US Special: TIAA-CREF, head of the SRI class

Company plans new SRI strategy to add to microfinance, sustainable real estate and community banking.

by Hugh Wheelan | February 7th, 2008

Like all good academics, TIAA-CREF is busy preparing its next thesis to build on an impressive body of work on socially responsible investment. The subject is ingrained in its history. The organisation, set up almost 90 years ago by philanthropist Andrew Carnegie as a non-profit provider of low-cost retirement plans and insurance for teachers and researchers in the United States, is today a mixed pension and insurance fund with a financial services arm that runs third-party money. Combined assets are more than $435bn (€300bn). The company runs dedicated socially responsible investment across three core parts of its structure: the $9.19bn CREF Social choice account, a defined contribution fund available only to traditional member institutions in the higher-education, medical and social fields, the CREF Social Choice fund, a $500m US mutual fund, and allocations made out of its sizeable in-house insurance assets.
The insurance portion is where TIAA-CREF has been taking innovative steps in areas such as microfinance, social real estate and community banking. Amy O’Brien, TIAA-CREF’s director of social investing, says the group
will soon launch a new dedicated SRI investment strategy for assets within the insurance account, but that it is too early to give details. A move into clean tech investment could be a logical step for a company that has been at the forefront of environmental and social investing.
O’Brien says: “We are also looking at ways we can add elements to the CREF social choice fund because we see growing market interest in specialist products.” Within the insurance segment, TIAA-CREF’s programmes represent what O’Brien calls a “win-win” policy: “Our approach is the so-called double-bottom line: financial returns comparable with what is in the market, allied to social commitment.” Importantly, the approach has the backing of clients. In February 2006, the group conducted telephone interviews with 501 investors in the CREF Social Choice Account (SCA) and 501 non-SRI participants. Of the non-SCA participants, 67% said shareholder activism was important, with 65% giving the same support to social screening and 66% to community investing. O’Brien says: “The kind of people we serve
are very aware. They want to safeguard their financial future but also want to be part of the solution to social and environmental issues.” This mandate led to the creation of the group’s Global Social and Community Investing Department led by Scott Budde, in which O’Brien works. Budde reports directly to TIAA-CREF’s chief investment officer, signalling the importance of the department’s work to the company’s overall investments. The raising of global human rights as a key issue in the member survey led in December, 2006, to the launch of a four-year project to invest $100m in microfinance. Its first allocation was a $43m private equity commitment to ProCredit Holding, a German microfinance specialist, which itself invests via a network of microfinance banks, notably in Eastern Europe and post-conflict countries in Africa. O’Brien says: “What better way to champion human rights – given that we are not a relief agency – than with economic credit? We are looking for private equity-like returns and there are both debt and equity investment possibilities now in what is a diverse industry with many financial players.”
Another growth area is its corporate and socially responsible real estate portfolio. Investment in the sector dates back to the 1980s and now totals just over $500m, mostly in direct equity stakes in commercial housing developments in economic development areas across the US. O’Brien says: “For a long time the portfolio was focused on affordable housing, but later adapted to include support housing to enable key workers like teachers and nurses to live in the communities they serve. SRI real estate is really exploding in the US, so
last year we hired Cherie Santos-Wuest as a specialist director because we see a lot of opportunity. There is a significant shift towards green and sustainable real estate and we have expanded our focus into sustainable mixed use and retail properties.

“SRI real estate is really exploding in the US.”

This includes building efficiency programmes, which saves both our tenants and us money, as well as developments that are transport and transit friendly. A lot of these trends are converging in the property sector.” The third current leg of work by the department is in community banking. Historically, TIAA-CREF placed deposits to a capped level of $100,000 in different community banks, particularly in areas hit by the loss of jobs in manufacturing sectors. In January, 2007, the company took advantage of a government initiative under the Federal Deposit Insurance Corporation to issue larger certificates of deposit: “We placed $22m last year in Shorebank Pacific, the US’ largest community bank and we think there are opportunities for us to expand the programme in the coming year. We get deposit yields comparable to US treasuries and communities get capital where it is needed,” says O’Brien.
Aside from these initiatives, the fund’s main SRI fund, the $9.19bn CREF Social Choice Account – launched in 1990 – is a comprehensively screened fund based on a research partnership with KLD Analytics. O’Brien says the first stage is a traditional exclusion filter, which she
says is still very important in the US, particularly with faith-based investors. The fund’s holdings are then assessed for environmental, social and governance issues before the adoption of an investment universe, which in-house fund managers use to construct the portfolio.
The broadening of TIAA-CREF’s charter in 1997 to enable it to sell asset management services led to the creation in 2000 of the Social Choice Fund, a mutual fund with both institutional and retail share classes and now valued at $500m.
At the same time, spanning the group’s entire assets is a separate, dedicated team for corporate governance and proxy voting, a product of 30 years activity dating back to corporate pressure from faith-based groups on issues
such as South Africa boycotts in the 1970s. O’Brien says: “Our trustee board was involved back then in examining how we should use our shareholder voting rights. Over the years, that trustee role has been sustained and we still have active committees on corporate governance and social responsibility.”
She believes the same US governance activism is now going mainstream in terms of actual investing: “There have been many misconceptions in the past about SRI. People thought that activity for a social good could not be good for investment. I think investors are now talking about these things in a different way and see that the alignment of the two makes sense. We see a lot of people in the US getting involved.”