ESG Club


NAVIGATING NET ZERO TO ACHIEVE REAL-WORLD DECARBONISATION


In June 2022, Newton announced its approach to net zero. We aligned our- selves with the Science Based Targets ini- tiative, which involves a commitment to aim for an interim target of 50% of the financed emissions from the investments we make on behalf of our clients being covered by credible transition plans by 2030 with 100% covered by 2040. It is not credible to decarbonise portfolios simply by cutting out certain sectors; that is not necessarily going to translate into decarbonising the real world, which is ultimately what we want to achieve. In practice, the path of real-world decarboni- sation looks different depending on the portfolio.


In some of our sustainable strategies, for example, we look for companies that are either supplying solutions to climate- change challenges or are aligning them- selves to a net-zero pathway. Infrastruc- ture-related strategies might contain net-zero targets that are perfectly achieva- ble for some companies, but for invest- ments in utilities it can be more difficult as they have the transition in front of them, although that may be where a lot of the value creation will lie. We believe that there are significant opportunities to invest in companies or lend to entities that are going to enable this transition. Members of our invest- ment team have undertaken a mapping exercise to look at the emissions that are being produced across all sectors. We have examined the solutions that can address each layer of those emissions, as


well as the marginal cost and the viability of each step of CO2 mitigation. This gives us a structure to know exactly what to look for, which ideas to pursue, and where we should focus our fundamental analysis. Our multi-dimensional research platform underpins this process, and brings together colleagues from across the busi- ness, including the responsible invest- ment and data teams, as well as our fun- damental analysts and portfolio managers.


Our mapping exercise has highlighted that the backbone infrastructure that our economy runs on is going to require an energy-focused and material-intensive overhaul. The framework helps us to look right across the value chain, for example, identifying copper and lithium as key commodities, finding mining businesses to invest in, and investigating supply- chain companies feeding into mining operations, such


as specialist under-


ground mining equipment. We also explore where these materials, such as copper and lithium, are being used and applied, for example, in solar- panel batteries and wind turbines, and can think about what the supply chains and component parts for those products look like.


In addition, we can look at who is ulti- mately using these products, including the developers looking for the sites and doing the construction, along with the companies operating the facilities.


Rolling out renewables Before the Covid-19 pandemic hit, there was already a progressive renewable energy agenda being pushed out in Europe. During the pandemic, policy-


PI Partnership – Newton Investment Management


makers were trying to pull the agenda for- ward to get the economy going again, but, with the energy crisis taking hold, energy independence has become more impor- tant for many.


The main limiting factor on building renewables is not supply of solar panels, or labour shortages, but regulation. In areas where the regulator is accelerating the permitting process, the rollout of renewables is going to be faster. When the conflict between Russia and Ukraine broke out, the European Union wasted no time in fully accelerating the permitting process. Understanding the direction of travel for regulation is there- fore likely to be critical in order to deter- mine whether there will be a faster push towards renewables. It has been suggested that the best cure for high energy prices is high energy prices, and we are now start- ing to see that the current crisis is acceler- ating the growth of renewables.


Engagement


It is important to be actively engaged with companies that have credible transition plans in place, and to understand their net-zero ambitions. This enables us to assess how realistic their goals are and to track the signposts along the way. When we are engaging, we are on the same side of the table as these businesses. If the company is taking the right action that is going to improve its path towards net zero, that may also create a good deal of shareholder value. We want these com- panies to do the right thing for the right reasons, and ultimately we believe this should result in good outcomes not only for the company itself, but for the world and for our clients too.


Important information This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particu- lar strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual invest- ment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. Issued by Newton Investment Management Ltd. ‘Newton’ and/or ‘Newton Investment Management’ is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM), Newton Investment Management North America LLC (NIMNA) and Newton Invest- ment Management Japan Limited (NIMJ). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation. NIMJ was established in March 2023 and is comprised of the Japanese equity management division of an affiliate, BNY Mellon Investment Management Japan Limited. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973. All firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’).


42 | portfolio institutional | June 2023 | Issue 124


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