Fund Size: £405.16m

Total screened & themed / SRI assets: £3633.63

Total Responsible Ownership assets: £83318.10

Total assets under management: £83318.10

As at: 31/03/23

Contact: Ryan Grey, Sales - Intermediary (UK) ryan.grey@bnymellon.com

Overview

Filters

Fund information

Policy

The mainstay of our Sustainable product range is to generate sustainable risk-adjusted returns for clients alongside improved long-term global outcomes for society and the environment. The process is derived from a combination of ‘exclusions’ of what we would always seek to avoid and ‘inclusions’ of what we consider to be part of our Sustainable investment spectrum (solution providers, balance stakeholders, and transition businesses).

In our Sustainable portfolios, we seek to identify and select businesses that demonstrate the following attributes (and are classified accordingly):

• Solution providers: These are companies that provide solutions (products and services) to environmental or social challenges or are in high-positive-externality industries.
• Balance stakeholders: These are companies that can be evidenced as successfully managing the competing interests of key stakeholder groups. Fundamentally, this is primarily about the internal management of a company, rather than being about the impacts of its products and services, which are captured under the solution-providers classification. We are looking for leaders or best-in-class industry practices.
• Transitions: These are companies that have the potential, or are already demonstrating a credible commitment, to a plan to transition their business models by reducing and mitigating their most material (to shareholders and other stakeholders) negative ESG externalities.

These classifications are guided by clear frameworks, developed and maintained by the Newton RI team, ensuring robustness and consistency in order to identify the strongest sustainable investment propositions.

The overall framework is reviewed regularly and may evolve/shift over time.

The exclusions mainly seek to avoid investments in areas of significant social or environmental harm and are known as the ‘red lines’, which are hard exclusions and cannot be overridden for our sustainable strategies. Here we seek to avoid investments involved in areas of high negative externalities, those that cause significant long-term societal harm, investments that have been identified as having severe controversies and/or violating one or more of the ten UN Global Compact Principles covering areas including human rights, labour practices, corruption and the environment. We do not believe that exposure to such activities is aligned with the objectives of our sustainable range of products.

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 defense, 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-real-return/.

*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).

Process

Investment themes*

Fundamental research is the lifeblood of Newton, and our multidimensional research platform looks to deliver world-class insights in pursuit of the best outcomes for our clients. One of the key inputs to our research process is our investment themes, which help to shape our research agenda and support our portfolio construction.

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 view clearly the structural changes that are taking place across the globe, and to look beyond often-superficial 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.

*Analysis of themes may vary depending on the type of security, investment rational and investment strategy. Newton will make investment decisions that are not based on themes and may conclude that other attributes of an investment outweigh the thematic structure the security has been assigned to.

Investment decisions

The Real Return team builds the portfolio from the best ideas from across the house. The analysts’ recommendations are framed in the context of themes which they believe will drive the global economy going forward. The context provided by these themes* can be global or region-specific. If a theme has particular prominence, it is likely to influence (among other factors such as the point in the market cycle) how much exposure there is to an individual security.

The portfolio is structured such that it has a return-seeking core and a stabilizing layer. The return-seeking core is designed to generate the lion’s share of the returns and is comprised of asset classes such as equities, corporate bonds, emerging market debt and alternatives. The stabilizing layer is comprised of both direct protection (derivative instruments) and indirect protection (for example government bonds and gold). The allocation between the two layers is determined by the team’s views on the global macroeconomic backdrop.

Once the allocation to the return-seeking core and stabilizing layer has been established, the team focuses on the composition of those areas. There is no predetermined asset allocation and individual securities are evaluated on a case-by-case basis in the context of the overall portfolio.

There are also a number of additional portfolio construction considerations that feed into the process: security valuations are assessed, as well as how individual holdings fit together within the core. Moreover, as each new idea is added to the portfolio, the team evaluates whether it is providing genuine diversification or if they are doubling up on our risk exposure in a particular area. We are constantly evolving the breadth of asset classes held in the strategy as the market itself develops. The ultimate aim of the return-seeking core construction process is to harvest alpha. Once the return-seeking core is assembled, the stabilizing layer is used to either dampen or increase the volatility and equity risk beta, based on where we are in the market cycle. The team identifies the risks in the portfolio that it wants to hedge and considers the cost of doing so as well as the opportunity cost. The simplest strategy used is to buy put options or futures on equity indices to hedge out market risk. Depending on the team’s view of the market, it may use shorter-term put options to hedge a varying proportion of the market risk in their equity holdings. The team also buys government bonds to provide a layer of downside protection. Depending on the team’s view of interest rates and level of protection, the team will buy different global government bonds and manage the duration. Gold is another asset used to act as a diversifier to hedge against a fall in equity markets.

The Newton Sustainable Real Return strategy depends on the input, perspective and interaction of a large number of individuals. However, the final capital allocation decisions for the strategy are the collective responsibility of Philip Shucksmith and Matthew Brown, along with input from the research analysts.

Unconstrained approach

At different points in time, we see certain business, investment and portfolio characteristics as important when seeking returns. We seek particular investment characteristics according to our long-term view on the global investment environment. Different environments lead us to change dynamically the size of the return-seeking core and to favor different security characteristics. The strategy is actively managed, and we are confident in our ability to meet our long-term objective in different market conditions, as a result of a very flexible and pragmatic investment approach. The flexibility afforded by the strategy's unconstrained nature allows the portfolio managers to adjust the portfolio's allocations nimbly to reflect changes in the market backdrop. The strategy is not compelled to invest in all asset classes at all times; instead, it takes a selective approach to investment in different asset classes on the basis of their underlying investment characteristics.

