With the focus on climate change heating up, we outline Newton Investment Management Ltd’s efforts on the journey to net zero.
- In March 2021, Newton Investment Management Ltd joined the Net Zero Asset Managers initiative, and we are taking steps to analyse and implement the requirements.
- Our approach will adapt as science, policy responses and management approaches progress, and we will seek to manage for better long-term climate outcomes, even if that means individual climate measures appear worse in the short term.
- We expect that the transition to net zero will present a number of investment opportunities, which we will look to identify using our thematic approach.
With the United Nations Climate Change Conference (COP26) taking place in November, the focus on the climate crisis continues to intensify. It is an issue that clearly presents financial risks and opportunities, but also threatens the climatic stability that has enabled modern life as we know it. In response to this, in March 2021, Newton joined the Net Zero Asset Managers initiative, which comprises a group of 128 asset managers with $43 trillion in assets under management, who are committed to supporting the goal of net-zero greenhouse-gas emissions by 2050 or sooner. We are taking steps to analyse and implement the requirements of the initiative, and are due to publish our overall approach by March 2022.
Developments in climate science and standards
The sixth Intergovernmental Panel on Climate Change (IPCC) report published on 9 August 2021 updated policymakers (and the investment community) on the latest scientific data regarding anthropogenic climate change. The report was described as a “code red for humanity” – indicating that we have reached a critical point at which urgent and dramatic reductions in absolute greenhouse-gas emissions are needed to avoid potentially devastating consequences for the health of the planet. The report indicated that the scientific community had increased confidence in the various potential outcomes for the climate, backed by empirical observations and improved data-processing techniques. Few of these outcomes made encouraging reading.
A common set of standards on climate reporting by sovereign issuers, corporate entities and investors is now emerging, and we welcome these standards as a means of providing crucial guidance for asset owners and managers. We also recognise that they are in their first iteration; these issues are complex and therefore the standards are likely to evolve over time, which will require an adaptive approach to modelling and reporting of climate-related risks, opportunities and impacts.
Supporting the development of common standards
We have taken part in the Institutional Investors Group on Climate Change (IIGCC) target-setting groups to ensure that the guidance standards are robust and practical to implement. Additionally, we have participated in consultations on target setting with the IIGCC; it is a complex task to set targets at an organisation and fund level, and therefore we have sought guidance and participated in the conversation about how this can be achieved. Moreover, we have conducted meetings with organisations that determine and audit science-based targets, which has assisted us in building our understanding of what the broader industry is doing.
Development of principles that underpin our approach
Adapt and evolve: Our approach will seek to incorporate a holistic set of actions with accompanying relevant and robust measures and targets. These will need to adapt over time as science, policy responses and management approaches progress. Active management is a dynamic process where the aim is to navigate client portfolios through an ever-evolving landscape of opportunity and risk.
Real-world change: We will seek to manage for better climate outcomes, even if that means individual climate measures appear worse in the short term. For instance, choosing to invest in a heavily emitting utility, engaging with it and encouraging it to adopt a credible, science-based decarbonisation strategy could be more beneficial for the climate than exiting sectors that will continue to play a central part in meeting the energy needs of society. This will be done in a thoughtful manner which incorporates robust fundamental analysis, and we will not engage without cause. Our aim is not to transition our portfolios; we want the real economy to decarbonise.
Paris-aligned portfolios: We are committed to evolving existing portfolios, as well as developing new strategies, to manage the long-term risks and opportunities associated with the transition to a low-carbon world. Identifying the winners of this transition will require deep fundamental research to better understand the influence of this transition on business and economic models. We must also consider the speed and intensity of the policy response from governments that will shape the incentives in the economic and financial system. Such an approach must go beyond a simple exclusion of high greenhouse gas-emitting economic activities to meet targets related to market indices. Instead, this approach must be based on the sustainability impact of business and economic models, and the financial risk-reward analysis of these outcomes.
Climate opportunities: The inevitable policy response to the urgent need to decarbonise the global economy should lead to a significant reallocation of capital across a broad range of economic activities. While it is important to actively manage the risk of stranded physical assets and business models, there will also be a myriad of new investment opportunities aligned to delivering the products and services needed to enable a successful energy transition. Our longstanding thematic approach to investing is an important pillar in understanding where in the value chain climate-related opportunities can be best identified.
Mechanisms for expressing climate-related issues: We have identified five key methods by which we can express our views or influence outcomes linked to climate change:
- Work with clients to understand and implement their strategic climate objectives
- The purchase, sale or change of weight of a security
- Collaborative or direct engagement with issuers, regulators and governments
- Voting at company meetings
- Transparent reporting and analysis of climate risks and solutions in portfolios
Measures: Initially, we plan on using the following measures to track and report progress at the aggregate house and selected individual portfolio level:
- Portfolio absolute emissions – measured in tonnes of carbon dioxide equivalent (tCO2e)
- Intensity of portfolio emissions (tCO2e / $m invested)
- Number of companies with credible ‘science-based’ or equivalent targets
- Number of climate-related engagements
- Number of climate resolutions voted ‘in favour of’ as a proportion of total climate resolutions
Target-setting approach: Our approach will involve the comparison of our portfolios against a hypothetical Paris-aligned global economy. While formalised Paris-aligned benchmarks are still in development, as a first iteration, we will compare our portfolios’ emissions intensity against their respective benchmarks, having applied an annualised reducing-balance percentage reduction of 7%. This percentage reduction is sourced from an emerging consensus from recent work including the IPCC’s Special Report on Global Warming of 1.5°C, the Network for Greening the Financial System’s climate scenarios, and the United Nations Emissions Gap Report.
We recognise that in emerging markets, emissions are likely to rise until 2030. However, the purpose of the benchmark is to provide a scientifically accurate profile of what the global economy should be doing if the global temperature increase is to be limited to 1.5 degrees. As regional and sectoral pathways become available and easier to apply, we will consider taking a more nuanced approach to these; however, there are significant data and technology requirements needed to do this in an efficient manner.
The journey to net zero
While we are pleased with our progress thus far, we are still in the process of refining our plans, none of which are completely formalised. It is easy to make commitments, but backing them up over the long term with subject-matter expertise, technology and cultural buy-in are crucial to ensure longevity. As the transition to a low-carbon world continues to gain traction, we are committed to supporting the goal of net zero greenhouse-gas emissions by 2050 by working alongside the Net Zero Asset Managers Initiative, and we will continue to adapt to the complex and evolving investment landscape.
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.