Sustainable, Responsible &/or ESG Policy:
We are aware that failure to consider ESG insights is likely to give an incomplete picture of the merits and risks of an investment opportunity. We believe that companies with good governance and a focus and strong track record of managing environmental and social issues are more likely to prove to be successful investments. Thus, we seek to consider the following factors, such as:
- Better long-term environmental and social outcomes: We integrate an investment’s externalities into the investment consideration, irrespective of whether they will affect the security’s financial performance over the proposed holding period. This helps represent the interests of other stakeholders, which should in turn lead to better multi-stakeholder outcomes and the potential to deliver more resilient financial returns.
- Investing with a longer-term mind-set: ESG factors, particularly environmental and social, can play out over multiple decades. Investing with a longer-term mind-set means we consider these issues, irrespective of whether they will impact financial outcomes on a three- to five-year basis, as they represent potential financial risks where the timing of their impact is uncertain.
- Alignment of economic, social and environmental interests: We believe that, over the long term, economic success is not a separate consideration from social and environmental well-being. Instead, we see these three objectives creating a security’s true value and together providing a comprehensive assessment of the long-term risks and opportunities facing a business.
- Encouraging and supporting change through engagement: We believe that using engagement to help achieve improved environmental and social outcomes should lead to more resilient financial outcomes for investors.
- Improving client outcomes: Increasingly, a wide range of investment clients and prospects are seeking to achieve their long-term financial goals through investment products that are aligned with their values. While we cannot meet the specific social and environmental needs of every client, our sustainable range of products is designed to have a clear and transparent purpose that will make alignment with client needs more attainable.
Red lines/hard exclusions**
The Fund is subject to a set of exclusion criteria referred to as the ‘Red Lines’. These Red Lines include companies that are deemed to be harmful from an environmental or social perspective.
The red lines consist of:
- Tobacco production (>0% revenue)
- Tobacco retail and supporting products (>10% revenue)
- Breaches of the UN Global Compact*
- Controversial weapons ((>0% revenue – clear evidence)
- Alcohol production (>=10% revenue)
- Gambling operations (>=10% revenue)
- Adult entertainment (>=10% revenue)
- Thermal coal extraction (>=10% revenue)
However, please note revenue threshold parameters reflect just one part of our sustainable investment process – a key part of this process is the additional research and analysis conducted by the investment team.
Our process seeks to clearly distinguish between activities that are subject to hard exclusions (red lines) versus those activities that sustainability portfolio managers may be able to invest in in certain circumstances (precautionary pool).
Precautionary pool
For areas that have been identified as having controversies or the potential to cause harm (such as fossil fuels other than thermal coal, animal welfare, conventional defence, and nuclear power) but are not covered by the red lines, sustainable portfolio managers are alerted, when considering such investments, to review the controversial activity through what is referred to as the “precautionary pool”. The precautionary pool includes companies that have been flagged in relation to their involvement in heavy-emitting industries, hold exposures to activities that are red lined, but at lower revenue thresholds, and areas such as nuclear power and animal welfare, where there may be nuances in the investment case that are deemed important to be highlighted.
The following types of businesses may be captured within the precautionary pool:
- Those that have exposure to the above activities but applying a lower revenue threshold for awareness – for example, tobacco retail and supporting products where revenues exceed 0%, which means any tobacco retailer or supporting products company with revenues >0% and <10% will be highlighted under the precautionary pool.
- Businesses that have related exposures that we feel are important for visibility – such as those that provide supporting services to some of these areas - For example, alcohol retail at 10% or more revenue contribution.
- Those that are in heavy-emitting industries that fail a profitability test with a carbon tax and are deemed to have an insufficient climate strategy – supporting our view that investing behind the transition and supporting a shift from ‘brown’ to ‘green’ in a careful way is a key part of the global decarbonisation challenge.
Other areas where there may be nuances in the investment case that are deemed important to be highlighted – for example, animal welfare or nuclear power.
