Impact investments still face challenges in differentiating themselves on the very metrics they champion, unlike conventional investments focused purely on financial returns, according to Stephen Liberatore, lead ESG-fixed income portfolio manager at Nuveen.
“It’s still a weakness,” he noted in a conversation with with Investment Officer. “At the moment, we can’t confidently say, ‘Invest in bond A because the solar parks it funds are 10 percent more efficient than those financed by bond B.’”
Liberatore, who attended last month’s Global Impact Investing Network (GIIN) Impact Forum in Amsterdam—a gathering of around 10,000 investment professionals—oversees a 21 billion dollar ESG and impact bond portfolio at Nuveen. While this constitutes about 5 percent of Nuveen’s total fixed-income assets, demand for impact bonds has risen consistently over the past few years. The global market for green, climate, and social bonds has reached 4.68 trillion dollar, according to Environmental Finance Data, with around $1 trillion in new issuances annually for the past three years.
Complex market
Despite the rapid growth, Liberatore points out that some innovations, like sustainability-linked bonds (SLBs), may dilute the market’s credibility. “They’re too non-committal,” he argues, noting that market data supports this view. “Growth in SLBs has slowed, increasing at only half the pace it did in 2023, while other segments are expanding faster.”
“It’s like asking which is more valuable—renewable energy or clean water access. These are incomparable metrics. What we can aim for is comparing investments within a single theme, determining which product yields the most impact.”
Nuveen is not shying away from innovation, having been the lead investor in the World Bank’s Wildlife Conservation Bond (the “Rhino Bond”) in 2022, aimed at boosting black rhino populations in South Africa. Nuveen also plays a significant role in initiatives like the Orange Bond Initiative, which aims to mobilise 10 billion dollars by 2030 to promote development for women, girls, and gender minorities. The initiative aligns with the UN’s fifth Sustainable Development Goal: gender equality.
Balancing idealism and returns
Nuveen’s commitment to impact investing goes beyond idealism. “Investing in a better environment is financially and economically the most rational thing to do,” Liberatore said. “The quality of our living environment directly impacts the quality of society, which in turn affects the economy.” Nuveen maintains that financial returns from impact bonds are competitive. “In our view, the initial motivation for impact bonds should always be financial return,” Liberatore stated.
Pension funds, insurers, and high-net-worth individuals each gravitate toward impact investments that align with their specific priorities—whether addressing climate change, social equity, or other themes. The result is a diverse market encompassing investments in carbon credits, sustainable agriculture, ocean conservation, student housing, wind energy, microfinance, and clean water access. These investments underscore the interdependence of environment, society, and economy, aiming for returns that are both financial and social.
Measuring social returns
Quantifying the social return of impact investments remains an elusive task. Liberatore points to metrics from Nuveen’s $21 billion impact portfolio: tons of CO2 avoided, hectares reforested, microfinance loans distributed, student housing units built, and wind-generated electricity. However, comparing these results to the investments’ costs is still challenging. “We can’t yet say how efficient these financings are in terms of impact,” Liberatore admitted. “We’re accumulating more data, but meaningful comparisons remain out of reach.”
Comparative analysis
Comparisons across different types of impact investments, such as deciding whether building student housing or protecting rhinos delivers more value, are currently impractical. “Asset owners don’t approach it that way,” Liberatore said. “They choose one or multiple themes for impact investing without comparing them. It’s like asking which is more valuable—renewable energy or clean water access. These are incomparable metrics. What we can aim for is comparing investments within a single theme, determining which product yields the most impact. But even that is still on the horizon.”
This article originally appeared in Dutch on InvestmentOfficer.nl.