Fund Complex: TIAA Funds
Management Company: Teachers Advisors, LLC
Funds Affected: TIAA-CREF Social Choice Bond Fund
Sustainable Investing Strategy: Exclusions, ESG Integration, Impact/Thematic
The fund’s investments in fixed-income securities issued by corporate entities or certain foreign governments are subject to certain ESG criteria. The ESG criteria are implemented based on data provided by independent research vendor(s). All corporate issuers must meet or exceed minimum ESG performance standards to be eligible for investment by the fund. The evaluation process favors companies with leadership in ESG performance relative to their peers. Typically, environmental assessment categories include climate change, natural resource use, waste management and environmental opportunities. Social evaluation categories include human capital, product safety and social opportunities. Governance assessment categories include corporate governance, business ethics and government & public policy. How well companies adhere to international norms and principles and involvement in major ESG controversies (examples of which may relate to the environment, customers, human rights & community, labor rights & supply chain, and governance) are other considerations.
The ESG evaluation process is conducted on an industry-specific basis and involves the identification of key performance indicators, which are given more or less relative weight compared to the broader range of potential assessment categories. Concerns in one area do not automatically eliminate an issuer from being an eligible fund investment. When ESG concerns exist, the evaluation process gives careful consideration to how companies address the risks and opportunities they face in the context of their sector or industry and relative to their peers.
The fund will not generally invest in companies significantly involved in certain business activities, including but not limited to, the production of alcohol, tobacco, military weapons, firearms, nuclear power and gambling products and services. While the fund’s advisor may invest in corporate and foreign government issuers that meet these criteria, it is not required to invest in every issuer that meets these criteria. The ESG criteria the fund takes into consideration are non-fundamental investment policies. Such criteria and the universe of investments that the fund utilizes may be changed without the approval of the fund’s shareholders.
The fund is not restricted from investing in any securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The fund’s advisor considers investments in these securities to be consistent with the fund’s investment and social objectives.
The fund also invests in certain asset-backed securities, mortgage-backed securities and other securities that represent interests in assets such as pools of mortgage loans, automobile loans or credit card receivables [Note: Mortgage-backed securities can include pass-through securities sold by private, governmental and government-related organizations and collateralized mortgage obligations (CMOs)]. These securities are typically issued by legal entities established specifically to hold assets and to issue debt obligations backed by those assets. Asset-backed or mortgage-backed securities are normally created or “sponsored” by banks or other institutions or by certain government-sponsored enterprises such as Fannie Mae or Freddie Mac. The fund’s advisor does not take into consideration whether the sponsor of an asset-backed security in which the fund invests meets the ESG criteria. That is because asset-backed securities represent interests in pools of loans, and not of the ongoing business enterprise of the sponsor. It is therefore possible that the fund could invest in an asset-backed or mortgage-backed security sponsored by a bank or other financial institution in which the fund could not invest directly.
The Corporate Governance and Social Responsibility Committee (the CGSR Committee) of the Board of Trustees of the Trust (Board of Trustees) reviews the ESG criteria used to evaluate securities issued by corporate and foreign government issuers held by the fund and approves the ESG vendor of that service. The fund’s advisor seeks to ensure that the fund’s investments in securities issued by corporate and foreign government issuers are consistent with its ESG criteria, but the advisor cannot guarantee that this will always be the case for every fund investment issued by a corporate entity or by a foreign government or agency. Consistent with its responsibilities, the CGSR Committee evaluates options for implementing the Fund’s ESG investment criteria and monitors the ESG vendors selected to supply the ESG-eligible universe. The fund’s advisor has the right to change the ESG vendor(s) at any time and to add to the number of vendors providing the universe of eligible companies. Investing on the basis of ESG criteria is qualitative and subjective by nature, and there can be no assurance that the ESG criteria utilized by the fund’s ESG vendor(s) or any judgment exercised by the CGSR Committee or the fund’s advisor will reflect the beliefs or values of any particular investor.
Additionally, the fund’s advisor invests a portion of the fund’s assets in fixed-income instruments according to TIAA’s proprietary Impact framework. As of March 31, 2018, these investments were 39% of the portfolio. These investments provide direct exposure to issuers and/or individual projects with social or environmental benefits. Within this Impact allocation, the fund seeks opportunities to invest in publicly traded fixed-income securities that finance initiatives in areas including affordable housing, community and economic development, renewable energy and climate change, and natural resources. These investments will be selected based on the same financial criteria used by the fund’s advisor in selecting the fund’s other fixed-income investments.