Sustainable, Responsible &/or ESG Policy:
The Fund leverages the Newton multi-dimensional process that integrates environmental, social and governance (ESG) matters into the selection of investments1. We select securities based on our assessment of their fundamental outlook and the valuation of their shares, guided by the longer-term perspective provided by our investment themes.
These themes capture powerful transformational shifts across economies and industries which we believe are likely to shape investment opportunities and risks. We employ research analysts who are responsible for analysing companies within their respective areas of expertise on a global basis and for providing recommendations to our portfolio managers who are individually responsible for the decisions taken for each portfolio. Our portfolio managers construct single, directly invested portfolios.
The Fund uses a performance benchmark2 of 75% equities, 20% bonds and 5% cash. We seek to outperform the performance benchmark by investing in attractively valued opportunities within that diversified universe. We believe the key attributes of the Fund are:
- Ethical rigour – we have a dynamic, defined, and relevant ethical policy to avoid key areas including alcohol, tobacco, armaments, pornography, and gambling, providing investors with greater transparency and confidence in the implementation of the ethics.
- Active consideration of ESG issues – we use a well-established investment process which incorporates the consideration of ESG issues (1).
- Focus on attractive returns - we recognize that like any other investors, ethical investors seek return; we aim to deliver attractive total returns within the constraints of the Fund’s ethical policy.
- Income as an important part of total return - we understand the ability to generate income is typically desirable. While there are some inherent conflicts between ethical considerations and the production of income; tobacco for instance is a high yielding sector, the Fund had a 12-month historic yield of 2.3%.as at 31 December 2022.
- Simple and cost-effective - the Fund is highly liquid and daily traded, wrapped in a tax-efficient non undertakings for collective investment in transferable securities (UCITS) retail scheme structure, offering administrative ease and transparency.
(1) Newton will make investment decisions that are not based solely on ESG considerations. It is one of many inputs into the fundamental analysis.
Other attributes of an investment may outweigh ESG considerations when making investment decisions. The way that material ESG considerations are assessed may vary depending on the asset class and strategy involved. As of September 2022, the research team performs ESG analysis on equity securities prior to their addition to Newton’s research recommended list (RRL). ESG reviews are not performed for all fixed income securities. The portfolio managers may purchase equity securities that are not included on the RRL and which do not have ESG reviews.
Not all securities held by Newton’s strategies have an ESG review completed prior to investment.2From 1 October 2021, the Fund’s benchmark changed from a blended index comprising 37.5% FTSE All-Share TR Index, 37.5% FTSE World ex UK TR Index, 20% FTSE Actuaries UK Conventional Gilts All Stocks TR Index and 5% LIBID GBP 7 Day to a blended index comprising 37.5% FTSE All-Share TR Index, 37.5% FTSE World ex UK TR Index, 20% FTSE Actuaries UK Conventional Gilts All Stocks TR Index and 5% 7 day compounded SONIA. The Fund does not aim to replicate either the composition or the performance of the performance benchmark.
The SRI criteria for the Fund aims to meet the requirements of a broad range of charities and was established in response to feedback from our investors and other charities. The Fund is screened against a range of negative criteria, reflecting these areas of concern and interest for our charity investors. The full criteria are mentioned below:
- Tobacco production, distribution and support
- Over 10% of turnover from production or distribution of tobacco.
- Over 10% of turnover from support to the tobacco industry.
- Alcohol production and distribution
- Over 10% of turnover from production or distribution of alcoholic beverages.
- Gambling
- Over 10% of turnover from gambling operations or products.
- Pornography
- Over 3% of turnover from pornography and adult entertainment services.
- Manufacture of products tested on animals and the production or sale of fur
- Any turnover from production or sale of fur products.
- Over 10% of turnover from the manufacture of cosmetic products tested on animals.
- Over 10% of turnover from the manufacture of non-cosmetic products that are tested on animals.
- Environment·
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Energy-related controversies. This covers the following topics: energy consumption thresholds, greenhouse gas emission thresholds, energy, climate change and air pollution.
