The sixth Intergovernmental Panel on Climate Change (IPCC) report published in August 2021 provided an update on the latest scientific data regarding climate change, and was described as a “code red for humanity”, indicating that we have reached a critical point at which urgent reductions in absolute greenhouse-gas emissions are needed to avoid potentially devastating consequences for the health of the planet.
Development of common standards
A common set of standards on climate reporting is now emerging, and we welcome these as a means of providing crucial guidance for asset owners and managers. We also recognise that they are in their first iteration; the standards are likely to evolve over time, which will require an adaptive approach to modelling and reporting of climate-related risks, opportunities and impacts.
Principles to support the journey
Within this context, we outline below a number of steps that we believe charities and their investment managers should be considering to support the journey to net zero from an investment perspective.
Adapt and evolve: Given the continuously evolving nature of the investment environment, it is important to incorporate a holistic set of actions with accompanying and robust measures and targets. These will need to adapt over time as science, policy responses and management approaches progress.
Real-world change: We believe that it is beneficial to manage for better climate outcomes, even if individual climate measures appear worse in the short term. For instance, investing in and engaging with a heavily emitting utility and encouraging it to adopt a decarbonisation strategy could be more beneficial for the climate than exiting sectors that will continue to play a central part in meeting the energy needs of society.
Paris-aligned portfolios: There are various long-term risks and opportunities associated with the transition to a low-carbon world. Identifying the winners of this transition will require deep fundamental research to better understand its influence on business and economic models. It is also important to consider the speed and intensity of the policy response from governments that will shape the incentives in the economic and financial system.
Climate opportunities: While it is essential to manage the risk of stranded physical assets and business models, there will also be a myriad of new investment opportunities aligned to delivering the products and services needed to enable a successful energy transition.
Expressing climate-related issues: We have identified some key methods which can be effective in expressing views or influencing outcomes linked to climate change:
- The purchase, sale or change of weight of a security
- Collaborative or direct engagement with issuers, regulators and governments
- Voting at company meetings
- Transparent reporting and analysis of climate risks and solutions in portfolios
Target-setting approach: While formalised Paris-aligned benchmarks are still in development, charity portfolios can be compared against a hypothetical Paris-aligned global economy. For instance, as a first iteration, we will compare the emissions intensity of the portfolios we manage against their respective benchmarks, having applied an annualised reducing-balance percentage reduction of 7% (this percentage is sourced from an emerging consensus from industry reports).
The journey to net zero
As the transition to a low-carbon world continues to gain traction, charities must consider how they navigate the related opportunities and risks within their investment strategies. Newton Investment Management Ltd joined the Net Zero Asset Managers initiative in March 2021, and we will continue to work with our charities clients to understand and implement their strategic climate objectives.
For more information, read our blog here.
Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
Lloyd McAllister is head of ESG research at Newton Investment Management
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This document is for information purposes 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 particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. Issued in the UK 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 Limited is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.