As investors, we have the ability and the responsibility to speak to the boards and management of the companies that we invest in, to raise concerns, offer feedback, and also share best practice. This dialogue enables us to get a sense of how key risks, such as the energy transition, are being managed, and helps us gauge how companies are positioned to pursue opportunities. We also gain useful insights into corporate culture. Our experience to date suggests that how a company engages with its investors and how receptive it is to feedback can be indicative of how open it is to change and, as a result, how wholeheartedly it is embracing the energy transition.
Stewardship feeds the research process
Our engagement uncovers data that cannot be gleaned from an annual report or a presentation alone. This data feeds into the mosaic of information we use in our investment research process and helps us be better informed investors and therefore better allocators of capital.
Companies must demonstrate a genuine commitment to the energy transition
Currently, it is rare to see a company report which does not contain the phrase ‘net zero’, and ‘greenwashing’ is a concern. When we analyse companies, and assess their strategies, there are a number of specific things that we look for. We want to see a roadmap, with interim targets up to 2025, 2030 and 2040. We want to see a discussion of scenario analysis, specifically showing that companies have considered how they could adapt to a range of different eventualities and externalities. We want to see evidence that the oft-stated commitment to the energy transition is genuine. Crucially, through our persistent engagement, we want to see how well the tone from the top is supported by action at the operational level.
One thing we find really useful in helping us understand a company’s approach is disclosure in line with the TCFD (Task Force on Climate-related Financial Disclosures) recommendations. This reporting framework provides a good structure for this level of detail. It should be emphasised that this assessment is undertaken in partnership with our investment analysts. These considerations are part of the fundamentals – capital expenditure is costs, for example, and changing product lines are changing revenue streams. Our collective viewpoints contribute to a better determination of the credibility of a company’s strategy.
The social implications of the energy transition
We see the social and environmental implications of the energy transition as intrinsically linked to the sustainability of companies’ business models. Human-capital management has been an important topic for Newton* for some time. Over the years, we have engaged with companies across the energy and utilities sectors in particular, in order to research how they are managing the transition for their employees. We ask companies to explain what they think the future model of work will be and how they are reskilling, or upskilling, their employees for the future they anticipate. Arguably, this area has been overlooked by many investors for a long time, with the result that there is a dearth of useful information and data investors can use to assess how companies are managing this risk, so peer-group analysis is challenging.
We look for companies to provide detailed disclosures and improved KPIs (key performance indicators), including what kind of reskilling and training is available to employees and what take-up rates have been across the business. We also look for longer-term planning measures which demonstrate considerations from an employee perspective, such as a thoughtful approach to a shift in geographic location based on future product offerings.
* Newton Investment Management Ltd
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management Limited is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton Investment Management Limited’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. ‘Newton Investment Management Group’ is used to collectively describe a group of affiliated companies that provide investment advisory services under the brand name ‘Newton’ or ‘Newton Investment Management’. Investment advisory services are provided in the United Kingdom by Newton Investment Management Ltd (NIM) and in the United States by Newton Investment Management North America LLC (NIMNA). Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation ('BNY Mellon').