2018 TCFD Disclosure Report

Transcription

1 2018 TCFD Disclosure Report

2 Newton Investment Management 2018 TCFD Disclosure Report Our TCFD commitment Responsible investment has been integral to our investment process since our inception in 1978, when we began actively voting our clients shares. In 1998, we started to run exclusions-based portfolios, and since then, our responsible investment approach has grown to include environmental, social and governance (ESG) integration across our strategies and active engagement with the management of companies that we invest in. We have also launched focused ethical and sustainable investment products. Owing to this heritage, and our long-term investment approach, climate change has naturally been an area of focus for some time. Scientific evidence suggests that man-made emissions are contributing to accelerated change in the Earth s temperature, and that any rise in global temperatures above 2 degrees Celsius could result in irreversible, catastrophic changes to the global environment. Consequently, for many years our work has included engaging with companies to understand the risks posed by climate change to the successful delivery of their business strategies, and to push for better disclosure of their management of carbon risks and opportunities. However, we also have to think about what the future holds. We therefore welcome and support the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, not only as a means of gaining better transparency on climate-related risks to investments, but also as part of a wider movement to limit global warming to well below 2 degrees Celsius. This is aligned with legislative developments across the world, encouraging greater action from both companies and investors. This report, which I commissioned, is Newton s first step in TCFD disclosure. I am particularly pleased that we have been able to identify that our total Scope 1, 2 and 3 emissions, which take into account the emissions from all our clients investments, are 26% below those of a multi-asset benchmark, and that 51% of our clients utility investments are in renewable energy.¹ Throughout 2019, we plan to undertake further work to enhance our disclosure, including more extensive climate-related scenario analysis to assist in identifying climate-related investment risks and opportunities. We will also continue to participate actively in industry-wide initiatives to advance investor thinking about climate change. We will issue an updated version of this TCFD disclosure report during We have structured this report in accordance with the TCFD recommendations, providing insight into the governance, strategy, risk management, and metrics and targets related to climate change. In order to appropriately reflect the nature of our business, we have split each section into two parts: 1. Climate change and our clients investments, describing how we manage climate change within our investment process, on behalf of our clients. 2. Climate change and Newton s assets, which include our operations, employees and business. I hope this report provides clarity as to how we consider climate change at Newton with regard both to our own business and our clients investments, and I look forward to updating you on how our thinking and actions develop in future years. Please get in touch with victoria.barron@newtonim.com to share your views. Hanneke Smits Chief Executive Officer Note: ¹ As at 31 December

3 Governance Climate change and our clients investments Newton Investment Management is a London-based investment manager. We manage 51.8bn in assets (as at 30 September 2018) for a broad range of clients using our active, global, thematic approach. Global trends that affect our business, of which climate change is one, are considered by our responsible investment team and global research analysts, who are industry sector experts. This research process is overseen by our Investment Oversight Committee, which has an input into strategic decision-making at board level. At present, there are three management-level processes that assess and manage climate-related issues: 1. Before any investment is formally recommended, our responsible investment team conducts an ESG quality review which includes consideration of climate-related risks and opportunities. This informs the risk/reward analysis of the company, and is therefore a vital part of our investment process. The consideration of ESG issues is also aligned with many of our investment themes, which reflect trends in the wider economy. The responsible investment team, together with our global research analysts and portfolio managers, may also engage with companies on material ESG issues, and vote on climate-related resolutions. 2. We offer a number of sustainable and exclusionsbased products to our clients, for which portfolio managers assess the nature of their investments contribution to climate change and the carbon footprint of their portfolios. In relation to this assessment, we have a monthly sustainable strategy meeting (including the sustainable portfolio managers, the responsible investment team, the chief investment officer and other relevant investment team members), where risks and opportunities associated with climate change are discussed when relevant. 3. Several of Newton s investment theme groups, which monitor and analyse trends in the global economy, discuss policy changes which involve climaterelated regulation, and their potential impact on current and future investment strategy. These meetings include the responsible investment team, portfolio managers and global research analysts. As we seek to implement the TCFD recommendations during 2018 and 2019, the Newton board and management team will explore how to further formalise oversight and responsibility on climate-related issues across our entire governance structure. Newton s Executive Management Committee established a Climate Change Working Group (CCWG) in June 2018 to contribute to this process. The CCWG convenes on a quarterly basis, and has responsibility for ensuring that Newton effectively manages climate-related risk and opportunities across the business, by integrating climate-change considerations into investment and business decision-making. The CCWG is chaired by the chief investment officer, and comprises employees from across the business, including risk, investment, estates, product development and reporting teams. The CCWG reports to the Investment Oversight Committee for investment-related issues and to the Executive Committee for all other matters. 3

