By mid-2023, Neuberger Berman (NB), an active asset manager, had grown its assets under management to about half a trillion dollars and took pride in its client centricity and innovative spirit. Responding to client demand for investment products that integrated climate-related risks and opportunities, NB had designed an innovative measurement system, the Net Zero Alignment Indicator, assessing companies' alignment with the world's goal to reach net zero emissions around mid-century, built engagement capabilities among its research analysts and portfolio managers, and offered several investment products across asset classes and geographies. While most climate transition strategies almost completely divested from the energy sector and relied on a single quantitative data metric, NB's approach invested in energy and other high carbon intensive companies, used a plethora of quantitative metrics and qualitative analyst judgments, engaged with management leveraging bottom-up fundamental analysis, and over time re-assessed firm alignment with net zero goals. Given that NB's climate transition approach included high carbon emitters and its complexity, how could NB communicate its approach effectively to asset allocators? A second question revolved around "how high to set the bar." NB had to make critical design choices regarding the Net Zero Alignment Indicator and derivative investment strategies that would have significant implications for the climate transition and clients. Lastly, climate focused funds had seen significant inflows in China and NB wanted to integrate its net zero alignment indicator into the construction of investment products there. Given this, should the net zero transition alignment standards be different across geographies?

In May 2022, Roche Group, one of the largest healthcare companies in the world, hosted its first ESG investor event focused exclusively on its efforts to impact access to healthcare. While Roche had recently set an ambitious goal to double the number of patients that had access to its innovative medicines and diagnostic solutions within ten years, it was not at all clear how the firm should structure its resource allocation criteria, performance evaluations, reporting and incentive systems to align efforts internally toward these goals. Group CFO and CIO Alan Hippe was presented with two options, none of which he was particularly enthusiastic about. One was to lower the hurdle rate for projects related to ESG issues, thus relaxing profit expectations. The alternative was to incorporate a set of minimum ESG requirements in all of Roche's new project proposals. In this case, however, the risk was to reduce the focus on ESG from a strategic priority to a compliance exercise. In the presentation shared with investors at the ESG event, access to healthcare had been positioned as Roche's greatest contribution to society. This type of public commitment required more than a compliance-level of effort. In September, Alan Hippe would sit down with the executive committee to chart a path for integrating ESG issues into Roche's project selection and business planning. Hippe went on to define three objectives for ESG at Roche, "we need to align on targets, we need to get resource allocation right, and we need to report both internally and externally."

Spreadsheet supplement to case 123014.

As of August 2022, the Itau BBA had structured dozens of sustainability linked bonds, which made future interest payments a function of the borrower meeting a target for a sustainability metric, and had solidified its reputation as a pioneer of sustainable finance in Latin America. The next few years would provide the firm an opportunity to broaden its sustainable finance portfolio by engaging more firms in measuring and improving their performance on ESG issues, such as carbon emissions, biodiversity, workplace safety, and diversity and inclusion. At the same time, Itau BBA would need to carefully navigate the financial and reputational risks associated with underwriting, marketing, and distributing sustainable debt of firms exposed to significant ESG risks. Should Itau expand its sustainable debt business to firms with high ESG risks and if so, what must be done to gain support from Itau executives, investors, and high-risk issuers? What systems should Itau adopt to alleviate concerns and would the transaction costs of these systems, such as enhanced disclosure or monitoring, be too steep to justify underwriting the product? Luiza Dias Lopes Vasconcellos, the partner heading sustainable finance at Itau BBA, wondered whether pursuing growth in sustainable debt was worth the risks involved.

In the beginning of the 21st century, the European Union (the EU) had led the global fight against climate change with a wide array of policy measures. The EU's primary approach to climate policy had been taxation via the European Union Emissions Trading System (EU ETS), the first carbon cap-and-trade regulation. EU ETS was a market-based solution designed to reduce GHG emissions by setting an upper limit on domestic emissions. However, the effectiveness of EU ETS had been debated since its inception in 2005. Years later in July 2021, the EU proposed implementation of a Carbon Border Adjustment Mechanism (CBAM), a carbon border tax intended to address business competition challenges plaguing EU ETS by establishing comparable carbon costs within EU borders for imports and local goods. Nevertheless, the CBAM proposal was also met with considerable skepticism. The potential enforcement of CBAM raised several questions for cement and steel producers around the world. First, what would be the impact on their strategies and financial performance? Second, what actions could they take in response? Stakeholders in other industries that relied on cement and steel to produce their own goods pondered the same questions. In addition, several questions emerged about the potential impact of CBAM on carbon emission reductions both in the EU and in other jurisdictions. Would CBAM be effective at reducing emissions and addressing emissions leakage? How would other countries respond to CBAM and would the response affect those countries' carbon emissions reduction efforts?