More information regarding the Fund’s ESG activities can be accessed via this link: https://www.newtonim.com/uk-institutional/special-document/ri-report-sustainable-global-equity/.
*Which is a simple pass/ fail/ watch list test whereby Newton will screen out those companies that ‘fail’.
**We use a combination of external ESG service providers (currently MSCI, Sustainalytics and Vigeo Eiris).
Sustainable, Responsible &/or ESG Process:
The investment process for this Fund starts with the research process. Fundamental research is the lifeblood of Newton, and our multidimensional research platform aims to deliver insights in pursuit of better outcomes for our clients.
One of the key inputs to our research process is our thematic research framework, which can help to shape our research agenda and support our portfolio construction. Our themes provide valuable inputs which help us to achieve long-term perspective and navigate a world in flux. They can alert the members of our investment team to the new
opportunities that change creates and can help us to identify the emerging risks that could impair the value of investments.
We believe that themes – which represent powerful transformational ‘micro’ and ‘macro’ shifts across economies and industries – are only growing in importance, and that their influence on our investment landscape has never been greater. Themes can provide our investment team with a long-range lens to clearly view the structural changes that are taking place across the globe, and to look beyond often rigid classifications like sectors or countries of domicile. They can alert the team to the new opportunities that change creates and help us to identify the emerging risks that threaten to impair the value of investments.
Guided by our themes, our analysts and portfolio managers aim to find the best investment ideas within their investment universe. Material and relevant ESG issues, risks and opportunities are considered in the process. When determining whether a company engages in "sustainable business practices," we consider which area of focus it falls under:
- Solution providers
- Balance stakeholders
- Transition
Portfolio construction
The global opportunities team is responsible for the Sustainable Global Equity Fund, with Nick Pope and Paul Markham being responsible for this strategy.
Our portfolio construction process is driven by bottom-up stock selection and exhibits high levels of active share. The portfolio managers are aware of the benchmark when they construct portfolios, but they have a high degree of freedom to deviate from it if their assessment of the fundamental opportunities and risks warrants it. Our active risk tends to come from stock selection; although at times of high conviction, sector and country allocation can be an important driver of returns.
Our process is designed to facilitate natural debate and provides a powerful combination of perspectives from our specialist and generalist investment professionals challenging one another and it can help to maximise the scrutiny of interesting ideas. We believe our process strikes a good balance between accountability and high-conviction investing on the one side with team-based collaboration and collegial thinking on the other.
The portfolio managers draw upon the output of our fundamental equity analysts and conduct their own research to ensure that the portfolio is composed of stocks in which we have strong conviction. Portfolios are 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 stock selection decisions as from more top-down considerations.
Diversification is achieved through having fewer than 50 stocks, with exposure to a variety of economies and industries. The portfolio managers carefully consider risk in the portfolio and make qualitative judgements on the impact new positions, exiting from current positions or existing market conditions would have on the overall portfolio.
Newton does not have an investment committee that makes allocation decisions for portfolios. Final investment decisions for the Newton Sustainable Global Equity strategy are the responsibility of the lead portfolio managers.
Implementation of sustainable investment philosophy
The sustainable investment philosophy is implemented consistently by NIM as follows:
- Responsibility: For the management of our sustainable suite of strategies, the sustainability portfolio managers are responsible for applying our sustainable investment framework, closely supported by RI advisors.
- Purpose: To generate sustainable risk-adjusted returns for clients alongside improved long-term global outcomes for society and the environment, by following our sustainable investment process. The process is derived from a combination of exclusions and definitions of what we consider to be part of our sustainable investment spectrum (solution providers, balance stakeholders, and transition businesses). The exclusions seek to avoid investments in areas of significant social or environmental harm and are known as the ‘red lines’.
- ESG analysis*: Securities held in sustainable strategies will have, where appropriate, based on the type of security, an ESG analysis performed. It should be noted that:
- Equity IPOs - are required to have an analysis conducted on them, though this may be of a shorter form than for already listed securities due to the lack of publicly available information.
