We work hard to refine our ideas of what constitutes responsible investment on a regular basis, because, while we are guided by a few fundamental principles, we know that it is a dynamic facet of investment with few clear answers.
Our sustainable strategy range is looking to invest in durable business models. To focus in on companies that fit this bill, we have some principles-based ‘red lines’ to identify companies within the investment universe that are obviously unsuitable from a sustainability perspective. The first red line excludes tobacco stocks; the second removes companies violating the UN Global Compact Principles; and the final red line is related to climate change.
As a house, Newton recognises that climate change is a real and impending issue which requires significant action. As a result, our sustainable strategies will not invest in any company that we deem to be incompatible with the aim of limiting global warming to 2°C. This means that if a company is a heavy emitter, would be unprofitable under a carbon cost of $140/tonne, and has no current intention of transitioning its business model to reduce emissions, it is uninvestable. Under this red line, 259 companies from the MSCI AC World Index are currently excluded, including various energy and mining companies, as well as certain airlines and utilities.
The energy issue
However, the energy sector has a key role to play in the fight against climate change, and there are questions we need to consider as more energy companies start to explore renewable technologies while continuing to extract certain fossil fuels.
While we can say that it is very unlikely that our sustainable strategies will invest in companies extracting coal, oil and tar sands, and at present they do not, we cannot say that they will never invest in a company that extracts gas. This is because there are some companies which are providing solutions to climate change, but are also involved in gas extraction. One example of this is a utility company that is not a typical electricity generator but is primarily a UK energy service provider. It is making great strides in improving its carbon footprint and is playing a crucial role in decarbonising the UK’s heat and electricity grid. However, to ensure a secure gas supply, it also has gas fields in the North Sea. A strict fossil-fuel exclusion policy would make this company uninvestable; however, we believe this would be a mistake. This is why we have a more nuanced approach to analysing fossil fuels, as there are potential positive investments on the fringes that can be inadvertently caught out by hard policies.
After considering whether or not a potential investment crosses one of our red lines, we then apply our environmental, social and governance (ESG) integration process to ensure that unsustainable companies have not been overlooked. Before any stock can be recommended to the portfolio managers across all our strategies, we analyse a company on its E, S and G credentials and current and future strategy, give it an ESG review score, and determine whether it is sustainable or not. When looking at climate-change risks and opportunities, we analyse many data points, including a company’s scope 1 and 2 emissions on an absolute and intensity-level basis, as well as how a business compares to its peers. This helps to assess a firm’s carbon footprint.
Analysing climate-change strategy
We seek to identify ‘green’ business solutions a company may present, to determine whether it will be suited to a net-zero carbon emissions world. A recent example of this was an analysis of a chemical company’s crop-science division. We analyse a company’s CDP score, Transition Pathway Initiative (TPI) score, and whether it has science-based targets, which determine the quality of its climate-change strategy. We also look to see if the company is reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, a best-practice disclosure framework for climate change readiness and action. If all this information is material, it is integrated into the company’s overall ESG score and goes towards the responsible investment team determining if it is sustainable. The responsible investment team can also exercise a power of veto over investment decisions, if related to sustainability concerns.
Finally, we are very sceptical of fossil-fuel companies that say they have sustainable business models. To be convinced that an incumbent is sustainable, we require: a high percentage of the business to produce clean energy or solutions; and/or a significant commitment to research and development; and/or concrete short and medium-term time-bound targets to decarbonise the business.
Another important part of our ESG work is using engagement as a tool to push companies to improve. We engage with heavy emitters regularly and ask all businesses to report in line with the TCFD recommendations. We are members of the Institutional Investors Group on Climate Change (IIGCC) and sit on the sub-advisory committee on AGM resolutions and within the corporate engagement programme. We are active Climate Action 100+ members and are leading and supporting engagements with a number of companies. We also use our voting power to submit shareholder resolutions on climate change, and recently did this very successfully at BP’s 2019 AGM.
Analysing fossil fuels in the energy transition is not a clear-cut process. By taking a nuanced approach we do not shy away from making hard decisions, but seek to ensure that we do not misjudge companies and miss out on sustainable investment opportunities.
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 countries or sectors. Please note that holdings and positioning are subject to change without notice.