Constellation Brands is a leading, multi-category alcohol supplier in the U.S., as well as the country’s top purveyor of premium beer, including major Mexican brands Corona and Modelo. As a firm believer in strong corporate governance, we encouraged the company to increase shareholder representation by eliminating its dual-class share structure, as an increasing number of companies have shifted away from these legacy structures to single-class shares structures. In 2022, Constellation’s controlling shareholder offered to convert its Class B voting shares to Class A common stock, thereby consolidating the share classes and democratizing voting control of the company.
Scope and Process:
Neuberger Berman engaged with the independent special committee of the board charged with negotiating the agreement, which ultimately involved a $1.5 billion cash payment to the Class B shareholders—equal to a substantial 26.5% premium over the then-recent closing price of the common stock.
While we advocated for a lower conversion premium, we were pleased with other proposed governance upgrades—including anti-pledging policies (to limit how much executives can borrow against their shares), a majority voting standard in uncontested elections, and the board’s commitment to rotating the lead independent director position. In our view, such policies generally increase management’s accountability to shareholders and improve overall governance practices.
Outcome and Outlook:
We believe Constellation Brands has taken significant steps to improve its governance profile—and we intend to continue engaging with the company on material environmental, social and governance issues to help serve shareholders well in the longterm.
Yamaha Corporation is the world’s largest manufacturer of musical instruments and a long-term holding of the Japan Equity Engagement strategy. The investment appeal of the company includes what we consider strong financials and attractive growth prospects, as well as proactive efforts to address material environmental and social issues. Keys to the business include scale and brand—scale to maintain cost effectiveness, and brand to ensure that customers associate Yamaha with a high level of quality. A long-term challenge that could affect these characteristics is the scarcity and cost of timber used to make musical instruments, driven in part by climate change and illegal logging.
Scope and Process:
As part of our broad engagement, we connected with Yamaha in 2021 on biodiversity and specifically the reliable procurement of certified timber—an issue that could affect its ability to make high-end acoustic pianos and other instruments, and thus affect its brand image. At the time, the company sought to procure 50% of its certified timber from clearly identifiable sources, to avoid the risk of obtaining timber that has been illegally logged.
As long-term investors, we believe Yamaha’s ability to maintain global scale and brand loyalty is contingent on its continued manufacture of high-quality acoustic musical instruments. Hence, the sustainable sourcing of its prime raw material is critical to its business fundamentals and growth outlook. For this reason, we encouraged new approaches to enhance company’s responsible procurement and to plan for periodic supply bottlenecks given timber’s status as a finite resource.
We approached the company as it prepared its mid-term business plan, where it would set its strategic agenda and establish key performance indicators for the next three years. Among our recommendations, we asked that the company integrate its sustainable procurement initiatives into its business plan and consider improving related disclosures in line with globally recognized ESG standards. Later, we continued our discussions and toured a company piano plant to better understand its manufacturing and timber processing.
Yamaha was receptive to our ideas, noting that it was already working to expand its certified timber allocation. In fiscal (March) 2022, the company was able to procure 52% of its timber from certified sources, and in its new three-year plan, it committed to raising this target to 75%. To do so, Yamaha joined forces with an accredited third party to create an internal certification system, which would reduce the financial burden on suppliers from licensing. We believe this is a significant step that could help the company eventually achieve 100% procurement of certified timber. Importantly, Yamaha’s actions could have broad implications, encouraging others to adopt similar standards.
Going forward, we will continue to engage Yamaha to strengthen its biodiversity disclosures, consistent with globally recognized ESG reporting guidelines.
First Solar is U.S.-based company that manufactures solar panels—a product that has come into increased demand due to cost-competitiveness and policy support in the fight against climate change. It has been a holding of the Neuberger Berman U.S. Equity Impact strategy since inception. Although viewing it as a leader in its field, we believed there was additional potential, particularly relating to capital investment choices.
Scope and Process:
As part of a cyclical industry, First Solar generated significant cash holdings through 2020 and was considering uses for that capital, including calls from the investor community to return capital to shareholders. Although it had been historically hesitant to invest in new facilities given the potential oversupply of panels, we advocated for expansion of new capacity in the U.S., in the belief that it would not only prove profitable, but have a significant positive impact by increasing the capacity of the domestic supply chain and reducing emissions. We continued a dialogue over the next two years on the manufacturing issue, on enhancing the independence of its board of directors and on setting science-based emission reduction targets. As supply chain security and the environmental footprint of solar moved up the priority lists of customers and policymakers, we also wanted the company to be positioned for any potential benefits.
In 2021, First Solar announced a $700 million investment in a new Ohio facility, as well as $700 million in a new plant in India, creating more than 1,000 direct manufacturing jobs. In the fall of 2022, President Biden signed the Inflation Reduction Act, providing significant tax credits for U.S.-manufactured panel production, and adding to the competitive advantages enjoyed by First Solar—something that was reflected in record bookings last year. To further meet customer demand, the company announced $1.4 billion in outlays for an Alabama production plant and an Ohio R&D center. In aggregate, the announced capacity will help First Solar triple its positive impact from avoided emissions over 2020 levels while providing 3,000 manufacturing jobs in the U.S. and supporting the addition of 15,000 jobs at other companies.
