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Neuberger Berman: A sustainable approach that doesn’t compromise performance

Hendrik-Jan Boer
11 February 2022

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The last two years have transformed societies, economies and technologies, and delivered us to a turning point for companies and investors alike.

This has put a spotlight on sustainability and a growing interest in sustainable investing, among both institutional and retail investors. The rise of the “conscious consumer” is increasingly holding corporations and governments to account through buying behaviour and shareholder activism, and there is increased appetite especially among younger investors in sustainable investments. At the same time, regulators are implementing new directives across borders to address environmental, social and governance (ESG) issues and transparency.

This has created a new wave of high-quality opportunities as investors strive to make an impact with their capital.

ESG products and assets have grown exponentially over recent years and there is now over $35 trillion under management1 which accounts for nearly a third of all the assets that are managed professionally from a bank and an investment fund perspective.

Choosing sustainable investments does not mean having to compromise on return; it’s a conscious decision to promote social stability, environmental protection and good governance, especially post-pandemic which has raised interest in working conditions and attitudes to food, supply chains and health.

Companies that capitalise on change and make sustainability central to their business models can offer compelling investment opportunities and attractive risk-adjusted returns.

To tap into these amid this disruption, investors need to look beyond traditional industry boundaries to identify future winners in today’s value chains.

Three features of tomorrow’s winners

There are three vital parts to this: they have a durable competitive position in their markets; their goods or services do little, if any, harm to the environment or society; and they can adapt quickly and effectively to change.

Let’s break these down a little.

  1. Durable Competitive Position: Having a good business model doesn’t justify a durable competitive position since a competitor might be able to replicate the product or service better or at a lower price. The two key indicators of durability are cash flow return on investment (CFROI) and asset growth. Companies with high CFROI and structural asset growth are highly profitable and able to compound those profits by reinvesting internally generated cash flows into the business.
  2. Do Little to No Harm: Good ESG practices can be aligned with a company’s broader financial performance when they are materially relevant to the specific business and its future strategy.
  3. Adapt to Change: Companies must be able to pivot with shifts in regulations, social attitudes and consumer preferences. In an age of disruption, offering solutions to emerging themes suggests a company can lead change in these value chains.

Modern value chain

With durability, sustainability and adaptability in mind, certain value chains offer a more realistic view of what’s going on in today’s economy and create greater potential for active return on capital. There are five key themes underpinning this:

  • The demand for renewable energy;
  • access to healthcare through lower-cost solutions for unmet or high-cost medical needs;
  • conscious consumption in line with the ever-sharper focus on ethics;
  • the shift to digital payments and online access to finance; and
  • digitisation of the enterprise driven by analytics, 5G and artificial intelligence accelerating productivity and business innovation.

At Neuberger Berman, we believe the key to unlocking alpha are fundamental insights gleaned from analysis of the value chain via bottom-up research and company engagement.

In terms of transparency, while reporting is vital, a cornerstone of our investment process is company engagement. So even if the data might not be available, by engaging with companies over time and analysing how they develop in terms of how they manage their company, we understand whether a company really means what it says and genuinely wants to be sustainable.

The more the focus on ESG increases, the more opportunities there are for greenwashing in this area by companies and funds attempting to take advantage of this. UK climate change think tank InfluenceMap recently studied 723 equity funds specifically marketed as ESG-related and found more than half of these funds fell short of global sustainability targets laid out in the Paris Agreement.

Therefore, we believe engagement is a key aspect just to find out how sustainable a company is indeed operating.

ESG needs to be forward-looking

The traditional top-down, quantitative ESG assessment is a blunt instrument and, in our view, only useful for weeding out the very riskiest businesses. We see it as much less useful for identifying the most attractive investment opportunities as it is unable to assess the materiality of certain factors to specific companies.

Quantitative ESG scores are necessarily based on historical data, telling us a little about “ESG momentum” by showing how certain metrics have improved over time. They offer no insight into a company’s sustainability action plans, let alone the credibility of those plans. They tell us nothing about the likelihood of changes in regulation or consumer attitudes that could alter a company’s material exposure to certain ESG risks and opportunities.

Forward-looking ESG insights help identify companies that have a durable competitive position and can adapt to change. A forward-looking view on ESG helps an investor appreciate how changing regulation, consumer preferences and investor priorities can make what were once immaterial ESG factors into potentially material threats or opportunities. In today’s changing environment, this is vital for the modern investor.

