Leading the Way in Private Markets ESG Integration

    Asset managers catering to an increasingly demanding institutional clientele have in recent years witnessed first-hand how ESG integration in private markets is rapidly becoming a question of good underwriting. Early adopters have also realised that their efforts are not without rewards. Integrated properly throughout policies, processes, and organisational capacity, ESG can potentially create value.

    Jennifer Signori
    Manager Director, Private Markets
    ESG & Impact Investing
    Neuberger Berman

    Independent, employee-owned investment manager Neuberger Berman (NB) has a reputation for being a frontrunner when it comes to sustainability. In 2020, the UN PRI named the firm a Leader, a designation awarded to fewer than one per cent of investment firms that are PRI signatories for excellence in ESG practices. The PRI also awarded NB an A+ for ESG integration across every eligible asset class and for its overarching approach to ESG Strategy and Governance..1

    NB Private Markets has been an active investor since 1987. It has seen strong and prudent growth over the past ten years, largely driven by product innovation and an increased focus on delivering customised client solutions. The NB Private Markets platform invests in funds, both on a primary and secondary basis, as well as direct equity co-investments, private credit and specialty strategies, including brand licensing (“Marquee”), direct Italian investments (“Renaissance” and “Aurora”), health care credit (“Athyrium”) and real estate investments (“Almanac”).

    To find out more about how ESG is embedded into the NB Private Markets investment process, we talk to Jennifer Signori, Managing Director, Private Markets ESG and Impact Investing. “We believe the most effective way to integrate ESG into an investment process is for investment teams to consider ESG as part of rigorous due diligence and portfolio management,” she says. “We are able to leverage the broader firm’s ESG capabilities and processes, from initial due diligence to ongoing investment monitoring, which allows us to integrate ESG throughout the lifecycle of the investment process2,” adds Signori.

    The importance of a stable base

    Signori reveals that ensuring ESG is truly ingrained in the backbone of the firm means laying the foundations right. At NB Private Markets, this is generally done in three ways. “Firstly, we typically apply robust oversight and responsibility to our process,” she explains. “Our investment teams are responsible for conducting the ESG analysis, which is then complemented by the Investment Committee’s evaluation of ESG considerations when the final investment decision is taken. Our ESG team can leverage the broader firm’s ESG capabilities and resources, including Neuberger Berman’s ESG policy, proprietary ESG materiality assessments, and ESG data and analytics.”

    The second part of the process is due diligence and selection. “ESG analysis is included in Investment Committee memorandums and forms an important part of the due diligence in the direct investments we consider,” comments Signori. “This analysis includes an assessment of material ESG factors specific to the potential investment’s industry sector. We also measure and assess the ESG integration of the lead private equity managers with which we invest before making a final investment decision.”

    “Thirdly, we are frequently able to continue considering ESG once the investment decision is made, through careful monitoring and ownership,” continues the managing director. “Importantly, we monitor direct investments for ESG violations and risks. We also engage with many of our private equity managers to share ESG best practices and resources where possible and aim to take an active leadership role in ESG-related industry collaborations.”

    Focusing on what matters

    In private markets, rigorous company due diligence tends to be a time-consuming, resource-intensive process. Assessing the materiality of ESG factors is essential to cope with it all. “We focus on ESG factors likely to be material on an industry and asset class basis,” explains Signori. “When conducting diligence on primary fund commitments, we aim to assess the lead GP’s level of ESG integration at both the firm and the fund strategy level based on industry best practices. For example, we look to assess the GP’s commitment to ESG by evaluating the firm’s ESG policy and governance, as well as how ESG is incorporated at the investment strategy level, that is, in due diligence, selection, ownership, monitoring, and reporting.”

    The team conducts due diligence on each specific co-investment opportunity to ensure that the potential portfolio company and underlying private equity manager appropriately manage ESG risks. “We use our proprietary NB Materiality Matrix to assess industry-specific ESG factors that are likely to be financially material, as well as the private equity manager’s level of ESG integration based on Neuberger Berman’s manager ESG Scorecard,” says Signori.

    “Lastly, we have introduced specific investment screening and monitoring tools,” she explains. “For private market investments where disclosure is more limited, we use a reputable data science monitoring tool to identify past ESG issues at private companies. This helps us supplement direct dialogue with the private equity manager when making co-investments. Our investment professionals are also responsible for considering international standards violations and other topic areas in accordance with our Responsible Avoidance Policy. Last but not least, we engage with the private equity co-investment managers to understand how the company is managing and mitigating material ESG factors and how the manager intends to improve on this over time.”

    Speaking of materiality, Signori is eager to point out the vital role that private equity plays in tackling the challenge of climate change. “We believe that climate change can be a material driver of investment risk and return across industries and asset classes and, as such, cannot be ignored. Private equity companies generally have lower carbon intensities based on sector representation. Furthermore, the private markets are generally where innovation and growth can be found. In our view, Private equity has an important role in safeguarding the planet – providing opportunities to invest in climate solutions, transition, and adaptation.”

    Collaboration: the key to tackling the data challenge

    Commenting on the quality, availability, and reliability of ESG data, Signori admits that there is a greater abundance of publicly available data and metrics in the public markets relative to the private markets. “This is not only related to the data metrics themselves but also the mechanism in which the data is shared and aggregated among investors,” she points out. “However, this is a rapidly evolving area with more private equity managers more systematically tracking and reporting material ESG metrics. Collaboration is key. We recently became a signatory to the ESG Data Convergence Project which aims to help standardize ESG metrics among both GPs and LPs.. We are also investing in our data systems and processes,” adds Signori.

    Once you realise the importance of collaboration, it is also imperative to act on it. “We actively participate in industry engagement and collaborate with other PE managers,” says Signori. “For example, in December 2021, NB co-hosted a webinar with the Institutional Investor Group on Climate Change to help educate private equity managers on how to implement net-zero objectives in private equity investing. We are also a member of the ILPA Diversity in Action working group, highlighting our engagement on diversity and inclusion initiatives.”

    Looking ahead

    NB Private Markets has a lot to be proud of when it comes to recent ESG achievements. In 2018, the firm launched a Private Equity Impact strategy that invests in direct and fund investments that seek to achieve positive social and environmental outcomes. Later, in 2021, NB implemented a formal step in the ESG due diligence process for co-investments to collect carbon footprint information. “We are also a supporter of the CDP’s private equity technical working group to encourage greater carbon disclosure in the private equity industry, among other initiatives such as Initiative Climate International, adds Signori.

    So, what is next for NB? And what are the firm’s sustainability aspirations? “We want to be our clients’ partner of choice for their most innovative and forward-looking ESG objectives. We continually seek to improve how we incorporate ESG in our investment process in a way that is consistent, rigorous, and evidenced. We also remain focused on solving collective challenges facing the private equity industry, such as greater ESG data consistency and transparency, and helping our clients understand the sustainability characteristics of their portfolios and how their investments have real-world outcomes,” concludes Signori.

    1. Additional information on PRI Leaders group and scoring available here
    2. Shared firm resources. Subject to Neuberger Berman’s policies and procedures, including certain information barriers within Neuberger Berman that are designed to prevent the misuse by Neuberger Berman and its personnel of material information regarding issuers of securities that have not been publicly disseminated

    Image courtesy of Donal Gianatti on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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