Neuberger Berman: Developing a net zero multi-asset class portfolio solution

Neuberger Berman (NB) has created a multi-asset class net-zero portfolio solution, leveraging its multi-asset team and net-zero investment capabilities across private markets, fixed income and public equity. The investment objective is to seek market returns through economic cycles across a diversified multi-asset class portfolio with a net zero by 2050 target and includes interim emission reduction targets.

Leveraging the Net Zero Investment Framework created by the Institutional Investors Group on Climate Change (IIGCC), the attributable net emissions of the portfolio will equal zero and any portfolio company emissions will be offset by carbon sequestration or regulated allowances by 2050. Given that the IIGCC net zero guidance for private equity and infrastructure has not yet been published [as of October 2021], we incorporate principles of the IIGCC, the EU Taxonomy and initiatives such as Science Based Targets to inform the private market framework.

Neuberger Berman developed this capability to respond to the growing number of clients which have made net-zero commitments, but had not yet worked out how to align their entire asset allocation to net zero. Clients recognise that it is not enough to simply tilt their passive equity holdings, but instead seek to solve the challenges of net-zero implementation across corporate fixed income, collateralised loan obligations (CLOs), asset-backed securities (ABS), sovereign debt, private direct investments, private co-investments, and private fund investments (infrastructure and other). They also want to ensure that climate change is considered in the strategic asset allocation (SAA) process between asset classes.

Why this approach?

Neuberger Berman’s approach encompasses all invested asset classes with explicit targets for net zero by 2050 and shorter-term targets that are aligned with the path to net zero (a 7% reduction per annum, with more than 20% lower emissions by 2025 or 50% lower by 2030). It also incorporates climate factors into the SAA to determine the weights of indices across equity and fixed income asset classes. The SAA model is based on quantitative climate metrics as well as a qualitative assessment of the relative impact of regional climate regulations on different asset classes. The SAA framework also allows for climate scenario analysis across industry standard temperature pathways.

Active management tools are used across the strategies in the portfolio. These include, but are not limited to, engagement, proxy voting, divestment, provision of incremental debt and private capital. Pillars of the shared framework include:

Company or issuance contribution

A uniform spectrum for assessing a company’s contribution to climate change is used, whereby companies or industries lacking alignment with the transition to a low-carbon economy are excluded and companies aligned or contributing to solutions are preferred. Across these sub-asset classes, Neuberger Berman sets and shares what it deems as “red lines”, such as its thermal coal exclusion policy, demonstrating its commitment to stop financing activities that have no economic or environmental case on the path to net zero.

For sub-asset classes like securitised fixed income, where company contribution is less relevant, Neuberger Berman evaluates the impact on climate change based on the characteristics of each asset pool through its proprietary securitised assessment process. For example, commercial and residential real estate-related investments are analysed to minimise potential physical climate risks while maximising the securitised asset pool’s energy efficiency profile.

NB net-zero assessment

All holdings are evaluated to ensure operations, strategy and governance support net-zero objectives. This includes analysis against the Transition Pathway Initiative’s management framework, carbon performance metrics and climate scenario analysis to assess emissions reduction plans. In addition, Neuberger Berman assesses company net-zero commitments, approval of targets by the Science Based Targets initiative (SBTi), and the extent of reporting aligned with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD). Analysis is also conducted on scope 3 emissions for sectors where it is particularly material to global policy objectives.

Engagement and tracking

Where holdings are not making necessary reductions, lacking adequate disclosure or failing to set targets, engagement is prioritised. If no action is taken to address concerns within three years, the company will be divested. One-on-one engagement is the primary tool to drive change, but collaborative engagement and proxy voting, including advanced vote disclosures, are additional tools.

Commitment to net zero

The portfolio targets carbon intensity (Scope 1 and 2) and the absolute carbon emission reductions necessary to deliver net zero by 2050. This equates to roughly 7% annual declines and involves interim targets of a greater-than-20% decline by 2025 and 50% lower by 2030.

The process is guided by the NB Climate-related Corporate Strategy and informed by the NB Net-Zero Action Plan, while engagements, topics addressed, and outcomes are tracked centrally and reported annually. Attributable portfolio emissions (absolute and intensity) and annual declines are communicated in standard reporting for the strategy.

What were the outcomes, benefits and challenges? What are the next steps?

The result of the approach is a diversified multi-asset class portfolio seeking market-rate returns with a net-zero target by 2050 and interim targets for 2025-2030. Neuberger Berman’s modelling suggests the aggregate portfolio and its components have significantly lower climate risk than their corresponding traditional benchmarks, while financing a greater amount of climate solutions through incremental debt, incremental private capital and equity exposure.

Outcomes from climate-related engagements are an important short- to medium-term indicator of progress. Proxy voting is an important tool in Neuberger Berman’s engagements, including through its NB Votes initiative. The investment manager provides detailed public explanation of its voting intentions in advance of company meetings on a substantial number of votes.

Given that Neuberger Berman manages the entire investment process from strategic asset allocation to outcome reporting, it also sees the benefits of an integrated approach to engagement and measurements. For example, cross capital structure engagement between its fixed income and equity teams has the potential to drive more action on climate objectives. Similarly, the reporting of apportioned emissions across fixed income and equities for holdings that overlap is ensured to be consistent when they are held at the same firm.

Neuberger Berman’s approach has highlighted a number of challenges. First, there are still significant limitations to disclosure of relevant climate information in sub-asset classes such as securitised credit. Second, incorporating climate risks and opportunities into strategic asset allocation is still in the development stage, given the inherent uncertainties related to forecasting potential inputs (climate value-at-risk, carbon intensity, Paris Agreement Nationally Determined Contributions, etc.). Third, the lack of widely used climate-aligned benchmarks outside equities may hold some clients back from deviating from high-emission sectors for fear of underperformance during certain market cycles. Fourth, consistent location data and the tools to assess physical risk across all sub-asset classes is still lacking.

Over time, Neuberger Berman would like to better evaluate the time horizon trade-offs between asset classes. For example, long-term scrutiny in short duration credit may be lower compared to the sovereign debt markets, with their longer maturity and slower changes to the issuer’s climate profile.