Q&A: Engagement and ESG innovation in commodities

Neuberger Berman’s Hakan Kaya discusses how the team improves ESG results in their commodity exposures, and where he thinks there is a tipping point for investment

Neuberger Berman's Hakan Kaya


ESG Clarity

Hakan Kaya, senior portfolio manager, Neuberger Berman discusses how the team engages with commodity exchanges and corporations as well as the emerging opportunities in the sustainable futures markets and carbon markets.

Kaya is manager of the Neuberger Berman Commodities UCITS fund, which holds roughly 28 commodities across a variety of sectors, such as gold, Brent crude oil, gasoline, copper, corn and sugar.

How closely do you work with the ESG team at Neuberger Berman for these strategies?

We take a holistic approach to investing and engagement across our commodity strategies, which includes working with a range of stakeholders, including the ESG team.  Our collaboration with the ESG team involves evaluating responsible investment methods in commodities and creating fresh structures for commodity investment that are cognisant of ESG factors.

See also: – Commodities will become stranded if they don’t go green

As a specialist in commodities, how does ESG factor into commodities investing? 

Incorporating ESG factors in commodities investing is not about excluding specific commodities due to their inherent traits. Instead, it’s about how we invest and interact in these markets to encourage improved ESG results. This includes managing climate risks, facilitating energy transitions, and reducing overall economic risks by acting as a liquidity provider in derivative markets. This method is not only responsible, but may also present the potential for appealing long-term returns.

Is there an opportunity to engage?

Engagement plays a vital role in our approach to responsible commodity investing. By actively engaging across the following areas, we can contribute to more efficient and responsible commodity markets:

  1. Engagement with exchanges: We engage with commodity futures exchanges and other key market participants to encourage the development of more responsible products. Exchanges should facilitate green-tracible inventory policies especially for ‘greenabler’ commodities. This is particularly relevant for new derivatives expected to support the transition to a sustainable economy.
  2. Engagement in new sustainable commodity futures markets: We see an opportunity for a collective of impact-oriented commodity investors to become more involved in developing and providing liquidity for new commodity-market products that can improve sustainability. This could represent a tipping point in their viability.
  3. Engagement with corporations: Engagement should be a holistic portfolio management exercise. Investors having exposure to commodities through equites or debt products should actively look for impact. Divestment from commodities, a common practice among ESG aware investors, is not a solution. In fact, it can create more problems. Instead, it’s critical to engage with commodity producing and consuming companies for improvements. This engagement is aimed at improving disclosure on how these companies are exposed to the transition to a more sustainable economy, and to align their business models with it. It is important to recognise that a significant portion of cap-weighted equity indices are in commodity producing companies and collectively investors can make a change.

There are controversies attached to some commodities. How do you navigate this and avoid greenwashing? Is it possible to invest in commodities responsibly?

Greenwashing is an unfortunate element of ESG investing. However, compared to equity and debt markets where this practice may be more prevalent, the risks of greenwashing are relatively minimal in exchange-traded derivative markets. This is largely due to the transparency and standardisation provided by these exchanges. We are optimistic that, through investor engagements, these exchanges – where physical producers interact with financial investors – are likely to transition towards green-traceable inventories and further facilitate the green transition.

Are there any new innovations in commodities that ESG focused investors would be interested in? 

One of the prominent developments is the emergence of Sustainable Commodity Futures Markets. These markets deal with commodities that bear certifications for responsible sourcing and complete traceability. For instance, futures contracts for commodities like green aluminium and fair-trade coffee are being explored, which can contribute to responsible investing. 

Another significant innovation is the advent of carbon markets. These markets, both in the compliance and voluntary segments, offer futures contracts and are anticipated to support the transition towards a sustainable economy. Notably, futures contracts on carbon emissions and carbon credits are being recognised as crucial additions to the traditional commodity futures realm.

See also: – COP28: Carbon markets crediting agencies align standards to increase integrity and transparency

Finally, there are carbon-tilted commodity indices. These are new products with commendable intentions, but they may lead to unintended ESG outcomes. These indices are created to rank commodities based on environmental scores and invest in futures according to these rankings. However, as we’ve argued earlier, this concept of a carbon footprint is not applicable to derivatives and this practice might lack a philosophical foundation to make a significant impact. Assuming it does have an impact, this practice could potentially do more harm than good for society by creating misleading signals and misdirecting resources. If every investor were to follow this approach, it could potentially result in significantly undervalued fuel prices for a prolonged period. This could potentially hinder the acceleration of aspirations for energy transition that require costlier, greener energy.

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