Most asset managers have room to grow when it comes to environmental, social, and governance investing, but a select few remain a notch above the rest. AllianceBernstein, Amana, and TIAA/Nuveen are not ESG leaders but are ahead of the pack.
Since Morningstar embarked on rating money managers’ commitment to ESG in 2020, it has become clearer what separates the leaders from the laggards. This is the second article in a series of four that seeks to delineate those differences by profiling firms from each tier of the Morningstar ESG Commitment Level for asset managers: Leader, Advanced, Basic, and Low. This installment highlights three firms with Morningstar ESG Commitment Levels of Advanced.
Advancing the Field
The chart below shows how AB, Amana, and Nuveen stack up versus the other nine firms this series profiles on key datapoints: total firm assets, percentage of assets in ESG-focused funds (as defined and classified by Morningstar), and asset-weighted average Morningstar Sustainability Rating (a peer-relative measure of ESG risk).
Though it’s a small sample size, the scatterplot reflects the variety of the U.S. ESG marketplace, which includes large, diversified asset managers as well as pure-play ESG firms. Unlike the three ESG Commitment Level Leaders recently profiled—Boston Trust Walden, Calvert Research and Management, and Parnassus—AB and Nuveen have most of their assets in non-ESG funds. Amana’s Shariah-compliant funds are classified as exclusionary, rather than ESG-focused.
Still Ahead of the Pack
Amana, AllianceBernstein, and Nuveen have sound ESG philosophies and sufficient resources to support their efforts, but each falls short of Leader status in one way or another.
All three firms signed the UN-supported Principles for Responsible Investing nearly a decade (or longer) ago, and each has advanced by boosting resources and improving the quality of their ESG investment processes. AB and Nuveen, however, have diverse and decentralized fund lineups, so sustainability is not as core to the firm’s culture compared with small firms founded on ESG philosophies. Amana, on the other hand, is a small firm that has invested in accordance with Islamic principles for more than 25 years.
The three have developed proprietary ESG research frameworks that underpin the efforts of their well-resourced analyst teams. Nuveen shines for its team’s breadth of ESG experience, its robust use of third-party data sources, and its ability to attract talent in a competitive hiring market. However, a separate, centralized ESG team is not the only effective approach. Amana’s analysts, for example, conduct ESG and fundamental research, driving a collaborative process.
The firms’ approaches to active ownership also differ. AB stands out with transparent guidelines for proxy voting and engagement that clearly articulate the firm’s stance on environmental and social issues. Nuveen has a similarly advanced approach, but Amana falters on engagement with portfolio companies, partly because of its lack of bandwidth to carry out these activities. Still, all three firms voted in support of more than 80% of the key ESG shareholder resolutions they voted in 2021.
Each family could disclose more about their funds’ sustainability characteristics. For instance, AB and Nuveen both publish ESG and climate-focused metrics for ESG-focused funds but provide less for the rest of their funds. Amana recently expanded its fund-level ESG disclosures but could offer more, such as carbon metrics.
Since becoming one of the earliest members of the Climate Action 100+ initiative in 2017, AB has advanced climate investing research. Since 2019, 250 AB investment professionals have taken classes on integrating climate science with investing that the firm created with Columbia University. AB is expanding the climate focus in its fund lineup and active ownership strategy, too. In 2021, AB launched three climate funds and co-led engagements with Petrobras PBR and Sasol SSL, two of the world’s largest oil and gas companies.
Amana’s Islamic investment philosophy overlaps some with mainstream ESG approaches. It avoids tobacco, weapons, alcohol, gambling, and pornography. Amana has invested along these lines for more than 25 years, but as ESG standards have evolved, so has the firm. In recent years, it expanded the investment process to consider diversity and pay equality, as well as carbon emissions and plans to reduce such emissions.
TIAA, Nuveen’s parent company, was an early adopter of ESG investing. The more than 100-year-old firm started to manage teachers’ pensions, which have long been in the forefront of what used to be known as socially responsible investing. TIAA launched the CREF Social Choice Account in 1990 and became an early signatory to the UN-supported Principles for Responsible Investing in 2009. Since it acquired Nuveen in 2017, the firm has prioritized impact investing, especially in fixed income and private markets, and it ranks among the best for transparency in impact reporting. As of June 2022, the firm’s flagship impact-focused bond fund, TIAA-CREF Core Impact Bond TSBIX, amassed roughly $6.4 billion in assets, almost double the U.S. runner-up.
ESG Risk and Impact
The three firms have diverse offerings that cater to different investor preferences in terms of ESG risk and impact. While these portfolio-level metrics are not a formal input to the Morningstar ESG Commitment Level methodology, they complement one another.
As shown in the exhibit above, Amana’s funds tend to avoid material ESG risks, leading to High and Average Morningstar Sustainability Ratings (5 or 3 globes, respectively). Meanwhile, roughly 75% of AB and Nuveen’s funds earn Sustainability Ratings of Average or higher. While AB and Nuveen manage their funds’ exposure to ESG risk better than peers, they lag Amana on this measure.
While ESG risk weighs the effect ESG factors might have on a business’s success, impact measures a company’s contribution to positive societal change. Morningstar Sustainalytics’ Impact Metrics calculate the percentage of a given company’s revenues that are associated with one of five impact themes, and the Morningstar Portfolio Impact Metrics aggregate those revenue exposures to the fund level.
Although none of Amana’s funds explicitly target sustainability themes, their values-based approach drives high levels of exposure to impact themes such as Climate Action and Basic Needs. For instance, Amana Income AMANX holds Bristol-Myers Squibb BMY, which derives nearly 90% of revenues from developing treatments for major and neglected diseases such as cardiovascular disorders and cancer.
These three firms may not tick every box for sustainability-focused investors, and they have room to improve. They’re still a notch above peers, though.
Raj Modi contributed to this story.
The author or authors own shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies.