Investor Spotlight

Investor Spotlight: TIAA-CREF


Scott Budde, Managing Director and head of the Social & Community Investment Department at TIAA-CREF shares his perspective with the GIIN community.

Global Impact Investing Network January 26, 2010

GIIN: How does impact investing fit into the TIAA-CREF business model?
SB: The organization is engaged in impact investing as one of three socially responsible investing strategies. It's also very engaged in social screening and corporate governance-related strategies like engagement and proxy voting. The organization has a long history of involvement in all three of those strategies. The earliest was probably engagement strategies related to apartheid in South Africa. We have the largest socially-screened fund in the country which started in 1990 and is now about $9 billion. We've also had impact investing programs going back into the 1980s, mainly in real estate, focused on issues like affordable housing and sustainable development. The organization engages in socially responsible investing strategies because we know our clients want it, we think it's important to look at what kind of social impact a company we're investing in will have over the long term, and to offer clients investments that reflect their personal values. We've surveyed our clients and over half of all TIAA-CREF participants say that they strongly or very strongly agree with the statement that their investments should reflect their values. When we ask about general issues, three that percolate to the top are human rights, economic development, and the environment. It's tougher to get people to respond on very specific strategies. Part of our job as managers in the company is to translate client interest into programs and products.
GIIN: What types of impact investments does TIAA-CREF make to meet these client interests?
SB: Within the social and community investing department, we have three programs. One is in corporate social real estate, which is focused on affordable housing and sustainable development; one is in global microfinance, which is focused mainly on equity investments in microfinance institutions or funds investing in microfinance; and the third is a community bank deposit program that focuses on large FDIC-insured deposits into community banks in the U.S. We are working on a fourth program related to green building technology investments, though we haven't yet made our first investment in it.
GIIN: What criteria do you follow when evaluating a potential impact investment?
SB: First we are looking for competitive risk-adjusted returns relative to whatever asset class we're investing in. So, we are looking at areas of impact investing where we think the returns are competitive with non-impact investing type strategies. Also, many of our funds are offered in pension plans governed by retirement security legislation called ERISA. According to ERISA, you can do impact investing, but you can't let it compromise risk-adjusted returns. So we have this law to follow in addition to our own belief that the growth of the impact investing field is well served by emphasizing strategies that provide both competitive returns and positive impact. Of course, we realize, there are a wide range of impact investing strategies available and that some of these may target below market terms to achieve specific impact goals. Having these types of strategies is great; it is just not a portion of the impact investing space we can work in. However, I should add that we can often be more flexible about certain aspects of impact investing - like structuring and deal size - to allow us to do impact investing deals that we might not otherwise do if they were being considered for one of TIAA-CREF's mainstream portfolios.
GIIN: How do you measure the social or environmental impact of your investments? Do you have targets or benchmarks you must meet, similar to your financial requirements?
SB: We have fairly high-level goals and criteria. In the community bank deposit program, for example, we look at the percentage of lending or deposit-gathering that's done in low- to moderate-income census tracks based on data from the National Community Investment Fund (NCIF). Within affordable housing, we have similar criteria for investing in projects that target families within a certain range around median income. In microfinance, we look at average loan or deposit account size. Those are very rough measures and that's why we try to stick to areas that have a pretty good general story for impact investing as well. It's also why we want to support more research in those areas.
GIIN: How do TIAA-CREF clients put their money into impact investments?
SB: With social screening, there are specific funds that are screened and other funds that are not screened. The impact investing programs are all done out of the pool of assets behind a fund we call TIAA Traditional, which is a large guaranteed annuity, and it is an investment option people can allocate to within their retirement plans. The bulk of the assets in that product are not impact investing programs, but the impact investing portfolios fit within this very large product.
GIIN: How much of the TIAA traditional fund is going to these impact investments?