4 The objectives of the CCWG, which reflect the risks and opportunities facing our clients and our business from climate change, are: Effectively assess, integrate, monitor and manage climate-related investment risk and opportunities to protect and grow our clients assets. Publish high-quality climate-related reports for clients, regulators and the public. Build operational climate resilience to protect Newton s own assets. Climate change and Newton s assets Newton Investment Management is an investment management subsidiary of BNY Mellon. The Board of Directors ( the board ) is comprised of executive directors, non-executive directors and BNY Mellon representatives. The board is responsible for oversight of the firm, approving the strategy of the business, and holding the Newton Executive Management Committee to account. Our CEO and Newton board member, Hanneke Smits, believes that the integration of ESG matters into our investment process is crucial to our, and by extension, our clients success, and speaks publicly on the topic. Her mandate for Newton to report in line with the TCFD recommendations is a natural progression of how we think about long-term issues. Newton s Emerging Risk Committee discusses various risks that may affect Newton s business, and includes climate change as a standing agenda item. The Operating Committee is responsible for the management of how Newton s business is run, and also considers relevant risks. Both committees ultimately report to the Executive Committee, and the outputs from the Newton Emerging Risk Committee are also discussed at Newton s Board Risk Committee. 4

5 Strategy Climate change and our clients investments How could climate change affect client portfolios? We believe that climate change poses a serious threat to the future of the planet and, as a result, our clients investments are exposed to risks. These risks, which are multilayered and interconnected, change over different time horizons and between various strategies, asset classes and sectors. While it is possible to outline potential scenarios across different industries and timeframes (such as those described on the right), the impact positive or negative of any scenario will not be the same for all companies operating in a particular sector. Accordingly, we analyse the actions being taken today by a company s management How do we seek to address this complex issue? to prepare for climate change, and, through our engagement efforts, seek to redirect a company s strategy to thrive though such a transition. This is a vitally important part of our ESG process. As evidenced here, the discussion is complex. So throughout 2019 we will supplement our work on how different scenarios could affect individual companies by further analysing the resilience of our clients investment portfolios to climate-related scenarios, including an outcome in which temperatures rise by 2 degrees Celsius or less, in order to better understand the risks and opportunities across all our strategies. At present, 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. We also already undertake an element of scenario analysis within our sustainable strategy range (which is described on the next page), and conduct carbon footprinting across our clients holdings. Idea generation: Our global investment themes, which include smart revolution (the implications of machines and networks becoming more intelligent) and Earth matters (the impact of environmental factors), keep us abreast of changing regulation and trends around the world, and help us identify new investment opportunities. One recent example of this was looking at electric-vehicle battery improvements and car manufacturers that are ahead of the curve.² 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; such research forms a core part of our current ESG review process, which spans our investments in both equities and fixed income. Currently, 2.6% of our clients assets (as at 31 December 2017) are invested in clean energy and related technology. Climate change potential winners and losers Over the shorter term, investments which have operations in areas which already, or will soon, experience the physical effects of climate change, are likely to face greater risks, for example unexpected operating costs and taxes. Over the medium to long term, the profits of heavy emitters (defined as those companies that have high operational greenhouse-gas footprints or highly emitting products) may be impaired owing to the burden associated with changing processes and practices to mitigate the level of emissions released, or on account of late adaptation costs. Over the longer term, companies with heavy emissions, such as those in the industrial/ energy sectors, may be adversely affected by regulatory changes that could result in higher operating costs. In turn, this may lead to a wider negative impact on demand for such products, whether owing to price increases being unsustainable, or because of a general slowdown in consumer demand for the products produced by heavy emitters on account of environmental concerns such as air pollution. At the same time, increasing scale and competitiveness of greener fuels may lead to lower energy prices, again squeezing margins for traditional energy producers. Conversely, incumbents that are taking action, such as some utilities, or disruptive players which are providing solutions, such as renewable-energy companies or electricvehicle manufacturers, are likely to profit. Technological change will lead to winners and losers in this modern-day industrial revolution. Markets with greater exposure to activities which produce high emissions, including the UK, Australia and Canada, are likely to be the first affected. Developing economies, such as South Africa, Vietnam and Chile, may experience higher adaptation costs, stranded assets and debt-repayment issues, particularly if their economies are heavily reliant on agriculture, are low-lying or are already experiencing societal tension, which may be exacerbated by scarcer natural resources. Note: ² 5

