How can investors seek to ensure portfolios are well positioned for a changing climate?

  • Rising global temperatures and an increase in extreme weather events have highlighted the urgency of tackling the climate emergency, while the Covid-19 crisis has put further pressure on the fossil-fuel industry.
  • In this context, it will only become more important for investors to ensure climate-related risks and opportunities are reflected when constructing portfolios.
  • We use a variety of approaches to identify climate-related risks and opportunities; these are incorporated into our idea generation, ESG analysis, company engagement, voting, product design and thought leadership.

While the news agenda may currently be dominated by Covid-19, the global focus on climate change had been intensifying prior to the outbreak of the pandemic, as rising global temperatures and greenhouse-gas emissions, together with an increase in extreme weather events, have highlighted the urgency of tackling the climate emergency.

This year, as severe restrictions have been imposed on the global economy as a result of the efforts to curb the coronavirus, the fossil-fuel industry has faced a collapse in demand. With the energy transition already gathering pace in recent years, this demand may never fully recover, especially as renewable-energy output continues to grow. Furthermore, as people have experienced the benefits of reduced emissions and cleaner air during lockdowns, there is likely to be growing pressure on policymakers to make the climate a priority.

In this context, it will only become more important for investors to identify climate-related risks and opportunities, and to ensure that these are reflected when constructing portfolios. We recently published our second Task Force for Climate-related Financial Disclosures (TCFD) report, which explains how we analyze and manage climate-related risks and opportunities both in our clients’ investments, and across our business. In this blog we summarize the key mechanisms we employ as part of our investment process.

1. Idea Generation

Our investment themes provide us with vital perspective on the investment landscape, allowing us to block out short-term market ‘noise’ and identify those powerful forces of fundamental change in the world around us, such as climate change. They are built upon fundamental, observable trends, rather than speculative or short-run forecasts. In thinking about climate change thematically, we use themes such as Earth matters, state intervention, technology-related net effects, and population dynamics to identify interconnected ways in which global warming can have an impact on our clients’ investments. Given our active management approach, we can seek out those businesses that are alive to these risks and better placed to seize the opportunities created. For example, we see a lot of investment opportunities in renewable technologies, and have made significant investments in the area.

We achieve further conviction in the investment thesis of each holding through proprietary research, rigorous bottom-up analysis and the consideration of material environmental, social and governance (ESG) risks and opportunities, specific to each holding.

2. Climate Change Investment Group

We have a dedicated climate change investment group whose activities include undertaking and interpreting climate scenario analysis, policy tracking and analysis, and better understanding physical and technological risks. The group also seeks to identify potential opportunities for our clients’ investments. It includes representatives from equity and fixed-income portfolio management teams, global sector analysts and quantitative and investment risk analysts, as well as our responsible investment team.

3. ESG Analysis

Every security which our global sector research analysts wish to recommend must have an in-depth ESG quality review completed by our responsible investment team. These reviews provide a chance to identify and analyze material ESG risks and opportunities, and feed these into our investment decision-making process, to enable our portfolio managers to consider these risks prior to investing. Where material, climate-related risks and opportunities are highlighted to our global analysts and portfolio managers for consideration before recommendation and investment.

4. Corporate Engagement

Based on the risks and opportunities identified in our ESG reviews, we engage with executive teams on management and execution of climate-related risks and opportunities, in order to incorporate further details into our investment thesis. We also engage with companies on governance structures and accountability, to seek to understand how the board is overseeing climate risks. For example, we will consider if directors have the appropriate expertise to understand how the business will be affected by climate change, especially where a company is a heavy emitter.

We encourage all companies to set a climate-change strategy, with company-specific greenhouse-gas emissions targets, and to evaluate the potential impact of a range of carbon prices, to ensure appropriate planning and capital-allocation decisions. We often discuss broader related issues including water stress, and the impacts of extreme weather on physical assets, to understand how significantly a company may be affected by climate change.

Positively, we also use engagement to understand further how companies are considering and looking to build on opportunities around clean technology and renewable energy, and if in fact they may benefit from these technologies.

5. Collaborative Engagement

Where we believe it is appropriate and will allow us to be more impactful, we also seek to collaborate with other investors, and sit on bodies and panels that support more rigorous management of climate-related risks and opportunities. Accordingly, we are active members within the Climate Action 100+ program, and are members of the Institutional Investors Group on Climate Change (IIGCC) Corporate Engagement Group.

6. Voting

Where we believe they are material and well-founded, we support shareholder proposals on climate change.[1] One example of our voting practice was the ‘Aiming for A’ shareholder resolutions which sought greater disclosure on climate change from oil companies. We engaged with proposers of the resolution, and the companies individually, before voting in favor of the resolutions. We have also supported similar resolutions since.

To advance our voting activities on climate change, we created our first climate-change voting policy, which will commence this year. We will look to vote against the re-election of chairs of heavy emitting companies’ boards that have inadequate climate-change disclosures, management and emissions performance. This will include the consideration of how risks and opportunities presented by the low-carbon transition are managed, as well as a company’s own Scope 1 and 2 emissions.

7. Product Design

To help our clients integrate climate change, sustainability, and other important considerations in their portfolios, Newton offers both screened and sustainable products, in conjunction with core ESG analysis, which is applied consistently across all our clients’ managed portfolios.

For our exclusions-based products, we offer portfolios that do not invest in thermal coal, tar sands and oil shale, as these are the most carbon-intensive fossil fuels.

8. Thought Leadership

To help develop climate thinking across the investment industry, members of our team sit on various industry bodies, including:

  • The IIGCC Scenario Analysis Working Group and IIGCC Shareholder Resolutions Sub-Group
  • Investment Association Climate Change Working Group
  • The Science Based Targets Initiative Expert Advisory Group
  • The Climate Disclosure Standards Board Technical Working Group
  • CDP Investor Signatory
  • Transition Pathways Initiative Signatory

For further information on our views on climate change and how we are responding to this complex problem, you can read our TCFD report.

[1] Where clients have afforded us discretion over the exercise of their voting rights.


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