If you thought climate-conscious investing was as easy as dumping energy stocks, think again: In the first half of 2022, the energy sector jumped 31%1 while the broader market fell 20%2 .
At Neuberger Berman, we recognize that much of the world still runs on fossil fuel—to heat homes, transport grain, and even avoid famine. However, we firmly believe investors can construct portfolios that substantially reduce their carbon footprints while retaining exposure to all sectors—including energy.
Consider the chart below, in which we rank each member of the S&P 500 based on its carbon intensity3 and plotted its cumulative contribution to the index. (Those who prefer “carbon yield”—or carbon-emissions scaled by market capitalization—would see similar results.) As the data shows, a small concentration of companies is responsible for an outsized portion of carbon intensity. In fact, the most carbon-intensive 1% contributes 29% of overall carbon intensity—yet the tracking risk of a portfolio without those names is a mere 20 basis points4.
How to put this valuable insight into practice?
First, we recommend excluding companies in carbon-heavy industries, such as thermal coal. This might include companies generating at least 25% of revenues from thermal coal mining, or companies planning to expand their thermal-coal power-generation capacity.
Second, we suggest screening for companies based on their current carbon intensities and ongoing assessment of their specific renewable-energy transitions—because every company’s pathway to decarbonization is different, and no one size fits all. That’s why we developed our proprietary “net-zero alignment indicator,” which scores companies using more than 30 data points from traditional ESG providers and specialized climate data sets, as well as sector-specific data points and qualitative insights based on interactions with company management.
Third, we recommend direct company engagement and shareholder advocacy, such as our NB Votes Initiative. Since 2020, our firm has been announcing our voting intentions in advance of the annual general meetings (AGMs) of a select group of companies in which we invest on behalf of clients. In 2021, we disclosed key votes and supporting rationales for 62 of our portfolio companies—twice as many as we announced in 2020.
Finally, we believe effective climate-conscious investing takes great discipline and skill—and that by working together with our clients, there are many ways we can help them meet their investing objectives while paving a path toward a more sustainable future.
