Is ESG integrated into your investment process? How? Which funds or does this apply to the entire firm?

Yes. Newton manage all our investors’ assets according to what we term our integrated approach. By this, we mean that analysis of material and relevant ESG issues is integrated into security selection, and engagement with companies is subsequently used as a powerful feedback loop to encourage ESG improvement in support of investment returns.

Our consideration of ESG issues is part of our broad investment approach that integrates rigorous financial analysis, thematic trends, macro-economic influences and valuation considerations. This is at the heart of the “mosaic theory” approach to active asset management. Failure to consider ESG insights, therefore, is likely to give an incomplete picture of the merits and risks of an investment opportunity.

We integrate ESG considerations into investment processes on the basis that the understanding of the materiality of these issues will likely improve risk adjusted returns over the proposed investment horizon. When potential investment ideas are being investigated for their attractiveness, ESG issues form part of that consideration.

The consideration of ESG issues also aligns with many of Newton’s investment themes, which reflect trends in the wider economy. Examples include state intervention, which highlights the likelihood of increasing regulation (for example, around climate change) and healthy demand, which highlights the increasing social need for access to healthcare in emerging economies.

Our sustainable strategies seek to balance between the current, as well as the future needs of stakeholders so as to avoid short-termism and encourage a better allocation of capital that leads to improved long-term global outcomes for society and the environment alongside generating sustainable risk-adjusted returns for clients. Our sustainable strategies seek to support financially successful companies that provide solutions for pressing social or environmental needs; balance well the interest of stakeholders as part of building long term shareholder value; or that have committed explicitly to improving their environmental and social impacts that will lead to a transformation of their business models.

Who conducts ESG analysis within the team? Is it done by PM, financial analysts or a central ESG team?

Research analysts, portfolio managers and the specialist analysts in our responsible investment (RI) team all perform ESG analysis. The RI team are the guardians of RI policy and act as specialist advisers on ESG issues for the rest of the investment team.

Members of the investment team undertake security analysis that incorporates ESG assessment into financial modelling and portfolio construction.

All new equity positions, irrespective of strategy, require an ESG Quality Review (QR) to be completed prior to purchase. The QR includes analysis of E, S and G factors, giving a proprietary ESG score for each stock, alongside in-depth assessment of material ESG issues.

For our core strategies, this ESG analysis then feeds into our investment decision-making and enables our portfolio managers to consider these risks and opportunities prior to investing.

For our sustainable strategies, the RI team has the ability to reject a proposed investment if they do not believe it is suitable for investment. This is an organisational design backstop to ensure unsuitable securities are not purchased.

Engagement with companies and wider stakeholders is not limited to our responsible investment team and is also a key element of the roles of our wider investment team.

Please summarise the key ESG metrics that are core to your strategy?

The issues our analysts review as part of our environmental analysis include carbon emissions, water management, energy sources and uses, hazardous materials, environmental benefits, natural resources, biodiversity, land rehabilitation and the risks presented by physical threats such as extreme weather events.

Social analysis includes an assessment of material social issues, such as human rights, human capital management, diversity and inclusion, supply chain management, labour standards, health and safety, business ethics, including consumer protection, and avoidance of corruption in all forms, including extortion and bribery, as well as changing social norms when it comes to demand for particular products or services.

For metrics on governance, we look at corporate governance structures and processes, taking into account particular company circumstances and regulatory environment, guidelines and established best practices with respect to board structure. This includes the balance between executive and independent board representation, succession planning, capital structure, remuneration, risk management, internal controls, shareholder rights, ownership structure and transparency, as well as corporate purpose and approach to managing competing interests between different stakeholders.

The RI team maintain a ‘materiality matrix’ which captures key areas of E, S and G focus by industry which help inform areas of research for the ESG Quality Review and potential engagement. To provide an example of an industry-specific engagement topic, a key focus of Newton’s engagement with energy and utility companies includes a focus on energy transition as well as broader E, S and G related topics. For companies in these sectors that we have identified as transitioning to a low carbon economy, a key area of engagement is the company’s performance and alignment with stated targets.

The RI team generates ESG scores on individual companies at the aggregate and environmental, social and governance level as part of the production of a QR. These scores are based on the judgement of the RI analyst following their detailed research into the underlying ESG characteristics of an entity. These inputs include a wide variety of information, including discussions with the in-house research analysts, third-party research firms and the entity itself (where appropriate), as well as a wide variety of publicly available qualitative and quantitative data. The QRs provide insights into material environmental, social and governance issues identified by the analyst, with the scores provided acting as an illustrative summary of the detailed work and supporting discussion between the research analysts and RI team in relation to material issues.

How is this research carried out? Positive/negative screening? Qualitative?

For our core strategies, our global industry analysts use our thematic framework to assist in narrowing the investment universe to a point at which they can then conduct fundamental research on a number of ideas. ESG analysis is integrated into that research in a qualitative way using the metrics described above. The RI analysts sit on the nine thematic working groups and bring their ESG insights to bear on the insights provided by these groups.