Please refer to our response given above for ESG Policy.

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/

Dialshifter

Our organization is helping to support the Paris Climate Agreement and the Race to Net Zero by...

NIM became a signatory to the Net Zero Asset Managers Initiative in March 2021. We have published details of our approach here: https://www.newtonim.com/uk-institutional/insights/net-zero/.

We have aligned ourselves with an independent methodology produced by the Science Based Targets initiative (SBTi). We are committing to having 50% of our financial emissions covered by credible net-zero plans by 2030, with the aim of reaching 100% by 2040.

We seek to meet these headline targets via a range of transparent measures around investments in climate ‘solution providers’, engagement with fossil-fuel companies to support their energy transition and advocating for supportive government and industry regulation.

Literature

• Fund overview & literature (including factsheet)
• Fund Policy Details
• Strategy Brochure
• Strategy Quarterly Responsible Investment Report

Dislaimer

IMPORTANT INFORMATION

Past performance is not a guide to future performance.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
For Professional Clients only.
Provided solely for use by Fund EcoMarket.

BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries.

Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority.

Assets under management (AUM) relates to the combined assets managed by the Newton Investment Management group. From 1 September 2021, Newton group of companies includes Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA).

For a full list of risks applicable to this Fund, please refer to the Prospectus or other offering documents.

Please refer to the prospectus and the KID/ KIID before making any investment decisions. Documents are available in English and an official language of the jurisdictions in which the Fund is registered for public sale. Go to www.bnymellon.com.

The Fund can invest more than 35% of net assets in different Transferable Securities and Money Market Instruments issued or guaranteed by any EEA State, its local authorities, a third country or public international bodies of which one or more EEA States are members.

Benchmark: The Fund will measure its performance before fees against SONIA (30-day compounded) +4% per annum over five years as a target benchmark (the "Benchmark"). SONIA is a nearly risk-free rate meaning no bank credit risk is included, the rate can rise or fall as a result of central bank policy decisions or changing economic conditions. The Fund will use the Benchmark as a target for the Fund's performance to match or exceed because, in typical market conditions, it represents a target that will be equal to or greater than UK inflation rates over the same period and is commensurate with the Investment Manager's approach. The Fund is actively managed, which means the Investment Manager has discretion over the selection of investments, subject to the investment objective and policies as disclosed in the Prospectus.

The Fund is a sub-fund of BNY Mellon Investment Funds, an open-ended investment company with variable capital (ICVC) with limited liability between sub-funds. Incorporated in England and Wales: registered number IC27. The Authorised Corporate Director (ACD) is BNY Mellon Fund Managers Limited (BNY MFM), incorporated in England and Wales: No. 1998251. Registered address: BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Authorised and regulated by the Financial Conduct Authority.

Fund performance calculated as total return, including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.

Returns may increase or decrease as a result of currency fluctuations.

Costs incurred when purchasing, holding, converting or selling any investment, will impact returns.
Costs may increase or decrease as a result of currency and exchange rate fluctuations.

RISK WARNING

- Performance Aim Risk: The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Funds which have a higher performance aim generally take more risk to achieve this and so have a greater potential for returns to vary significantly.
- Currency Risk: This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund.
- Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the Fund can lose significantly more than the amount it has invested in derivatives.
- Changes in Interest Rates & Inflation Risk: Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the Fund.
- Credit Ratings and Unrated Securities Risk: Bonds with a low credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the Fund.
- Credit Risk: The issuer of a security held by the Fund may not pay income or repay capital to the Fund when due.
- Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.
- Charges to Capital: The Fund takes its charges from the capital of the Fund. Investors should be aware that this has the effect of lowering the capital value of your investment and limiting the potential for future capital growth. On redemption, you may not receive back the full amount you initially invested.
- Shanghai-Hong Kong Stock Connect and/or the Shenzhen-Hong Kong Stock Connect ("Stock Connect") risk: The Fund may invest in China A shares through Stock Connect programmes. These may be subject to regulatory changes and quota limitations. An operational constraint such as a suspension in trading could negatively affect the Fund's ability to achieve its investment objective.
- China Interbank Bond Market and Bond Connect risk: The Fund may invest in China interbank bond market through connection between the related Mainland and Hong Kong financial infrastructure institutions. These may be subject to regulatory changes, settlement risk and quota limitations. An operational constraint such as a suspension in trading could negatively affect the Fund's ability to achieve its investment objective.
- Sustainable Funds Risk: The Fund follows a sustainable investment approach, which may cause it to perform differently than funds that have a similar objective but which do not integrate sustainable investment criteria when selecting securities. The Fund will not engage in stock lending activities and, therefore, may forego any additional returns that may be produced through such activities.
- CoCo's Risk: Contingent Convertible Securities (CoCo's) convert from debt to equity when the issuer's capital drops below a pre-defined level. This may result in the security converting into equities at a discounted share price, the value of the security being written down, temporarily or permanently, and/or coupon payments ceasing or being deferred.
- Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the Fund to financial loss.
- Investment in Infrastructure Companies Risk: The value of investments in Infrastructure Companies may be negatively impacted by changes in the regulatory, economic or political environment in which they operate.

A complete description of risk factors is set out in the Prospectus in the section entitled "Risk Factors".

Last amended: 06/10/23 09:35