6 ESG analysis: All of our globally recommended stocks have to be considered from an ESG perspective, the results of which are contained within an ESG quality review produced by our responsible investment and fixed-income teams. These reviews feed into our investment decision-making process, and enable our portfolio managers to consider risks prior to investing. Where material, climate-related risks and opportunities are highlighted to our global analysts and portfolio managers. Corporate engagement: Based on the risks and opportunities identified in our ESG reviews, we engage with boards and management teams to better understand their approach to climate change, so we can incorporate further details in our investment thesis. Governance: We engage with boards to understand how they are overseeing climate risks. For example, we will consider if non-executive directors have the appropriate expertise to understand and robustly challenge how a business will be affected by climate change, especially where a company is a heavy emitter. We also hold these discussions with management teams, to see how those running the businesses consider the issue. Strategy, metrics and scenario planning: We encourage all companies to set a climate-change strategy, with company-specific, concrete greenhouse gas (GHG) emission-reduction targets, and to consider a range of carbon prices, to ensure appropriate planning and capitalallocation decisions. This is especially crucial for high-impact sectors, which, as a result of climate or air-pollution policies, might see the cost of their operations, compliance and strategic decision-making change in the future. We also seek to discuss the impacts of climate scenario planning on long-term capital-allocation decisions, including using a 1.5 degree Celsius scenario, and encourage companies to report in line with the TCFD recommendations. Physical impacts: We often discuss issues including water stress and other impacts of extreme weather on physical assets, to understand how significantly a company s operations may be affected. For example, businesses already experiencing extreme weather events or resource scarcity are at risk of these pressures increasing, especially if local stakeholders will also be affected. Implementing mitigation and adaptation plans will be crucial to protecting assets and, as investors, we need to understand how aware companies are of these risks. Clean technology and renewable-energy opportunities: Positively, we want to understand 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. This is another key input for our investment thesis. Investor collaboration: As climate change is a global investment risk, we seek to collaborate with other investors on the issue, and we sit on bodies and panels that support more rigorous management of climate-related risks and opportunities. Accordingly, we are active members of the Climate Action 100+ programme (climateaction100.org), and are members of the Institutional Investors Group on Climate Change (IIGCC) Corporate Engagement Group (iigcc.org). Voting: Where we believe they are material and wellfounded, we support shareholder proposals on climate change. One example of our voting practice was the 2015 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 favour of the resolutions. We have supported other similar resolutions since. In addition, during 2018 s voting season, we wanted to deliver a message with a big impact. We therefore worked with our industry colleagues and rallied other investors to write a public letter to the oil & gas industry which we believe could, and should, do more on climate change.³ The letter, supported by 60 global asset managers and owners with combined assets of over $10.4 trillion, gained excellent traction in the global press; it was first published by the Financial Times⁴ and then by other media outlets including The Wall Street Journal and Bloomberg. Product design: Newton offers both exclusions-based and sustainable products, and all our strategies apply integrated ESG analysis. 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. For our sustainable strategy range, we incorporate a series of proprietary red lines in order to ensure the poorest-performing companies on an ESG basis are not eligible for investment, while aiming to identify those with Note: ³ ⁴ 6

