Many investors have made net-zero commitments. We believe metrics need to rapidly evolve in response.
Organisation details:
Signatory type: Investment manager
HQ location: US
Covered in this case study:
Asset class: Listed equities and fixed income
AUM: US$508 billion (as of 31 December 2024)
At Neuberger Berman, our investment philosophy is founded on active management, fundamental research and engaged ownership. We believe that financially material environmental, social and governance factors may be an important driver of long-term investment returns from both an opportunity and a risk mitigation perspective.
Looking forward, not just back, when quantifying climate risk
Many investors, including some of our clients, have made net-zero commitments or wish to position their portfolios in a way that is informed by the climate transition. We believe metrics need to rapidly evolve in response. While first and second generation tools that rely solely on carbon emissions or readily available quantitative metrics are important, investors are recognising the need for nuanced analyst judgement to understand the complexities of the climate transition.
Figure 1: The measurement and assessment of net-zero progress is evolving
| Measuring progress >> | ||||
| Carbon emissions | Climate solutions/ SBTi commitments | Climate VaR/Implied temperature rise | Proprietry net-zero alignment indicator | Engagement |
|
Carbon intensity Apportioned/ carbon footprint Scope 1, 2 and 3 |
EU Taxonomy SBTi commitments or approved |
Climate VaR at a company and sector level broken out into transitional and physical risk + Implied temperature rise measures, in aggregate, a portfolio’s temperature alignment (in °C) |
The framework seeks to generate a forward-looking view on each company’s alignment with net-zero Our starting point is the IIGCC net-zero framework, which offers a guide on how to assess alignment at the company level. |
Ongoing systematic engagement provides a platform to advise companies on strategies and objectives to mitigate risk and advance opportunities related to climate change and the energy transition. |
| Backward looking | Forward looking | |||
How we assess companies in the climate transition
Our proprietary Net-Zero Alignment Indicator seeks to capture a company’s climate transition readiness. The indicator was created in partnership with our clients with decarbonisation targets, and incorporates specific sub-indicators informed by the high-level expectations of the Institutional Investor Group on Climate Change (IIGCC).
Figure 2: How our Net-Zero Alignment Indicator works
We consider the Net Zero Alignment Indicator to have a number of key advantages:
Robustness and accuracy: We use diverse data sources: more than 40 quantitative data sources from multiple providers, and qualitative insights from more than 125 equity and credit research analysts. Compared to off-the shelf alternatives, such as service provider ratings, our Indicator uses forward-looking metrics and analyst insights, integrates analysts’ deep, sector-specific knowledge, and undertakes active engagement based on the company’s net-zero alignment status. Outcomes of that engagement is fed back into the alignment score in real time.
Effectiveness: The indicator drives real-world outcomes by investing in potential transition winners and targeted engagement. For example, we held more than 1,200 climate-related meetings in 2023.
In 2024, we launched our internal ‘Starling’ data platform to support analysts and portfolio managers in tracking and delivering on climate objectives specifically requested by our clients. The platform provides full transparency into companies’ net-zero alignment statuses and score breakdowns, while equipping analysts with the tools to review and override company Indicator assessments.
Analyst input and active engagement informs forward-looking alignment status
Having a robust technology platform enables us to react in real-time to a change in company commitments which could signal a deceleration in the pace towards decarbonisation. Qualitative insights of our analysts and active engagement enables us to react faster than the data, which can often run at a significant lag to changes in company transition plans.
How our Net-Zero Alignment Indicator helps us achieve our goals
Our climate transition strategies aim to achieve three key targets:
1) Reduce carbon footprint by a minimum of 30% by 2030 (relative to a 2019 baseline) and achieve net zero by 2050.
2) At least 90% of corporate and quasi-sovereign exposures should be considered as achieving, aligned or aligning to net zero or be subject to active engagement by 2030, with 100% alignment achieved by 2050.
3) A requirement from inception was that securities contributing 70% of financed emissions should align with net-zero pathways or be subject to ongoing engagement. (This requirement will be overridden by 2030, by number two above.)
Our Net-Zero Alignment Indicator plays a pivotal role in achieving these goals, tracking alignment progress at the portfolio level, conducting detailed company analyses, and informing targeted engagement efforts. By integrating the indicator into every stage of the investment process, a climate transition strategy can deliver a robust framework for real-world decarbonisation while meeting clients’ ambitious climate objectives.
For high emitting companies, our Net-Zero Alignment Indicator allows us to undertake more targeted stewardship in areas where a company is making less progress toward net-zero alignment. Research analysts and portfolio managers can drive targeted engagement toward very specific areas of improvement. As a result, the indicator creates a positive feedback loop: research analysts and portfolio managers can conduct engagements on the weakest sub-indicators, and the company’s responses can be fed back into the indicator to enhance our insights.
Figure 3: Neuberger Berman climate transition world equity strategy (December 2024)
Example: Engaging with an auto manufacturer
Figure 4: Net zero alignment status and engagements with company over time
Following the auto manufacturer’s corporate strategy update in August 2024, our autos analyst revised its net-zero alignment indicator score. The company had revealed a significant shift in its electrification roadmap, with reduced capital expenditures, scaled-back production, and delayed launches of electric vehicles (EVs). While these changes are aimed at optimising resource allocation and limiting losses in the near term, they represent a marked departure from its previous aggressive commitment to electrification, raising concerns about its alignment with net-zero objectives.
The company announced plans to cut 800 jobs in the UK over the next three years as part of a broader restructuring effort to achieve long-term competitiveness. This move is part of a larger European restructuring plan that primarily affects operations in Germany. The job cuts came amidst criticism of the auto manufacturer’s slow transition to EVs, with the company starting 2024 with only one EV model, while competitors like BMW and Hyundai were surpassing EV sales targets.
The revisions to the company’s indicator score reflect this strategic pivot. Specifically, the decarbonisation strategy sub-score was downgraded, as the company’s reduced EV rollout undermines its ability to achieve meaningful emissions reductions. The capital allocation sub-score was similarly reduced, reflecting the diminished financial commitment to electrification. Lastly, the emissions performance sub-score was adjusted downwards to account for the likely misalignment of the future emissions trajectory with 1.5°C targets due to slower EV adoption. These adjustments lowered the overall status from ‘aligned’ to ‘aligning’, a more conservative view of its net zero alignment trajectory.
This case study aims to contribute to the debate around topical responsible investment issues. It should not be construed as advice, nor relied upon. It is written by a guest contributor. Authors write in their individual capacity – posts do not necessarily represent a PRI view. The inclusion of examples or case studies does not constitute an endorsement by PRI Association or PRI signatories.
