A divining rod for where to dig.
Based in New York, Neuberger Berman (NB) is a private, independent, employee-owned investment manager investing approximately $255 billion in equities, fixed income, private equity and hedge fund portfolios. NB has always been a pioneer in ESG integration and first began applying “avoidance screens” in 1942. In 1989, the firm launched one of the first socially responsive investment teams. Today, the firm’s Socially Responsive Investment (SRI) group and Emerging Markets Debt (EMD) team are industry leaders in ESG integration.
Twin track investment approach
Neuberger Berman is continually striving to improve its ESG credentials believing that responsible investing is not only key to sustainability but also that utilizing an ESG approach has a positive effect on longterm investment performance. In 2012, NB established a Principles for Responsible Investment Advisory Committee (PRI Committee) headed by Chief Investment Officer Joe Amato and other representatives from across the company. In June 2012, with the help of the Committee, NB became a signatory of the Principles for Responsible Investment (PRI).
The firm has been a member of CDP since 2004 and all the teams at NB have access to CDP data. The information plays an especially important role in the Neuberger Berman Socially Responsive Fund.
Ingrid Dyott, Portfolio Manager of the $2.5 billion Neuberger Berman Socially Responsive Fund, says, “Our team uses CDP data on emissions, water and forestry as part of the bottom-up ESG analysis we conduct on all companies in our portfolio.” In particular, the SRI team finds that the thoroughness with which a company completes their CDP questionnaire can be a useful proxy for understanding how well a company is managed.
Dyott says, “The way in which questionnaire answers are completed – both data and free text – tell our team a lot. It’s pretty crucial because if they can’t show that they’ve systems in place to manage their environmental challenges then it suggests that management may not be up to standard in other areas too.” Dyott gives examples of criteria such as whether climate change is integrated into business strategy, and whether there is board level oversight, as places where CDP data can flag potential issues for investors.
It is not just about spotting risks for NB either. “The way a company completes their CDP questionnaire can also be an affirmation for us - so if we have an opinion that management is good and they affirm that that’s right in their CDP response, it may create an opportunity for us in our investments” says Dyott.
Helping understand where to dig
CDP is not the only source of sustainability data that Dyott’s team uses, but they find that some of the detailed criteria in CDP’s questionnaire, especially on emissions, help them understand which companies might need further investigation.
One example the team offers is their review of the electric utilities sector. When analyzing utilities companies, indicators such as levels of ‘greenhouse gas emission/megawatt hour’ can help identify how efficiently a company is operating compared with peers. Dyott explains, “CDP data is not the whole story but it highlights where we need to go more granular. So in the case of gas utilities the high-level answers on GHGs give us the ability to pinpoint which companies we should then find out more about, for example going to the EPA to get plant level data”.
In that sense, the CDP data can act like a diving rod does for discovering water; it tells the investor where it is they need to dig for more information.
Data is not the be all and end all
CDP questionnaires also give valuable context, explains Dyott.
She argues that investors cannot always assume that high emissions automatically mean a poorly managed company. Dyott explains, “For us, we don’t reach conclusions solely on absolute or relative data. We need to know context. So for example, a company may have high emissions but this may be because of a recent acquisition or because they currently have facilities that they plan to close down or retrofit etc..” Thus, she states, one of the real value-adds of the CDP questionnaire is the chance it gives to companies to comment on what is going on and why they may have, for example, not met a target.
Dyott explains that CDP’s sector research reports also provide a valuable industry-wide viewpoint for their corporate analysis. “These benchmarks help provide a big industry perspective and the standardized approach is a vital framework for comparing peers that, again, give us a better sense of where to drill down and so enable us to form our own conclusions.”
Water data becoming essential
Portfolio managers may also use CDP’s water data in their investment analysis looking at criteria such as a company’s total water withdrawals, discharges, disposal and water usage and targets in areas of water stress. An example is a US-based semi-conductor manufacturer which they analyzed and where water management was a key issue. “We noted that the company had set out aggressive water targets”, explains Dyott, “But they weren’t on track to meet them. We engaged on this issue and the company explained that the ambitious targets were set primarily to catalyze water efficiency measures internally, especially in chip design.”
This helped reassure Dyott about the management in place on this issue and what sort of enabling tools and technologies were in place in regards to water conservation. The company also explained their intention to close down inefficient facilities in their global supply chain. CDP responses will be one of the prime tools that she uses to monitor the company’s progress on this going forward.
“Water is an area of growing importance and CDP is by far the most robust single point of data on both water and forests,” says Dyott, “Though I hope that many more companies start to provide CDP with their water data because too few do at present” she concludes.
A decade of data
Reflecting on over a decade of membership with CDP, Dyott says that CDP has helped to streamline research efforts as it is a single repository for much of the emissions data that they require.
Dyott argues that, of course things are not perfect and that she’d like to see more assured data, more companies reporting on water and deforestation and that the way CDP collects Scope 3 data will be consistent with its other emissions data. But most importantly, they plan to continue to use CDP data and urge as many companies as possible to complete the questionnaire so that they and other investors can more easily invest in sustainable, well-managed companies.