Human tragedy, financial damage, regulatory tightening and people power are driving ESG up the agenda.

To mark the release of our 2018 ESG Annual Report, today’s CIO Weekly Perspectives comes from guest contributor Jonathan Bailey.

In January, a mining company lost a quarter of its value after a dam failure left hundreds dead. It was the company’s second such incident in three years. In March, 157 people lost their lives in an airline crash—the second crash in five months for a plane that serves as a global aviation workhorse. It raised thorny questions as to safety and regulatory capture and wiped a fifth off the manufacturer’s value.

A fortnight later, the European Parliament approved the third and final legislative proposal in the European Commission’s Action Plan on Sustainable Finance: a taxonomy of business activities considered to contribute to environmental objectives, and a requirement that investment institutions declare whether or not their processes consider sustainability.

Another two weeks later, the U.K.-based climate change activist group Extinction Rebellion began a series of rolling demonstrations. Before ending last Thursday, they brought much of London to a standstill and clocked up more than 1,000 arrests.

Human tragedy, financial damage, regulatory tightening, people power. The opening months of 2019 gave us plenty of reasons to think about our exposure to environmental, social and governance (ESG) risks, and how we integrate ESG factors into our investment programs. We have been asking ourselves these questions as we put together our inaugural ESG Annual report.

Depth

Neuberger Berman has long believed that ESG factors are an important source of risk and a driver of long-term returns, and recognized that many of our clients consider the impact of their portfolios to be as meaningful as their performance.

Both considerations require us to get real about ESG. The “check-box” approach that passively maps a subset of companies to a handful of sustainability outcomes—and approves a solar power manufacturer despite its high worker injury rate, or misses the opportunity to invest in a plastics company’s efforts to use more recycled material—will enhance neither performance nor impact. For that, we believe ESG integration requires both depth and breadth.

By depth, we mean a commitment to active ownership, which we consider to be a natural complement to active management of high-conviction portfolios.

In last year’s proxy voting, we supported 84% of shareholder proposals on political spending or lobbying and opposed 11% of management proposals, including 15% of executive compensation plans. We supported all shareholder proposals on pay equity and climate change.

But it goes well beyond voting. It’s also about formulating engagement on goals that our experienced analysts consider to be both material and realistically achievable.

Just to highlight two examples, during 2018 our portfolio management teams led efforts to replace an entrenched CEO and directors at a midcap technology company bogged down with failing strategy and excessive pay; and participated in a letter-writing campaign through the Farm Animal Investment Risk and Return (FAIRR) initiative that led a large U.S. grocer to commit to making 100% of its eggs cage-free and to engage in reducing antibiotic use at its meat suppliers.

Breadth

We think it’s also important to engage when we are not owners but lenders. Our fixed income teams avoided investing in the senior unsecured notes of a health care company, and exited a position in its senior secured loan, after engagement failed to reassure us that the business had any plan to normalize its unsustainably high and socially controversial pricing policy. In another recent example, we attained additional covenants and more robust board independence from an issuer whose key equity owner is highly leveraged, and potentially incentivized to extract value to the detriment of creditors.

That brings us to the subject of breadth in ESG integration. Something is always better than nothing. Ultimately, however, clients who recognize the importance of ESG-related risk and opportunity generally want to integrate these factors into all parts of their portfolios, and align as much of their investment as possible with the U.N. Sustainability Goals: bonds and loans as well as equity, alternative as well as traditional strategies, emerging as well as developed markets, private as well as public.

To that end, recent months have seen us enhance our already cutting-edge ESG practices in emerging markets debt, begin to harness the power of Big Data in the quest for sustainability insights, and develop impact strategies in U.S. municipal bonds and private equity. When Neuberger Berman invited me to join this effort two years ago, around a quarter of its clients’ assets benefitted from the systematic integration of ESG factors into the investment process. Today, we are closer to 60%.

That’s good progress. But every week brings a reminder of how much further there is for the investment community go. Society expects it. Our environment needs it. And increasingly, our clients demand it.

In Case You Missed It

  • U.S. Building Starts:  -0.3% to SAAR of 1.14 million units in March
  • U.S. Housing Permits:  -1.7% to SAAR of 1.27 million units in March
  • U.S. Existing Home Sales:  -4.9% to SAAR of 5.21 million units in March
  • U.S. New Home Sales:  +4.5% to SAAR of 692,000 units in March
  • Bank of Japan Policy Meeting:  BoJ will keep its short-term interest rate unchanged
  • U.S. Durable Goods Orders:  +2.7% in March (excluding transportation, durable goods orders increased 0.4%)
  • U.S. 1Q GDP (First Estimate):  +3.2% annualized rate

What to Watch For

  • Monday, 4/29:
    • U.S. Personal Income and Outlays
  • Tuesday, 4/30:
    • Euro Zone 1Q GDP (First Estimate)
    • S&P Case-Shiller Home Prices Index
    • U.S. Consumer Confidence
  • Wednesday, 5/1:
    • China Purchasing Managers’ Index
    • ISM Manufacturing Index
  • Friday, 5/3:
    • U.S. Employment Report
    • ISM Non-Manufacturing Index

– Andrew White, Investment Strategy Group

Statistics on the Current State of the Market – as of April 26, 2019

Market Index WTD MTD YTD
Equity      
S&P 500 Index 1.2% 3.8% 18.0%
Russell 1000 Index 1.2% 3.8% 18.4%
Russell 1000 Growth Index 1.8% 4.8% 21.7%
Russell 1000 Value Index 0.6% 2.8% 15.1%
Russell 2000 Index 1.7% 3.4% 18.5%
MSCI World Index 0.7% 3.3% 16.4%
MSCI EAFE Index -0.1% 2.5% 12.9%
MSCI Emerging Markets Index -1.3% 2.0% 12.2%
STOXX Europe 600 -0.4% 3.0% 14.3%
FTSE 100 Index -0.3% 2.5% 12.2%
TOPIX 0.1% 1.7% 9.5%
CSI 300 Index -5.6% 0.5% 29.3%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.2% 0.1% 1.1%
Citigroup 10-Year Treasury Index 0.5% -0.6% 2.5%
Bloomberg Barclays Municipal Bond Index 0.5% 0.3% 3.2%
Bloomberg Barclays US Aggregate Bond Index 0.4% 0.0% 3.0%
Bloomberg Barclays Global Aggregate Index 0.1% -0.4% 1.7%
S&P/LSTA U.S. Leveraged Loan 100 Index 0.2% 2.0% 7.2%
ICE BofA Merrill Lynch U.S. High Yield Index 0.2% 1.3% 8.8%
ICE BofA Merrill Lynch Global High Yield Index 0.0% 1.0% 7.6%
JP Morgan EMBI Global Diversified Index 0.0% 0.1% 7.1%
JP Morgan GBI-EM Global Diversified Index -1.3% 0.0% 2.9%
U.S. Dollar per British Pounds -0.6% -0.7% 1.6%
U.S. Dollar per Euro -0.7% -0.6% -2.4%
U.S. Dollar per Japanese Yen 0.3% -0.8% -1.6%
Real & Alternative Assets      
Alerian MLP Index 0.5% -0.7% 16.0%
FTSE EPRA/NAREIT North America Index 1.6% -0.3% 15.7%
FTSE EPRA/NAREIT Global Index 0.8% -0.9% 14.0%
Bloomberg Commodity Index -1.1% -0.2% 6.1%
Gold (NYM $/ozt) Continuous Future 1.0% -0.7% 0.6%
Crude Oil (NYM $/bbl) Continuous Future -1.2% 5.3% 39.4%

Source: FactSet, Neuberger Berman.