Investment professionals throughout the firm are responsible for incorporating material ESG factors in portfolios and investment research as a part of their role. To reinforce the importance of ESG to our work, compensation for many investment professionals is tied to ESG research insights and integration. We believe the most effective way to integrate ESG factors into an investment process over the long term is for investment teams themselves to research ESG factors and consider them alongside other inputs. For this reason, ESG is included in the work of our research analysts rather than a separate ESG research team. The investment teams can then choose how best to apply all the tools of active management, whether that is to engage or ultimately to sell a security when it no longer offers attractive risk-adjusted potential returns. To augment our analysis, we regularly add new data sets and leverage the capabilities of our data science team, which play a key role in the development of our firmwide proprietary ESG ratings system, the NB ESG Quotient. We believe our proprietary data allows us to identify sometimes hidden issues whose contribution to one or more investment themes may not be fully expressed in financial disclosures, but are critical to the fundamental thesis of a company. We are continually exploring new ways to strengthen and evolve our investment processes and tools to enhance the data we use, facilitate its application across our investment platform and provide transparency to our clients through reporting.
We believe alternative and big data are likely to transform active management over the next five years, minimizing reliance on voluntary disclosure and large third-party data providers. Our ESG Integration Framework Each portfolio manager has a customized approach to ESG integration that is driven by multiple factors, including the objectives of the strategy, asset class and investment time horizon. For our ESG-integrated strategies, each portfolio management team selects an approach from our ESG Integration Framework: Avoid, Assess, Amplify or Aim for Impact. In building their portfolios, portfolio managers consider whether to simply exclude particular companies (Avoid), reach a more holistic understanding of risk and return (Assess), tilt the portfolio to best-in-class issuers (Amplify) or invest in issuers that are intentionally generating positive social/environmental impact (Aim for Impact). The approach to integration can be further customized by the type of investment vehicle employed for investing—for example, specific client vehicles can be created to implement client-specific avoidance criteria, to tilt toward specific ESG characteristics valued by the client or to seek certain types of positive impact such as pathways to net zero. We know that every client journey is different when it comes to ESG, and changes in regulation or legislation over time are going to require a product that can be dynamic and adaptable.
2021 ESG ANNUAL REPORT
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