Stephen M. Liberatore, CFA, portfolio manager and head of ESG/Impact – global fixed income at Nuveen, explains how it approaches impact investing and why the opportunity set in public fixed income will continue to grow.

Environmental Finance (EF): How does Nuveen approach impact investing?

Stephen Liberatore (SL): At Nuveen, we focus our public fixed income efforts on the areas where we can have the greatest impact. By utilising our proprietary impact framework, we focus on use of proceeds, transparency, and disclosure to help finance positive social, environmental, and sustainable outcomes. We call this "direct and measurable" impact investing.

Public fixed income is an ideal asset class for impact investing because it gives you more control over capital allocation decisions and empowers you to require relevant impact metrics from issuers. We realised that the fixed income asset class allows this level of specificity and granularity nearly two decades ago, which spurred me and Amy O'Brien, our global head of responsible investing, to launch the framework in 2007. Our framework hasn't really changed since then, which allows us to connect with investors, issuers, and industry groups in a consistent manner, explaining and educating on how impact investing should work. That consistency and transparency ought to help build scale via the capital markets.

Historically, when investors considered impact investing, they assumed it had to be through an alternatives allocation, like venture capital or private equity. But today, investors now understand that impact opportunities are available across most sectors of the global fixed income market. The bond market enables investors to direct capital to specific projects and programs, with well-defined outcomes, rather than providing capital at the enterprise level via an equity stake or general obligation lending.

The interesting thing about public fixed income specifically is the ability to invest for impact in a highly diversified manner within a broad asset class. Whether the investment objective is income-oriented, total return/alpha seeking, short or long duration, investors can support projects spanning renewable energy generation and transmission, affordable housing, gender equality, and rural broadband access. Increasingly, investment opportunities are arising in biodiversity through assets like blue bonds, outcome bonds, and debt-for-nature swaps.

EF: What are the key components of a successful impact investment?

SL: From an investment standpoint, free cash flow stability is critical to long-term performance. Fixed income isn't about picking winners, it's about avoiding losers. But our approach is also quite intentional regarding how issuers and management teams deploy capital. We seek capex aligned with our four impact themes.

Nuveen's size, expertise, and longevity in the marketplace has allowed us to build a strong reputation for being willing and able to look at new and unique transactions. The real key to success to impact investing is engagement with issuers, and our reputation enables that.

We spend a significant amount of time working with issuers and underwriters to engage on the factors we believe are important and structure transactions that fit our proprietary impact framework.

As a member of the original executive committee that drafted the Green Bond Principles, I am fond of saying that just because something is labelled a green bond, doesn't mean it is one. And just because a bond doesn't carry a label, doesn't mean it isn't green.

We want to ensure that when we look at any transaction, the issuer's mission and strategic objectives, the use of proceeds, and the intended outcomes all pull together into our general thesis, which is that the environment impacts society, which impacts the economy. We believe that is a virtuous cycle: beneficial for the impact portion of an investment, but also the financial side.

Critically, we are not concessionary investors. We want to outperform over time to attract more capital into impact mandates, reducing the cost of capital for borrowers, thereby making the strategic investments more profitable going forward, and more attractive to a wider set of issuers and companies.

EF: How big is the impact team and what other Nuveen resources can you draw upon?

SL: Our fixed income impact team includes me, co-portfolio manager Jessica Zarzycki, and associate portfolio manager Adam Guerino. All three of us are credit analysts by training, and we combine our impact investment perspective with the research and evaluations of over 100 fundamental analysts and more than 25 traders across Nuveen's global fixed income platform. That integration is critical for the successful performance we have been able to generate historically. We're also supported by a couple dedicated client portfolio managers, or product specialists, who work with our clients day-in and day-out to maximise our focus on markets. We tap into Nuveen's Responsible Investing team to compile our annual impact reports, deliver SDG alignment information to clients, and assist with various other data needs.

EF: What have been the key impact investing themes of the past 12 months?

SL: One of the biggest recent trends and one we are likely to see continuing is the increasing granularity of the opportunity set. Historically, marginal issuers were supranational, but now they are corporates, structured securities, or sovereigns. That has only been made possible because of the use of proceeds model.

The use of proceeds model allows people to see where capital will be deployed and what outcomes are being sought. This visibility enables issuers to identify and report on relevant impact metrics and allows investors like us to force them to do so as a condition of our participation in a given deal. Clearly articulated use of proceeds is the basis for newer opportunities like blue bonds or carbon credit transactions. We are also starting to see things like "gender lens" investment opportunities, or orange bonds, where you're able to provide capital to women in underserved parts of the world, such as south-east Asia or Africa.

EF: How do you see the growth of your team's capabilities supporting impact opportunities across the public fixed income market?

SL: One of the things we advocate strongly for is transparent and comparable impact reporting when engaging with issuers. As a large player in the space and frequent anchor order on new deals, we view our growth and market presence as a real opportunity to push for increasingly granularity of impact measurement and standardisation of reporting. We believe this is essential to credibly track progress towards meeting impact objectives.
Impact reporting and comparability is important. To the extent this is standardised across asset classes, we can create a positive feedback loop via impact reporting, allowing the industry to grow and attract capital from investors with different risk profiles and liquidity needs. This ultimately delivers more and more positive social and environmental outcomes at a lower cost of capital from diversified capital sources.