SB: The TIAA Traditional fund is over $180 billion, so it's one of the largest funds of its kind in the world. Because we're working with such large numbers on the institutional side, we like to size what we're doing relative to the impact investing markets we are considering, which are often relatively small. For example, in microfinance, we've signed deals worth $100 million, which makes us one of the largest institutional equity investors in microfinance in the world, even though this is a fairly small percentage of our fund.
GIIN: What types of changes do you think are necessary for more institutional investors to consider impact investing?
SB: It can be hard to convince people that Impact Investing can provide both competitive returns and positive impact. Most people think that by definition this is an area where you have to give up returns to get positive social impact. So, I would start with improved communications strategies, and drumming home that you can in fact have both competitive returns and positive social impact. The second major area would simply be research supporting this conclusion. As an example, TIAA-CREF's community bank deposit program is placing FDIC-insured deposits, through the CDARS program, with leading community development banks around the country, like ShoreBank, or Native American Bank, or New Resource Bank, or mainline community banks in low-income areas, like Carver Federal Savings in Harlem, or City National Bank of NJ in Newark. A one-year CD at Carver Federal Savings and a one-year CD with a large banking institution both work exactly the same way. Also, in our case, the community banks often have better one-year CD rates. We now have three years of experience in this program and we've worked with eight banks, and we've placed tens of millions of dollars. And it's fully FDIC insured, so there's no real question about risk. The CDARS program, which stands for CD Account Registration Service, is how these CDs get insurance for large amounts, up to $100 million. Basically, a network of banks pool together to allow a member of the network to take in a large deposit and remain insured for the full amount. So, this question of whether you get competitive returns and positive social impact, the answer in this case is very clear: yes, you have an optimal solution for these two things. But even in this case, people can sometimes be skeptical. That shows a very fundamental assumption that people can't give up even when you present them with very strong evidence.
GIIN: Does TIAA-CREF partner in deals made possible by other institutions' below market-rate investing or philanthropic funding?
SB: Those deals do exist and they're very important examples. For instance, we're an investor in ProCredit Holding, a German microfinance holding company with majority stakes in 22 MFIs around the world. They have a training academy for African staff in Mozambique, in Maputo. That training is supported with a technical assistance grant. Putting the training academy in Maputo is time-consuming and expensive but there are very strong economic development reasons to do it this way.
GIIN: How do your peers within TIAA-CREF view your work? Have you had to convince them of the value of impact investing?
SB: I think my peers find my work quite interesting though I often need to emphasize the messages around competitive returns relative to the risk. I know from experience that I need to overemphasize that. Impact investing at TIAA-CREF is within the investment area, and I report to the chief investment officer. So from the perspective of returns and risk, we are in the same position as everybody else. My team has the added responsibility of being concerned about social and environmental impacts. For example, TIAA-CREF has many deposit relationships with a wide range of banks. However, only the Community Bank Deposit Program specifically looks at social metrics as part of its decision making process.
GIIN: Do you think that your portfolio attracts new clients to TIAA-CREF?
SB: Yes. I've done speaking engagements at large academic institutions that use TIAA-CREF, and to high-net-worth clients. People have left the meeting and said, "I want to move money to TIAA-CREF because of this." We have some strategies like corporate governance, and proxy voting that apply to the entire company. Different people warm up to different strategies, which is not surprising. I do think that it's a little bit tougher if impact investing is completely walled off from everything else. There are cases where I would love to have a range of stand-alone funds for some people, but stand-alone funds have their own issues - they're much more time intensive, they require a lot of reporting. A lot of people simply like the fact that TIAA-CREF engages in impact investing. It's just part of what the company does and for some investors that's a big selling point.
A note to readers from the GIIN:

Diversity is a hallmark of the impact investment market, which has attracted traditional financial institutions, pension funds, private foundations, government-funded development finance institutions, fund managers, high-net-worth individuals, and family offices. As a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing, the GIIN aims to bring transparency to this market and to the practice of impact investing. To this end, we believe it is in the interest of the field to share a sample of the diverse viewpoints held by investors who are motivated by social and environmental considerations. The publication of such diverse viewpoints, however, should not be construed as an endorsement by the GIIN of those viewpoints or the individuals or institutions expressing them.

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