Each equity security that is formally recommended by our global industry analysts must have an ESG quality review conducted by a member of our RI team. This integrates third party ESG research into further proprietary qualitative work and also provides a proprietary, quantitative ESG score.

The ESG score takes account of the material ESG issues with weighting, scoring and rationale. Next, the market ESG consensus of the company is presented, alongside where we disagree with that.
We have developed our own proprietary ESG dashboard which provides us with a range of data to assess material ESG risks.

For our sustainable strategies, we use sustainable themes to help us identify sustainable opportunities focused on solution providers, those that balance the interest of stakeholders in their business models and companies in transition. We also use principles-based ‘red lines’ which seek to exclude market failures that have a significantly negative social or environmental impact. These red lines make use of models, such as our climate change model. We have also identified various unsustainable and unethical activities that we wish to limit or completely avoid exposure to in our sustainable strategies and have established threshold limits on certain activities based on these principles.

How do you measure your success regarding ESG? Performance against benchmarks (which ones)? Reports?

Our fundamental view is that a considered approach to ESG analysis enhances our investment process, particularly for corporate investments. This process includes identifying the ESG risks and opportunities faced by a company and ensuring that these challenges are well managed. Engagement can play a crucial role in helping achieve this understanding and to influence change.

To provide oversight of our long-term engagement activities, we have developed a stewardship tracker which outlines ESG engagement opportunities. Our fundamental analysts also provide input on contentious votes, company ESG engagements and other policy work. This ensures that our voting decisions are able to support our investment thesis and engagements.

We report publicly at a firm level, as well as by investment strategy, concerning our responsible investment activities. These reports extend to all voting activity undertaken, any conflicts of interest recognised, and the rationale for each incident where we have voted against the recommendations of the relevant company’s management team.

We do not measure ourselves against ESG benchmarks because these tend to be built on subjective third-party assessments and, in effect, you are allowing what “good” looks like to be defined by an external agency. ESG is a powerful concept still in want of a common industry definition, which, in our opinion, is a limiting factor in the use of third-party ESG ratings in the investment process.

Is your business a signatory to PRI? Why, why not?

Yes. Newton has been a PRI signatory since February 2007, ten months after its inception. In the 2020 PRI assessment report, Newton was rated overall A+ for the fourth consecutive year. Only 29% of investment managers received an overall A+ rating in the latest assessment period.

We have been awarded the highest rating possible (A+) in all five areas assessed, with Newton’s A+ scores strongly outperforming the median score across all categories.

The percentage of investment managers who also received an A+ rating for the modules that we responded to were as follows:

• Listed Equity – Active Ownership: 9%
• Listed Equity – Incorporation (refers to integration of ESG analysis): 23%
• Fixed Income – SSA (sovereign, supranational and agency bonds): 16%
• Fixed Income – Corporate Financial: 11%
• Fixed Income – Corporate Non-Financial: 11%

We signed up to the PRI because we are committed to its six principles through our research, analysis, engagement, voting and reporting activities. It is also important to us that our credentials in responsible investment are independently verified and confirmed in the consistently high ratings we have achieved across all categories. We are pleased that the PRI has independently agreed that our responsible investment practices meet its highest standards.

Are you disclosing climate change policies in line with the Task Force on Climate-Related Financial Disclosures (TFCD)? Please briefly outline your policies.

Yes. We were one of earliest investment managers to release a disclosure report that was structured in accordance with the TCFD recommendations, providing insight into the governance, strategy, risk management, and metrics and targets related to climate change.

We did this to ensure that we were holding ourselves to the same standards as our investee companies, and specifically to explain how we were considering, and preparing for, the risks and opportunities presented by climate change.

Our first report was for 2017, and subsequent reports have provided updates on a number of positive changes during that time. Highlights include establishing board-level oversight of Newton’s actions on climate-related risks, entering into new data relationships with carbon experts, undertaking significant internal education, and establishing a climate change-focused investment group to undertake climate scenario analysis.

We use a variety of approaches to address the complex issue of climate-related risks and opportunities and we incorporate these into our idea generation, ESG analysis, company engagement, voting, product design and thought leadership. We also already undertake an additional element of scenario analysis within our sustainable strategy range, and conduct carbon foot printing across our clients’ holdings.

Further details on all these policies, as well as metrics on our business and the companies in our portfolios, can be found in our TCFD report that is available on our website:

https://www.newtonim.com/uk-institutional/special-document/tcfd-disclosure-report/.

Has your business signed up or committed to any other campaigns relating to ESG?

Yes. We have signed up or are committed to the following ESG related groups:

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Managers Limited (BNYMFM), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

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 and, in Switzerland, for Qualified Investors only. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager unless otherwise noted and is not investment advice. This is not investment research or a research recommendation for regulatory purposes.
For further information visit the BNY Mellon Investment Management website.