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By David Kathman, CFA, Ph.D. | 06-14-2016 02:00 PM

Does Sustainability Weigh on Fund Performance?

Ingrid Dyott from Neuberger Berman thinks considering ESG factors makes them more thoughtful investors.

David Kathman: Hi, I'm David Kathman. I'm a senior analyst at Morningstar. And I'm here with Ingrid Dyott, one of the portfolio managers of Neuberger Berman Socially Responsive.

Welcome, Ingrid.

Ingrid Dyott: Hi, David.

Kathman: Now, Ingrid, as the name of the fund implies, you do what used to be known as socially responsible investing, although nowadays people tend to use the terms ESG investing for environmental, social, and governance, or sustainable investing. Could you explain what that means to you and how you implemented it into the fund?

Dyott: Yeah, I think you make a really good observation that there's a proliferation of language: sustainability; environmental, social, and governance; socially responsive; impact investing, call it what you want. From our perspective, ESG--environment, social, and governance--are factors that are really relevant for investors to identify risks to underlying businesses as well as to identify opportunities for growth. Environment can be everything from their footprint of their operations to the attributes of their products and services that a company offers. Social is everything from workplace issues, diversity, how you attract and incent talent, as well as complex issues like sustainable supply chains. And governance has been around for a long time. That's not just what are the incentives for corporate management, but what's the oversight of the company that you're investing in from a board of directors perspective?

Kathman: A lot of people tend to think of this kind of investing as screening out certain companies like alcohol, tobacco, and so forth. But you have a more positive approach to the social screening, don't you?

Dyott: Yeah, absolutely. I do think you are right that the industry has a legacy of avoiding certain types of companies, but more importantly is knowing what you own and understanding the quality attributes that ESG can help uncover in fundamental analysis. So, our process is very much understanding what are the material issues from an environmental, social, and governance perspective as it relates to our investment process. But first and foremost, we want to find companies that are well-positioned.

Kathman: Could you give an example of a company that you like and how those criteria apply to it?

Dyott: Sure. So, a company that we've owned for a long time in the fund--and keep in mind, our turnover rate tends to be in the 25% to 30%. We have companies in the portfolio that have been there for many years. And a good example of a company that's been in the fund a long time, is one of our top 10 holdings and a company that we continue to hold is Texas Instruments. So, you may say, what are the relevant ESG issues as it relates to Texas Instruments?

Take a step back, we like Texas Instruments because the company is in analog devices, analog chips, and that's a very interesting market in the sense that it's proliferating across industry segments from industrials, to consumer products, to automobiles. You think about taking a real world signal, putting your foot on the break, opening and closing a refrigerator, and enabling energy efficiency, emissions reductions, optimizing power, that is what sort of the intelligence behind products is what Texas Instruments provides.

From an ESG perspective, the products are very attractive to us in terms of a world that's concerned around climate change, around fuel efficiency, emissions controls, emissions reductions--their products enable that in a whole range of end products. Likewise, from an operations perspective, they have been very thoughtful with their manufacturing around water issues and energy issues. So, a good example of how ESG issues identifies high-quality management in terms of operations of their manufacturing and also identifies companies that have good secular growth in terms of being a leader in analog chips.

Kathman: So, it's all integrated. You're looking at the ESG factors along with the other factors that you look at just to find good investments in general?

Dyott: Exactly. So, for the Neuberger Berman Socially Responsive Mutual Fund we do have five avoidance criteria: tobacco, alcohol, gambling, nuclear power, and weapons-related defense. The lion's share of our time is spent on thinking about identifying, looking at materiality as it relates to ESG issues, and that's very much integrated into our identification of quality businesses. So, we're investors, investors first, and we think about this from an investor perspective, looking to identify elements that may derail a company's ability to execute or in the case of Texas Instruments, is an identifier of a well-run company that also has a decent growth opportunity given its product attributes.

Kathman: Now, a lot of people worry that social screening like this will hurt performance, but there have been a lot of studies done, including some by Morningstar, that have shown that there isn't really a significant negative impact on performance from social screening. And your fund has a very good long-term record. Has that been your experience?

Dyott: I think that it's the myth, the largest myth, that continues to be a cloud over the industry. And to your point, there's academic research, there's company research, business school reviews, Morningstar, that have all shown that there are many viable investment options within the ESG space. There have been periods of time that our fund has underperformed but it's never been attributed to ESG factors. So, we don't find it as that hampers our ability to find companies. In fact, we think it helps us be more thoughtful investors.

Kathman: Well, that's a good place to end. Thank you very much for being here, Ingrid. I appreciate your time.

Dyott: Thank you for having me.

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