PI Partnership – Newton Investment Management


however, recognise that as universal own- ers of the market, they have a stake in en- couraging a successful energy transition to renewables. Simply put, they view it as short-sighted and misguided to eschew the industry entirely.


Andrew Parry is head of sustainable invest- ment at Newton Investment Management


ENGAGING FOR A GREENER FUTURE


Why active asset owners are well placed to encourage the energy sector’s lower- carbon transition.


It is no secret that price-competitive


renewables, advances in technology, changing social norms and increased reg- ulation are colliding with economic diffi- culties and taking their toll on oil, gas and coal company profits. The sector’s woes are such that, despite short-term bumps, as of the end of 2020, energy stocks accounted for less than 3% of the S&P 500, down from over 16% in 2008. Asset


impairment charges are also


increasing across the fossil-fuel industry, giving rise to the new concept of stranded liabilities. Specifically, this is the cost of retiring long-lived oil and gas infrastruc- ture. Expanding production of the feed- stock for plastics could prove another misallocation of capital, as changing atti- tudes to single-use plastics could translate into this ‘growth opportunity’ becoming an oversupplied or even declining mar- ket, given the awareness of pollution from plastics.


As a result, many fund managers are increasingly avoiding the energy sector, on concerns over potential permanent capital impairment. Asset owners,


While some asset owners have divested from fossil fuels – recognising that rising concern for the environment globally is linked to poor financial returns – some continue to hold them in the hope of driv- ing change through engagement. Active managers, drawn by seemingly low valua- tions, are engaging alongside them, with the combined weight of their collective voices leading to better reporting and some shift in strategy towards redirecting a growing proportion of capital expendi- ture


to renewables. The challenge


remains whether the change being sup- ported by engagement will be sufficient to avoid fossil-fuel stocks becoming ‘value traps’.


Advantages of an active approach Active managers have distinct advantages when it comes to proxy voting and en- gagement, the most obvious being that they have a far smaller number of securi- ties to cover than a passive manager. Fur- thermore, traditional active managers can embed engagement opportunities into their due diligence analysis of stocks before purchase. Finally, the continuous feedback loop between company manage- ment teams and active managers provides greater insight into the quality of corpo- rate governance, a perspective that makes for better-informed decisions when it comes to proxy-voting judgements. In our view, this should make active managers more informed voters of proxies, with the ultimate sanction of selling if change is not forthcoming and client capital is at risk.


Climate risk management promises in- creasingly to lead active managers to put fossil-fuel assets in a ‘why bother?’ bucket. For universal owners, however, achieving alignment with climate outcomes delivers different conclusions, as they are focused on managing long-term systemic risk associated with owning the market. With- out the sanction of divestment, there is a danger that perpetual engagement becomes diluted and leads to just token action, such as committing to a net-zero carbon for 2050 target, while failing to commit to absolute emission reductions and key interim milestones.


Investors as activists The recent and rapid growth of both active and passive environmental, social and governance (ESG) and sustainable assets has been accompanied by a rise in active engagement and proxy voting. Rather than pliantly voting with management, investors are increasingly voting against them. This new-found, vigorous investor activism only promises to grow as we emerge from our current Covid-19 envi- ronment. The increasing adoption of Task Force on Climate-related Financial Dis- closures (TCFD) reporting, the commit- ment to net-zero targets and to absolute emission-reduction targets by a few com- panies, alongside accelerated investment in renewables, is evidence that fossil-fuel companies are responding to pressure, both economic and from shareholders. The question remains whether the indus- try can remain relevant in a rapidly chang- ing world. The energy industry is inextri- cably interwoven with geopolitics, which is why for active investors, avoidance, divestment and engagement are the sharpest arrows in the quiver as we aim towards achieving a cleaner energy for tomorrow.


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 in- formation 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. Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeav- our Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton Investment Management Limited is registered with the SEC as an invest- ment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov web- site or obtained upon request. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited.


Issue 100 | February 2021 | portfolio institutional | 23


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