Is it feasible to apply a sustainable investment policy across a multi-asset portfolio?
Yes, I think it’s absolutely possible to apply a sustainable philosophy across a multi-asset portfolio. But first, I think we need to define what we mean by sustainable.
At Newton we have a long and proud heritage of integrating environmental, social and governance research into our security-selection process, with the simple goal of maximising returns for investors. We build on that with sustainable process, which aims to deliver a dual outcome of positive financial returns as well as positive benefits for all society.
To do that, we employ some principles-based red lines. First, no investment in tobacco. Second, no investment in a security that violates the UN Global Compact of simple, basic rules around bribery and corruption, environmental standards, human rights and employment regulations. And thirdly, we won’t invest in any security which we deem to be incompatible with the goal of limiting global warming.
To give the process integrity, our responsible investment team have a power of veto as to whether a security can be included in a sustainable portfolio.
What should asset owners look for when evaluating a sustainable multi-asset strategy?
It is absolutely possible to implement those red lines across a multi-asset portfolio. However, building on that, sustainable investment should not be defined simply by what you don’t own, but also what you do own, and at Newton we use sustainable investment as a lens through which to identify opportunities.
For instance in 2017, capex in the renewable-energy space was $33bn – the first year that that number exceeded the spending in the fossil-fuel sector. That is a significant investment opportunity. Some of these opportunities are best accessed through the public equity markets, some through alternatives, and some, like green financing and development agencies, through the fixed-income markets. So in fact, a multi-asset approach is an excellent way of implementing a sustainable investment philosophy.
Voting and engagement can be powerful levers in sustainable equity portfolios. What levers can Newton deploy in fixed-income markets?
Voting and engagement are really important in equity markets, in particular the exercise of the vote. And that is not something that is available to fixed-income investors. However, we have ample opportunity – just as many opportunities – to engage with the issuers of fixed-income securities as we do with the issuers of equity securities. And in fact in many cases, buy-side financial institutions are the only viable source of capital for these companies. So we very much have the opportunity to engage with and shape their ESG policy.
The best way to illustrate this is with the recent example of our engagement with the UK food retailer Iceland, a company which has had its fair share of scandals in the past, but more recently, announcements around plastic use and palm oil were indicative of a company moving in the right direction. We needed to engage with Iceland to ensure that this was genuine and not just ‘greenwash’, and what we found, we were actually very impressed with. But what really struck us was a statement from the CFO that this was the first time he’d been asked ESG questions by a bondholder.
So whilst it very much feels like ESG integration and investment has moved into the main stream, there are still significant opportunities to add value in the fixed-income markets.
Commercial investment director Jon Bell considers how to apply a sustainable investment policy across a multi-asset portfolio
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These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes 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.