Why we believe effective sustainable engagement requires a truly holistic approach and a focus on quality over quantity.
- At Newton, we are seeking a more focused approach to stewardship as part of our ‘responsible investment 2.0’ plans.
- We believe the engagement process needs to be a holistic partnership between the stewardship, ESG research and wider investment teams.
- As active rather than passive investors, we believe we can have a far more investment-led conversation with a company to explain the changes we would like to see, and, pertinently, how we believe the company can enhance its business model.
- It remains vital to speak directly to companies to explain why an issue is important and how it can help it evolve its business model towards a more sustainable future.
Before entering any sustainability-related company engagement, we undertake significant research to examine the rationale for talking in the first place and what we hope to achieve. The criteria can differ, but often we may have identified material risks from a business or planetary sustainability perspective, and therefore a company that lags its peers.
At Newton, we are seeking a more focused approach to stewardship as part of our ‘responsible investment 2.0’ plans. This means evolving to become highly organised and targeted in our engagement prioritisation with a focus on outcomes. As head of stewardship, I work on determining the engagements where we believe we can have most impact, and where the pressure is most needed. In the case of equities, the considerations will revolve around how much we have invested, what the company’s shareholding structure is, and whether minority investors have a voice at the annual general meeting.
After the initial assessment, we focus on a company’s ESG risk exposure via considerations such as credibility of net-zero plans, employee engagement, and the impact of poor management on the business. We use these questions to frame our dialogue with a company to enhance its sustainable credentials, with the aim of also creating future opportunities for it.
Importantly, we believe the engagement process needs to be a holistic partnership between the stewardship, ESG research and wider investment teams. As stewards of the companies they have invested in, members of our investment team take the lead in strategic engagements. Within our responsible investment team, the ESG research team provides support and subject-matter expertise on environmental and social considerations, shares guidance on best-practice expectations, and advises as to how a company fares on these versus its peers. The stewardship team provides governance-related support and expertise, and based on initial conversations with the investment team, we may choose to engage as an individual team, or in partnership.
A current example where the teams are working in tandem is a continuing engagement with a FTSE 100 company which recently appointed an activist investor to its board. We met the chair to understand whether the appointment had affected board dynamics or the execution of strategies at a time when the company faces significant pressure to deliver on its sustainability targets. All three teams (ESG research, stewardship and the wider investment team) were also involved when we met a US technology giant earlier this year to understand how it processes employee feedback and manages its relationship with its staff. In advance of the dialogue with the company, collaboration across our teams is crucial in planning our approach to research, engagement and voting.
An obvious example of a potential ‘red flag’ is if we see a significant gap between the current operations of a heavy carbon-emitting company and a net-zero scenario. Our approach to net zero is to focus on the financed emissions in the portfolios we manage, and to scrutinise the credibility of companies’ transition plans. This approach, as with many of our sustainability-focused engagements, seeks commitment and leadership from all levels of an organisation. Having multiple company touchpoints for engagements (the board, executive management and business unit heads) enables us to get a sense of how consistent this commitment is, and how credible the team is. Both at Newton and in previous roles, I have sat in many conversations with boards where I have sensed that sustainability boxes were merely being ticked, with issues not being deemed as pressing. At Newton, we have walked away from engagements where we have judged that our recommended changes to help minority shareholders have been ignored.
As active rather than passive investors, we believe we can have a far more investment-led conversation with a company to explain the changes we would like to see, and, pertinently, how we believe the company can enhance its business model. This approach has been effective for selected energy companies.
Quality of engagement
We are in the process of setting multi-year engagement targets with our investment teams as they take an increasingly prominent role in the sustainable engagement process, and we are shifting our focus to allocate greater resources to companies where we believe we can genuinely unlock value or reduce risks. In our view, there has been a historic tendency in our industry to measure quality of stewardship by the number of votes against management at shareholder meetings, or in terms of the number of companies or scale of assets under management covered by the engagement. By shifting our emphasis to strategic engagement, we are focusing more on the quality of the impact we can have, rather than simply hitting an abstract target.
We regard advocacy and collective efforts as effective tools to advance and address issues and, as stewards of our clients’ capital, we constantly review and refresh our membership of sustainability-related industry bodies to ensure we remain at the heart of the dialogue. For us, being sustainable-engagement leaders means being active contributors to industry bodies rather than merely being seen to be there.
By way of example, we have worked to progress issues with the cobalt supply chain, and we are an active member of Climate Action 100+. There are many other important bodies, sometimes addressing nascent areas with a clear investment risk, where we can be thought leaders and make a difference. Our work on food sustainability and nutrition standards is one such area. We have participated in thought leadership, collective engagement efforts, and open letters to the UK government on food standards. We will continue to use advocacy, company engagement and voting as tools to drive more sustainable outcomes. It remains vital to speak directly to companies to explain why issues are important and how they can help those companies evolve their business models towards a more sustainable future.
Important information 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. How ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved. 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. ESG considerations do not form part of the research process for Newton's small cap and multi-asset solutions strategies.