- Funds & derivative instruments - will not necessarily have an analysis prepared. These will be considered on a case-by-case basis taking into consideration the purposes of the proposed investment (hedging or investment purposes), the underlying characteristics of the investment, the availability or relevance of ESG-related information and the economic exposure of the instrument.
- Sustainable investment forum (SIF) oversight: The SIF has been established to act as a “center of sustainability excellence” and to provide support and oversight to any strategies managed by Newton that make sustainability claims. The participants include the portfolio managers of such strategies, including Newton’s sustainable strategies. It also includes representation from the RI, investment risk, product and investment research teams. The SIF meets every two months, with additional meetings for certain strategies depending on the regulatory framework in which they operate.
The Fund follows ESG Policy as mentioned in the above response.
*Newton will make investment decisions that are not based solely on ESG considerations. Other attributes of an investment may outweigh ESG considerations when making investment decisions. The way that ESG and sustainability considerations are assessed and the assessment of their suitability for Newton's sustainable strategies may vary depending on the asset class and strategy involved. For Newton’s sustainable strategies, ESG reviews are performed prior to investment for corporate investments (single name equity and fixed income securities). The analysis will then also follow the Newton sustainable investment process to ensure it fits with the wider Newton sustainable investment philosophy.
Resources, Affiliations & Corporate Strategies
RI Team
Newton has a dedicated team of full-time RI analysts. The four-person team is embedded within Newton’s global research team and is led by Newton's head of sustainable investing, Andrew Parry. Andrew is responsible for developing our sustainable investment offering and communicating our approach to responsible investment to our global client base. The RI team further includes Ian Burger, head of responsible investment, and two RI analysts (Lloyd McAllister and Rebecca White). Additionally, Sakshi Bahl, an employee of BNY Mellon Operations India (based in Pune), provides research support to Newton’s RI team.
The RI team collaborates closely with the rest of our centralised global research team (which also consists of thematic, quant and strategy analysts as well as equity industry and credit analysts) to ensure that ESG risks and opportunities are fully understood and factored into the investment case for a company. The team also engages with portfolio managers to contribute to investment decisions, particularly within the sustainable strategy range.
List of Newton’s RI related memberships
- PRI
- 30% Club - Investor Group
- Asian Corporate Governance Association
- Carbon Disclosure Project
- Climate Disclosure Standards Board - Technical Working Group
- Council of Institutional Investors
- GC100 & Investor Group
- ICGN Global Stewardship Principles
- IFRS Advisory Council
- Institutional Investors Group on Climate Change
- International Corporate Governance Network
- Investment Association - Stewardship Working Group
- Investor Stewardship Group
- Pension and Lifetime Savings Association Stewardship Advisory Group
- Share Action Healthy Markets
- UK Stewardship Code
- Workforce Disclosure Initiative
PRI membership
Newton have been a signatory of the UN Principles of Responsible Investment (PRI) since 2007, and we are ranked A+ across all areas of the PRI’s annual assessment.
Collaboration
Where appropriate and aligned with the interests of our clients, we work with others across our industry and civil society (including other investors, industry bodies, non-governmental organisations, academics and other specialists) to ensure good oversight and regulation, and to drive the positive change that leads to better outcomes for stakeholders. This makes us better-informed and engaged participants in the broad dialogue on social and environmental issues.
In addition to our annual engagement priorities discussed in part one of the document, broad areas of focus for collaboration include promoting climate resilience, supporting diversity and inclusion, and preventing acts of modern slavery and human trafficking.
Among the many organisations with which we play an active role are the UN PRI, the International Corporate Governance Network, the Workforce Disclosure Initiative, the Transition Pathway Initiative, The Institutional Investors Group on Climate Change, and the Investment Association’s Stewardship Working Group.
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Please Note:
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/
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