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 recognizes 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 (3.6°F). This means that if a company is a heavy emitter, would be unprofitable under a carbon cost of $140/metric ton, 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, it is our belief that 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 decarbonizing 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 analyzing 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 analyze 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 analyze 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.
Analyzing 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 analyze 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 skeptical 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 decarbonize 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 program. 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 successfully at the AGM of a major oil and gas company.
Analyzing 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.
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.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice.
This is a financial promotion. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton Investment Management Limited is authorized and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. 'Newton' and/or 'Newton Investment Management' brand refers to Newton Investment Management Limited. Newton is registered in England No. 01371973. VAT registration number GB: 577 7181 95. Newton is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton'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. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. You should consult your advisor to determine whether any particular investment strategy is appropriate. This material is for institutional investors only.
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