In addition, First Solar appointed its first lead independent director in 2021 and two new members to the board in 2022, enhancing its governance profile. It also set science-based emission targets to reduce its Scope 1 and 2 GHG emissions by 34% by 2028 and achieve net-zero emissions by 2050.
Scout24 operates Germany’s largest online real estate platform—with more than 20 million monthly users—where buyers, sellers, agents, and landlords can buy or rent residential and commercial properties.
We believe the company has an especially resilient business model, due to its market share with nearly twice as many listings as its nearest competitor; multiple revenue streams (platform subscriptions, advertising fees and sales leads for agents and mortgage brokers); and three-tiered level of service catering to agents and landlords looking for deeper functionality.
Scope and Process
Starting in early 2020, we have had multiple meetings with the CFO, board and investor relations team to address specific issues—especially including the company’s data protection and security practices—that we felt were material to its long-term financial performance. Through consistent engagement we have encouraged the company to strengthen its practices and disclosures pertaining to this area and others.
Outcome and Outlook
Scout24 was receptive to our engagements and has since made considerable improvements. In order to remain a trusted platform for sellers and buyers to connect, data protection and security is of the utmost importance. We have observed that the company has focused on preventing fraudulent activity on its platform. For example, in 2022, the company introduced mandatory multifactor authentication for real estate agents to help protect users from malicious phishing attacks and other platform abuse. In that year, fraudulent listings fell by 20%, to less than 1% of its active property portfolio.
Additionally, in 2022, management took significant steps to safeguard its systems and protect client data This included enhancements to its automatic attack-detection system using machine-learning algorithms and innovative anti-crawling technology. The company is aiming to achieve external certification of its information security management system, in accordance with ISO 27001, by the end of 2025. Further, the board has received briefings from an external data-security firm to ensure it remains effective in its oversight of this critical function.
Algonquin Power & Utilities Corp. provides infrastructure services including electricity, natural gas, water and wastewater transmission for more than 1 million customers, primarily in North America. Neuberger Berman has invested in Algonquin’s bonds and hybrid securities over the years, and although it faces some exposure to energy transition risks, we believe the issuer can make certain policy improvements to manage these risks and the potential impact on its business. For example, climate change may increase the frequency and severity of weather events, which could pose mechanical and operational risks to some of the company’s assets. Additionally, regulatory risks, such as stranding of the company’s capital investments due to climate change, could pose additional risks for cost recovery and be subject to legislative proposals that would impact the extent to which such costs could be recovered. Given these potential impacts, it is essential that we integrate material climate risks into our bond valuation for Algonquin. Moreover, it is critical that we understand the credibility of the company’s net-zero objectives and its climate transition plan, and how related capital allocation decisions could impact credit risk and thus, our investment.
Scope and Process
Our engagements with Algonquin initially began in 2018, and following our participation in the company’s bond offering in the Fall of 2020, we engaged three times over the course of 15 months. These engagements included discussions with the CEO, CFO and investor relations team. Because the issuer significantly lagged its peers with respect to emissions reduction targets, we advised them to set longer-term, science-based targets and to submit them for verification from a credible third party. Not only do we consider these best-in-class practices, but a target to reach net-zero emissions is necessary for Algonquin to mitigate risks associated with a climate transition. We believe that the establishment and verification of these targets, along with transparent disclosure of Algonquin’s capital allocation plan would provide investors with clarity concerning the deployment of incremental capital to meet end electricity demand. This would provide bondholders with greater visibility into future cash flow metrics, ensuring these projections remain appropriate for the level of business risk.
Outcome and Outlook
In 2022, the company announced its target to achieve net zero emissions by 2050. Additionally, it aims to generate 75% of its power from renewable sources by 2023, up from 50% in 2020. Given the continuous and growing legislative push for stricter renewable energy generation targets, we believe Algonquin is taking meaningful steps toward managing its climate transition risk. Thus, the company is mitigating long-term credit risks, which further supports our investment thesis and ongoing engagement strategy.
As the physical and regulatory impacts of climate change ripple across the global economy, more companies and investors are taking critical steps to navigate this significant transition.
The NB Sustainable Equity team strongly believes enhanced disclosure practices lead to better business practices and that the CDP (formerly the Carbon Disclosure Project)1 is an important leader in the field. As a signatory, we have urged our portfolio companies to participate in what has now been viewed by many as the leading climate disclosure initiative for nearly 20 years. As of December 31, 2022, approximately 80% of our portfolio companies were reporting to the CDP (via a questionnaire covering an array of topics, from governance to emissions data), as well as following recommendations issued by the Task Force on Climate–related Financial Disclosures (TCFD).
