn’t completely rule out small developments, the aim is to work with what’s already on the ground and to repurpose and work with local communities to establish what they really need from these buildings.’

Measurement challenge
Measuring the social impact of an investment remains a challenge, not least because of the qualitative nature of many of the targeted benefits. How, for example, do you measure increased quality of life, better access to opportunities and a greater sense of wellbeing? Unlike with environmental impact, where several common metrics and benchmarks exist such as GRESB (Global Real Estate Sustainability Benchmark) and CRREM (Carbon Risk Real Estate Monitor) – as well as mandatory regulations like the SFDR (Sustainable Finance Disclosure Regulation) and EU Taxonomy – no such uniform system has yet been devised to measure social impact.

Says Volksheimer: ‘The measurement side of things is something that is widely discussed in the industry because you’re not looking at output so much – in other words counting households or residential units – but at outcomes which you can’t grasp as easily such as residential stability and empowering people to lead a better way of life. It’s more about communication, actually talking to the tenant and engaging with the community, bringing in services and giving the right impulses and then finding out if they have had a positive impact.’

Nonetheless, measurement tools and guidelines do exist and are likely to evolve as the sector matures. A minimum requirement appears to be alignment with the UN’s sustainable development goals (SDGs). In addition, many impact investors and managers like Nuveen use the Operating Principles for Impact Management as a basis for their own proprietary systems and frameworks. Another tool, created by the Global Impact Investing Network, is the IRIS+ system for measuring, managing, and optimising impact.

What about the financial returns?
Volksheimer and McLennan stress that the social and environmental gains from impact investing need not be at the expense of financial returns. ‘We believe that impact strategies can make market rates that are comparable to those of a regular residential strategy, which proves that the social, environmental and financial return can co-exist. It’s just a different resilience, the return equals the risk you’re taking on,’ says Volksheimer.

As for the UK strategy, being able to diversify into commercial assets means different asset styles can be injected into an investment to spread risk, observes McLennan. ‘It means you’ve got different levers at different points during the asset management – so you can be driving the financial return on part of an asset at the same time as you might be on a longer business plan to provide the societal impact from another.’ Injecting debt is another potential ‘lever’ to boost financial returns, she says.

Based on the feedback from investors so far, the return projections have been very well received, according to McLennan. ‘Some are so keen on the impact element, they would almost forego a bit of the financial return in order to nail the extra bit on the societal or carbon piece. It shows there really is genuine appetite for something that makes a positive difference.’

Investors are also prepared to wait for positive outcomes. ‘Direct property is a long-term investment, and I think impact investing is probably taking it one notch further,’ she says. ‘So, if you’re giving yourself, say, three-five years to be NZC on a building, the societal impact might take five-six years – it’s more for an investor style that really understands that, and wants to be in it for the long term and be part of a transformation.’

For now, Nuveen is taking an opportunity-driven approach to its impact strategy in Europe, partly reflecting the fact that some jurisdictions are further ahead in their thinking and embrace of impact investing than others. This contrasts with the US, where strategies can be ‘scaled up’ easily due to the size and uniformity of the market, says McLennan.

‘The US is very scalable, it’s had huge projects and I would imagine the lion’s share of the new global strategy to be concentrated there in the short term. Europe will start as pockets and we’ll build up that framework as we go along. Besides doing more in Germany and getting going in the UK, you could imagine us eventually doing something in the Nordics or Netherlands.’

The investor demand is certainly there. Says McLennan: ‘We do meetings with investors across different European jurisdictions and there’s not just interest, there’s a lot of enthusiasm – and they really have a vision as well.’ Volksheimer concurs: ‘The investors in the German fund are very motivated, they love having a say in how their money is allocated, and being able to make a positive difference is very appealing.’


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