At a Glance – Neuberger Berman Global Sustainable Equity Fund

  • Seeks to invest in quality companies where sustainability reinforces competitive advantage
  • Global, best ideas portfolio of typically 40 – 60 quality holdings
  • Diversified across non-correlated high-quality business models and value chains
  • Long-term bottom-up research outlook (typical two to four years holding period)
  • Active share >75%
  • Sustainability, value chain lens and engagement key to approach

To learn more about Neuberger Berman Global Sustainable Equity Strategy, click here.

Why Neuberger Berman?

  • Dedicated team of seven experienced, industry-leading professionals; lead-PM has 30+ years of investment experience, over half of which has been on this strategy. Strategy ranked seventh percentile among peers over five years2
  • Supported by 46-person senior research analysts averaging 17 years of experience, and a dedicated 13-person ESG investing team (As of 31 December 2021)
  • ESG leadership – Neuberger Berman is awarded A+ scores by UN-supported PRI and a member of PRI 2020 Leaders’ Group, a designation awarded to fewer than 1% of PRI investment manager signatories3

1  Source: Global Sustainable Investment Review 2020, all assets reported as of December 31, 2020, except for Japan which reports as of March 31, 2020

2  Source: eVestment as of September 30, 2020. The portfolio managers were the lead decision makers of this strategy at their previous firm, NN Investment Partners, until September 27, 2020.  Peer statistics are reflective of performance against the respective vehicle peer group (Global Large Cap Core).

3  For illustrative and discussion purposes only. PRI grades are based on information reported directly by PRI signatories, of which investment managers totaled 1,924 for 2020, 1,119 for 2019, 1,120 for 2018 and 935 for 2017. Please see Principles for Responsible Investment (PRI) Scores and end of this material for information regarding PRI scores shown.

This article is sponsored content. The supplier of this content has a commercial arrangement with Switzer Financial Group.

Disclaimer on PRI

For illustrative and discussion purposes only. PRI grades are based on information reported directly by PRI signatories, of which investment managers totaled 1,924 for 2020, 1,119 for 2019, 1,120 for 2018 and 935 for 2017. All signatories are eligible to participate and must complete a questionnaire to be included. The underlying information submitted by signatories is not audited by the PRI or any other party acting on its behalf. Signatories report on their responsible investment activities by responding to asset-specific modules in the Reporting Framework. Each module houses a variety of indicators that address specific topics of responsible investment. Signatories’ answers are then assessed and results are compiled into an Assessment Report. The Assessment Report includes indicator scores, summarizing the individual scores achieved and comparing them to the median; section scores, grouping similar indicator scores together into categories (e.g. policy, assurance, governance) and comparing them to the median; module scores, aggregating all the indicator scores within a module to assign one of six performance bands (from E to A+). Awards and ratings referenced do not reflect the experiences of any Neuberger Berman client and readers should not view such information as representative of any particular client’s experience or assume that they will have a similar investment experience as any previous or existing client. Awards and ratings are not indicative of the past or future performance of any Neuberger Berman product or service. Moreover, the underlying information has not been audited by the PRI or any other party acting on its behalf. While every effort has been made to produce a fair representation of performance, no representations or warranties are made as to the accuracy of the information presented, and no responsibility or liability can be accepted for damage caused by use of or reliance on the information contained within this report. Information about PRI grades is sourced entirely from PRI and Neuberger Berman makes no representations, warranties or opinions based on that information.

Disclaimer

Neuberger Berman Australia Ltd (ACN 146 033 801 AFSL 391401 ) (“NB Australia”), is the Responsible Entity for the Neuberger Berman Global Sustainable Equity Fund (“Fund”) (ARSN 641 099 738). Neuberger Berman Asset Management Ireland Limited, a private limited liability company incorporated under the laws of Ireland, is the investment manager of the Fund. This publication has been prepared by NB Australia to provide you with general information only. In preparing this publication, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this publication. Neither NB Australia, nor any of its related parties, their employees or directors, provide any warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Fund’s Product Disclosure Statement before making a decision about whether to invest in this product. The information contained in this publication is taken from publicly available sources that is subject to change without notice. NB Australia makes no representation as to the reliability or accuracy of the publicly available information.

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