Many investors have asked how we incorporate environmental, social and governance (ESG) capabilities into TaxM portfolios. In this column, we provide a brief overview of that process.

Neuberger Berman’s ESG capabilities allow clients to select their preferred customization within the TaxM™ onboarding platform. We offer the following ESG options for TaxM portfolios:

  • Exclusions based on a customizable set of values
  • Portfolio tilts toward more highly rated ESG companies and away from those with poor ratings
  • Coordination of client ESG objectives with client specific tax objectives

Clients choose the level of ESG to incorporate using the following ESG methodologies:

Avoidance Screens Based on Industry

We exclude names based on specific industries, for example tobacco and private prisons. The NB Sustainable Exclusions Policy is currently the most common avoidance screen used in our tax-managed portfolios. Individual industry options are available for clients to customize according to their preference.

Security Selection Based on ESG Ratings (NB ESG Quotient):

Our ESG Quotient incorporates ESG risks and opportunities and is used to determine overweight and underweight positions in the portfolio. We aim to hold none of the worst rated names. In contrast to our avoidance screens, this use of ESG ratings is focused on individual companies rather than industries. For example, the Personal Products industry is not an excluded industry in the NB Sustainable Exclusions Policy; however, if a particular company is rated very poorly based on, for example, its natural resource use and product safety, we will not own it even though it is in a permitted industry.

The ability to select a tax objective within a tax-managed account gives clients the ability to tailor how the avoidance screen impacts their portfolio. For example, some clients may want to remove a name identified in the avoidance screen immediately, while others may prefer to defer the sale based on unrealized gains. Specifically, for portfolios with a Gain Deferral tax-objective, negatively screened names will only be sold when these names have no realized gains in the account.

We leverage a broad range of sources to build our internal ESG ratings, including third-party research, forward-looking evaluations and alternative data, to quantitatively evaluate securities. Our vendor-sourced data is combined by favoring particular ESG data points that have been predictive of returns. Our Global Equity Research team contributes to our ESG ratings by gaining insights from granular third-party data and alternative datasets, such as employee reviews of the companies they work for, with help from our Data Science team. These inputs are combined to create our ESG Quotient, which is used to rank names in positive and negative screening methodologies as described above.

We believe that engagement and proxy voting can drive positive change, and our portfolios benefit from engagements led by the firm’s portfolio managers and Global Equity Research analysts. Neuberger Berman carried out 3,666 engagement meetings in 2020 and our NB Votes initiative has disclosed over 60 advance votes this year.

Overall, we have a multifaceted and customizable approach to integrating ESG into our TaxM portfolios for a wide breadth of investor needs.