Integrating ESG at Neuberger Berman
What are Neuberger Berman’s assets under management?
As of December 2018, $304 bn.
When did you join the firm and what is the scope of your role?
I joined two years ago in April 2017. My role is to lead the ESG investing activities across the whole company – our equities business and also our fixed-income and alternatives businesses. We’ve had a dedicated sustainable equity team since 1989, but when I joined it was the first time we had someone working across different asset classes. Part of the reason for creating the role was that there are more themes that are consistent across asset classes than previously, such as best use of engagement and best use of data.
My job really has three components. The first is working with research teams (equity, credit and private equity) to analyze ESG issues that are material to corporate performance. I don’t have a separate team. My goal is to work with our tenured professionals and help them understand the material ESG issues in their industry, and then work with portfolio managers on how they can better consider ESG opportunities and risks as they engage with companies.
The second component is that we have clients that want specific products targeting specific sustainability outcomes. Our goal is to ensure that all of our existing offerings integrate ESG characteristics into their methodology. Today, 60 percent of those assets systematically integrate ESG into the decision-making process, so there is proprietary analysis taking place to construct the portfolio, which shapes portfolio managers’ thinking.
We expect that number to go up, but there are obviously some niche strategies that might be harder to embed these strategies into. The final component is me spending a fair amount of time working on our thought-leadership relating to ESG.
How do you approach ESG research? Do you subscribe to third-party data providers?
We use data providers like FactSet and Bloomberg but we also look for the very specific data feeds we’re interested in and use a very wide range of other sub-data points. For example, we will look at NGOs and industry groups that have single-issue datasets on a specific material topic. We also use data from regulators and company filings, plus well-known ESG data providers like MSCI and Sustainalytics.
The key for us is using the right sub-data points to reach the right conclusion. In most of the proprietary ratings we’ve built, a significant portion end up relying on the personal judgment of the analyst. There are plenty of issues we think are material that are very difficult to get data on, so our analysts talk to the companies they’re researching.
For example, in the pharma sector, drug pricing is a very important social issue central to the business. That’s too complex and nuanced to take a benchmark number on a one-to-10 scale. It’s important for our analysts to go and talk to the companies they invest in to understand what they do with their pricing.
A significant number of environmental and social issues are ultimately linked to the fundamentals of the business and its competitive advantage, so when we ask about these we don’t say, ‘This is an ESG question’. We put out an article on our website from Jared Mann [senior research analyst in the global equity research department], who covers chemicals.
He talks about how he analyzes the strengths and weaknesses of those companies. One example he gives is of a company that has been working to innovate its production to implement recycled plastics. That could be framed in lots of different ways – whether it will grow, capture market share, in which markets it will be popular and how it affects the valuation growth story for the company.
What’s key for us is that it’s Jared who is having the dialogue with the company and then making the decision about the buy recommendation and price target for that company. When it’s someone like Jared having that conversation rather than a separate stewardship team, I think it becomes a dialogue that firms embrace and welcome.
Do you have a particular ESG reporting framework you recommend issuers use?
The ideal is for companies to use an SASB-aligned data table, but that’s less common than we would like, though some companies have gone down that path now. It’s materiality-driven, comparable, focused on the most important issues and, I think, it’s cost-effective for companies.
Then, of course, we are always looking for companies to place that data into the broader strategic narrative. Why is it you’re going to build or strengthen your leadership on ESG issues? Whether that’s through an annual update, strategy update session, annual report or something else, we like to hear that link being made.
Reporters for Corporate Secretary and sister publication IR Magazine are sometimes pointed to a lack of ESG questions on earnings calls as a sign they don’t matter to investors and analysts. What is your response to companies that say they don’t receive ESG questions?
The data shows that it’s coming up in the Q&A portion of earnings calls more frequently. When you look at the language choice of CEOs on earnings calls, there has been a growth in CEOs talking about sustainability subjects, though I’m not sure that a good-enough job is being done of linking it back to business performance and materiality.
But the earnings call isn’t necessarily the most natural venue for those questions to come up. We have our proprietary rating of all our equities. We haven’t talked to every one of those companies about ESG because it might not be the most pressing thing that quarter or that year. But that doesn’t mean ESG is not making a difference to our portfolio construction and investment decisions.
Last year we engaged with 50 percent of our equity assets under management and 60 percent of our credit assets under management on an ESG topic. Those companies may not have classified [the engagement] as related to an E, S or G topic, but we do, and it shapes our decisions.
How would you like to be engaged by issuers on ESG topics?
We’re always open to talking about this and hearing what companies are doing, and to providing feedback and being supportive. We have analysts who are part of the SASB standards group because we want to provide our perspective on what it is that we want companies to disclose.
We’re very keen to have a dialogue with companies on this. I’d love to see companies reaching out ahead of proxy season, not just on CEO compensation structure, but also to frame this as a broader conversation. I think that would be a more progressive thing for investor relations professionals and corporate secretaries to do. We don’t need to think about this as a separate dialogue – embedding this into the discussion proactively is a sign of leadership.
For instance, if you flick through the slides the chief executive and CFO present, there’s always a slide that has all of the sustainability prizes the company has won. I always wonder why they don’t use that as a slide to report on SASB metrics and how the firm is allocating capital toward more sustainable operations for the company.
This interview appeared in IR Magazine sister publication Corporate Secretary’s special report on ESG engagement, reporting and integration