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Biodiversity-related controversies. This covers the following topics: biodiversity and/or animal testing, including exploitation of sensitive eco-systems, and farm animal welfare.
- Developing world
- Broken International Code on Marketing of Breast Milk Substitutes
- Human rights
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Human Rights-related controversies. This covers the following topics: Fundamental Human Rights, Fundamental Labour Rights, Non Discrimination, Child and Forced Labour.
- Military
- Over 10% of turnover from production of conventional weapons.
- Over 5% of turnover from production of key parts or services for conventional weapons.
- Produces cluster munition systems.
- Not addressed allegations or indications of involvement in anti-personnel landmines.
- Reproductive medicine
- Production of abortifacients.
- Provision of abortion-related services.
- Climate change (fossil fuels)
- Over 10% turnover from thermal coal mining activities.
- Over 10% turnover from the extraction of tar sands or oil shale.
- High interest rate lending
- Over 5% turnover from high interest rate lending. High interest lending will typically have an APR of over 100%, a loan duration of 18 months or less and require no collateral with little or no credit checks performed.
Screening criteria is correct as of 26 August 2021. Newton may make changes to the above screens from time to time. Newton uses a third party vendor, Vigeo EIRIS, in order to apply the negative screening criteria to the Fund, apart from the anti-personnel landmine and cluster munitions screens. The negative screening criteria are based upon Vigeo EIRIS’ own definitions of each controversial activity/area of controversy and are implemented using Vigeo EIRIS’ in-house research. For the anti-personnel landmine and cluster munitions screens, Newton uses output from Sustainalytics to implement the screens.
More information regarding the Fund’s ESG activities can be accessed via this link: https://www.newtonim.com/uk-charities/solutions/strategy/newton-sri-fund-for-charities/
PRI A+ rated (AFM Company Wide): We were rated A+ in 2020 but recently PRI has changed their types of ratings. Please refer to our latest scores are detailed on our website here: https://www.newtonim.com/uk-institutional/responsible-investment/
Sustainable, Responsible &/or ESG Process:
Constructing the Newton SRI Fund for Charities
The Fund aims to strike the balance between providing an investment solution focused on capital growth and income generation and being firmly aligned with SRI standards for charity investors. It aims to achieve a combination of capital growth and income through a multi–asset portfolio screened against SRI criteria. Our focus is very much on delivering attractive total returns for our clients – we recognize that ethical investors seek return, like any other investors. Where this Fund differs from non-screened funds is that we aim to deliver that return within the constraints of a relevant
and dynamic ethical policy which reflects the needs of our investors.
The SRI criteria for the Fund aims to meet the requirements of a broad range of charities and was established in response to feedback from our investors and other charities. The Fund is screened against a range of negative criteria, reflecting these areas of concern and interest for our charity investors. The full criteria are mentioned below:
- Tobacco production, distribution and support
- Over 10% of turnover from production or distribution of tobacco.
- Over 10% of turnover from support to the tobacco industry.
- Alcohol production and distribution
- Over 10% of turnover from production or distribution of alcoholic beverages.
- Gambling
- Over 10% of turnover from gambling operations or products.
- Pornography
- Over 3% of turnover from pornography and adult entertainment services.
- Manufacture of products tested on animals and the production or sale of fur
- Any turnover from production or sale of fur products.
- Over 10% of turnover from the manufacture of cosmetic products tested on animals.
- Over 10% of turnover from the manufacture of non-cosmetic products that are tested on animals.
- Environment
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Energy-related controversies. This covers the following topics: energy consumption thresholds, greenhouse gas emission thresholds, energy, climate change and air pollution.
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Biodiversity-related controversies. This covers the following topics: biodiversity and/or animal testing, including exploitation of sensitive eco-systems, and farm animal welfare.
- Developing world
- Broken International Code on Marketing of Breast Milk Substitutes
- Human rights
- No investment permitted in a company that has any critical severity controversies; is considered a persistent offender; and is considered non-communicative in respect of Human Rights-related controversies. This covers the following topics: Fundamental Human Rights, Fundamental Labour Rights, Non Discrimination, Child and Forced Labour.