SBTi: Taking Action to Drive Credibility Behind Net Zero and Paris Aligned Targets
To spur even further awareness on the impact of greenhouse gas (GHG) emissions, we have encouraged our portfolio companies to embrace the Science Based Targets initiative (SBTi), a collaboration with the CDP and other global organizations to provide guidance on setting science-based emissions-reduction targets. The SBTi defines, promotes and independently assesses science-based targets (SBTs) according to a set of strict criteria.2
SBTs can provide companies with a clearly-defined path to reduce emissions in line with the Paris Agreement, which calls for limiting global warming to under 2°C above pre-industrial levels (and ideally to no more than 1.5°C). To achieve this, GHG emissions must be halved by 2030 – and drop to net-zero by 2050. By adopting SBTs, we believe investors can decarbonize their portfolios and mitigate climate-related risks to which they may be exposed. Amidst a proliferation of corporate climate promises, we believe commitment to SBTs is an effective path to limiting financially material risks from climate change and ultimately reaching net zero.
Scope and Process: Multi-year engagement
We began our engagement by evaluating each holding across the entire NB Sustainable Equity strategy, including mutual funds and separate accounts... At the end of 2017, only two companies had established SBTi-approved targets, while the rest were either in the early stages of evaluating their own SBTs or only vaguely aware of the SBTi.
Beginning in early 2018, we sent letters to each company CEO and/or Chairman, Lead Director and Investor Relations contact that explicitly asked if they were in the process of considering or implementing an SBT. These letters led to ongoing specific discussions over multiple years, and we began to track each company’s long-term progress on the road toward SBTi implementation.
Then, in 2020, Neuberger Berman joined an investor coalition—with $2.3 trillion in assets under management—to promote the CDP’s Science-Based Targets campaign, further helping promote the initiative beyond the scope of our portfolio.3
Outcome and Outlook
As of December 31, 2022 approximately 39% of our portfolio vs. 26.9% of the S&P 500 benchmark4 have set SBTi approved targets, and another 25% of our holdings are committed to working towards this goal within the next two years. According to the SBTi, more than 2,000 businesses and financial institutions are striving to implement SBTs to reduce their emissions in line with climate science. In some cases, our engagements have been challenging—some management teams can be reluctant to provide additional disclosures—while in other instances our efforts have been well received and led to greater SBT adoption. This is an important topic that warrants ongoing attention. As such these conversations have been a multi-year effort and we continue to work with CDP and SBTi on how we can better enable companies to meet their emissions-reduction targets.
1 CDP (formerly the Carbon Disclosure Project) is a non-for-profit organization that helps companies meaningfully disclose their environmental impacts
2 Science Based Targets initiative (SBTi)
4 Reflects NB analysis of CDP and Bloomberg data as of 12/31/2022
Shifting workplace expectations and an escalating talent war have led to higher employee-turnover rates in recent years. These trends prompted our team to explore how best-in-class companies are trying to attract and retain high-performing employees in the post-COVID era. We believe this research not only will provide valuable insights into our holdings’ potential long-term performance, but also will allow us to share best practices with management teams and encourage more meaningful engagement with them over time.
Scope and Process
Starting in the fall of 2021, our team engaged with companies across an array of industries—from technology companies to railroads.
Armed with alternative third-party data, we demonstrated how companies’ employee retention stacked up against their peers (figures not readily found in public documents). While the findings grabbed companies’ attentions and facilitated discussion, raw data never tells the whole story. A company with extremely low turnover may be holding onto mediocre performers for longer than it should; likewise, a high number of job openings could indicate business momentum or a talent leak due to underlying cultural issues.
That’s why we also gathered propriety research by surveying management teams on various human-resources topics—including what seems to motivate workers (beyond compensation) and why employees decided to leave their firms. Ultimately, our main goal was to gain a deeper understanding of how great companies cultivate strong workforces and enduring cultures.
Outcome and Outlook
While labor-management practices continue to evolve, our team did uncover some common themes. A big one: Most companies agreed that actively seeking employee feedback is crucially important to success—be it in the form of one-on-one meetings with managers, or during town-hall forums designed to address broader questions about the health of the business.
And what do employees say they want? More flexibility, for a start. Though some organizations still require Monday-through-Friday attendance, we found that many have adopted hybrid work schedules to help workers attend to life’s other commitments.
Opportunity is another key demand. Management teams concurred that many of their employees seek career development and a fair shot at upward mobility.
Diversity matters, too. Studies suggest a strong correlation between diversity across gender and ethnicity and higher profitability and value creation. For example, one leading ride-sharing company said it established a policy to seek new applicants from a representative sample of its local communities.
In addition to seeking regular feedback, we found that many companies are taking steps to improve their onboarding practices to make sure new hires feel connected and hit the ground running. Many have also added dedicated affinity networks to help recruit, retain and raise awareness of diverse employee groups.
While we’ve yet to find a one-size-fits-all approach to building a strong team, we believe our research efforts will continue to enhance the quality of our engagement with portfolio companies, and ultimately help our team make more-informed long-term investment decisions.