- Military
- Over 10% of turnover from production of conventional weapons.
- Over 5% of turnover from production of key parts or services for conventional weapons.
- Produces cluster munition systems.
- Not addressed allegations or indications of involvement in anti-personnel landmines.
- Reproductive medicine
- Production of abortifacients.
- Provision of abortion-related services.
- Climate change (fossil fuels)
- Over 10% turnover from thermal coal mining activities.
- Over 10% turnover from the extraction of tar sands or oil shale.
- High interest rate lending
- Over 5% turnover from high interest rate lending. High interest lending will typically have an APR of over 100%, a loan duration of 18 months or less and require no collateral with little or no credit checks performed.
Screening criteria is correct as of 26 August 2021. Newton may make changes to the above screens from time to time. Newton uses a third party vendor, Vigeo EIRIS, in order to apply the negative screening criteria to the Fund, apart from the anti-personnel landmine and cluster munitions screens. The negative screening criteria are based upon Vigeo EIRIS’ own definitions of each controversial activity/area of controversy and are implemented using Vigeo EIRIS’ in-house research. For the anti-personnel landmine and cluster munitions screens, Newton uses output from Sustainalytics to implement the screens.
The Fund is actively managed and draws on an investment process which concentrates on identifying high quality, well-managed companies that benefit from themes and secular growth trends. It is constructed holistically, with no regional, sector or benchmark constraints and with the ability to invest anywhere. Sector and regional allocations may result as much from a series of security selection decisions as from more top-down considerations. The Fund is constructed with reference to the mixed assets and charities team’s model portfolio; however, the portfolio managers do take into account the Fund’s ethical policy and investment objective. The portfolio managers carefully consider risk in the portfolio and make qualitative judgments on the impact new positions, exiting from current positions or existing market conditions would have on the overall portfolio.
The portfolio managers draw upon the output of our proprietary global research team as well as conduct their own research to ensure that the portfolio is composed of securities in which they have strong conviction*. The portfolio managers have a broad and diversified universe of equities, bonds and listed vehicles from which to construct the Fund. The ethical screens exclude approximately 15% of the investible universe, although this varies by region. The global nature of the Fund minimizes the impact of this constricted universe and provides an ample opportunity set from which to deliver attractive returns.
* There is no compulsion for portfolio managers to purchase recommended ideas, and portfolio managers may choose to invest in securities that are not on the research recommended list (RRL).
Buy discipline
The decision to buy the security rests with the lead portfolio manager. This is dictated by the manager’s conviction in the investment idea along with the risk/reward characteristics of the security as well as how it will impact the overall portfolio. The skill of the portfolio manager is in selecting the best combination of securities in the right proportion with the aim of delivering the best risk-weighted return from the portfolio.
The aim is to create a diversified portfolio of active positions. Positions are sized by:
- Conviction
- Downside risk
- Market liquidity conditions
- Active tactical cash allocation
Sell discipline
Securities will be sold if they no longer conform to our SRI ethical criteria or if our view on the fundamentals and valuation changes. If a security falls out of the investable universe, it must be sold within three months to maintain the ethical rigour of the portfolio but at the same time to avoid a ‘forced sale’ at an inopportune time. Changes in the fundamentals of a company, such as a change in management or acquisitions, etc., would prompt the portfolio manager to reassess a company's rating.
We aim to invest for the medium to long term; however, securities may be sold for the following reasons:
- Investment thesis deteriorates
- Change in ‘acceptability’ on ethical screening grounds
- Change in model weight and conviction
- Taking profits
- Switching to more attractive investment opportunities
Ethical investment process
Newton’s investment team employs a straight-forward and transparent approach to ethical investment on behalf of our clients and pooled fund investors. We partner with charities to ensure that we understand their specific needs and desired outcomes. We monitor the evolving ethical landscape for trends in ethical investing and develop the Fund’s strategy to align with these trends. We aim to ensure that the Fund’s policy is relevant and dynamic for all the unit holders in the Fund, that it continues to provide adequate coverage and can be implemented effectively.
Our process leverages the expertise and resources of Newton’s broader investment team. We construct portfolios using a fundamental, security selection process driven by themes and taking account of key ESG factors*. Our detailed analysis provides valuable insight into what a company does (activities/industry) and how it does it (management/governance). It is this detailed understanding of the companies we invest in which also provides a level of risk management within the investment process.
We make direct investments in securities, resulting in greater transparency and knowledge of the portfolio at a deeper level to provide our investors with confidence that the ethical policy is being implemented effectively.
All investment decisions are predicated on two key factors: 1) an investment’s eligibility based on the ethical policy; and 2) the requirement for attractive valuation and upside potential. We would never purchase a security simply for its ethical/ESG credentials, as we believe maximizing returns and delivery of the Fund’s investment objectives is key.
NIM is able to implement a client’s ethical policy using both sectoral-based exclusions and ethical threshold-based exclusions. A sectoral-based exclusion will effectively exclude any company within a given sector, whereas a threshold-based exclusion will look-through to a company’s revenues to identify earnings from the respective activity.
In both cases, compliance with the client’s ethical policy are monitored through NIM’s order management system (OMS).
Sector exclusions are implemented directly into NIM’s OMS using industry classifications from the major market data providers.
We use the expertise of specialist, market leading data providers to facilitate the provision of ethical threshold-based screens. NIM’s main provider of ethical threshold-based screens is Moody’s ESG Solutions (formerly Vigeo EIRIS), but we also retain access to supplementary screens provided by Sustainalytics and MSCI. We ensure that our data providers are reviewed on a regular basis.
For ethical threshold-based exclusions NIM will create an ethical strategy within Moody’s ESG Solutions online platform (DataLab) in line with the respective client/fund’s ethical requirements, choosing from a suite of screens provided by the vendor. The ethical strategy is compared to Moody’s research universe and will then produce a list of companies that are not permitted under the screens selected. The resultant security list is downloaded into NIM’s OMS and can then be used to prevent the purchase of non-compliant companies, as well as flag any holdings that become “restricted”.
Security lists are downloaded into NIM’s OMS from DataLab on a weekly basis.
The integrity of the ethical screens implemented on behalf of our clients/funds and the respective portfolio’s adherence to them is fundamental to our approach as ethical investors and ensures our clients have confidence that we are investing only in those areas deemed investible under the client/fund’s ethical policy. Output from the provider systems in the form of a security list is fed into NIM’s OMS and therefore any attempt to buy a stock that is unacceptable, or where an existing portfolio position becomes un-investible, a warning is triggered, alerting the portfolio manager (PM), the client team and NIM’s investment control (IC) team to this fact.
IC will raise the alert with the PM and NIM’s investment relationship management (IRM) team and will ask the PM to take the appropriate action:
- Selling the security - the PM has three months (in practice this is done immediately) to investigate the issue fully before selling. This time period also helps to ensure that the portfolio does not become a forced seller.
- Retaining the security – if NIM believes it to be in the client’s best interest, it may seek to discuss the company with the client with a view to obtaining permission to continue to hold the security (whereby a detailed file note would be recorded and retained).
The PM will then notify IC which action will be taken. Where the position is to be sold, the three-month time limit will be monitored by IC and the IRM team. Where the client agrees to retaining the security, the IRM team will ensure a file note capturing the client instruction is recorded.
* Where material and relevant information exists. Analysis may vary depending on the type of security, investment rationale and investment strategy. Newton does not currently view certain types of investments as presenting ESG risks, opportunities and/or issues, and believes it is not practicable to evaluate such risks, opportunities and/or issues for certain other investments. In addition, Newton will make investment decisions that are not based solely on ESG considerations. In some cases therefore, Newton may conclude that other attributes of an investment outweigh ESG considerations when making investment decisions.
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