7 excellent ESG credentials. As a result, the sustainable suite of products (equities, multi-asset and fixed income) uses an explicit quantitative climate-change model, which we call the climate change red line. The aim of this model is to screen out the worst of the emitters that will be most affected by policy changes, and which are incompatible with the aim of limiting global warming to 2 degrees Celsius. This is primarily achieved through: Tailoring cash-flow forecasts by internalising a cost of carbon during the valuation process. Understanding the carbon footprint and carbon intensity of each portfolio. Analysing the portfolio s exposure to stranded assets. 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 (iigcc.org) The Principles for Responsible Investment (PRI) TCFD working group (unpri.org) The Science Based Targets Initiative Expert Advisory Group (sciencebasedtargets.org) The Climate Disclosure Standards Board Technical Working Group (cdsb.net) We also publish regular thought leadership blogs and articles on our website. Additionally, in 2018, during New York Governance Week, our CEO Hanneke Smits chaired a panel discussing how effective corporate engagement can have an impact on climate change, speaking alongside former head of the UN Framework Convention on Climate Change (UNFCCC) Christiana Figueres and Professor Xi Li from the London School of Economics. For the second year running, in 2018 Newton signed the Global Investor Statement to Governments on Climate Change.⁵ For further examples of our thought leadership, please visit newtonim.com/ri. Climate change and Newton s assets Climate change will increase the severity and frequency of extreme weather events which can affect the buildings in which we operate and the ability of our employees to work effectively. As an asset manager operating in London and New York, our operational impact on climate change is relatively small. However, there are opportunities for us to make cost savings, build climate resilience and make a positive contribution to the global efforts to avoid runaway climate change. Our operational climate strategy involves the following strands: Building resilience: Our business continuity plans incorporate environmental risk assessments and prepare the business for the increased likelihood of natural disasters associated with climate change affecting our offices. Reducing energy consumption: A significant number of energy-efficiency projects have been implemented, helping to reduce energy costs and our GHG footprint. Energy procurement: 100% of the energy we purchase is renewable, which helps to reduce our carbon footprint and demonstrate demand for cleaner energy sources to the market. Resource efficiency: We have reduced our consumption of goods that contribute towards climate change such as paper and plastics. Examples include providing all employees with reusable coffee and water cups, removing plastic from the kitchen areas, and removing plastic covers from presentation documents. While these are individually low-impact strategies, they help to build a culture of awareness and behavioural change. Each of the above initiatives enables us to make a positive contribution to reducing the risks of climate change, as well as preparing our business for the consequences of a changing climate. Note: ⁵ 7

8 Risk management Climate change and our clients investments Through our investment process and the ESG reviews produced for each potential investment, material climatechange risks and opportunities are highlighted to our global analysts and portfolio managers. To do this, we gather information through company reports and engagement, data providers, climate-change research, internal and external analysts, consultants and non-governmental organisations to identify potential risks and opportunities. These are discussed with the global analyst or portfolio manager and integrated into our overall research on each potential investment, which is disseminated internally. Recent output from this approach has highlighted medium-term methane leakage concerns for a credit investment in a gas pipeline company, possible water stress for a semiconductor manufacturer, and clean technology opportunities for a conglomerate engineering company. Once an investment is made, we monitor an investment s climate change performance through regular engagement and annual ESG data updates. Recent examples of this have been discussions with UK oil & gas companies to encourage the setting of concrete emission-reduction targets, and with North American utility companies to encourage them to respond in line with the TCFD recommendations. We also use annual general meetings as a way to monitor and engage with companies to reduce the risks from climate change, as well as to support climate change-related resolutions. In addition, we work with other investors to monitor climaterelated risks. In relation to our sustainable strategies, the climate change red line restriction is hard-coded into our riskmanagement system, which prevents portfolio managers from purchasing stocks that violate the climate criteria. Throughout 2019, we will develop a house-wide, portfolio-level approach to climate risk management. Climate change and Newton s assets We work with the business continuity team of our parent to understand and manage a broad set of short, medium and long-term business continuity risks, of which climate change is one component. We assess that our current risk from physical climate change is low, and therefore have commensurate systems, processes and controls in place to ensure that our exposure to physical climate risk is mitigated. The business continuity programmes focus on three areas crisis management, business resumption and technology recovery and are designed to ensure resilience and preparedness to withstand and recover from natural or man-made disasters. 8

9 Metrics and targets Climate change and our clients investments We analyse all equity and fixed-income investments on their GHG and climate performance data. We use these disclosures as one input into our investment analysis when considering climate change. The data is sourced via our ESG data and climate-change research providers, the CDP (formerly Carbon Disclosure Project), Bloomberg, investor relations communications and corporate disclosures, and by speaking to directly to company management. This information then forms a picture of the robustness of a company s accounting methodology (including boundary, scopes, and treatment of grey accounting areas such as joint ventures and leased assets). It also enables a performance assessment of Scope 1 (direct) emissions, Scope 2 (indirect) emissions (using both market and location-based methodologies), and intensity metrics over previous years. In addition, it highlights clean or technology investment opportunities. However, we believe that the data currently disclosed by companies does not typically show how climate change could materially affect the future viability or performance of their businesses. Therefore, where necessary, our analysts consider other strategic, qualitative disclosures and risk metrics. companies to prioritise engagement with. It also shows a portfolio s exposure to green investments and carbon-related assets, and its contribution to a lower-carbon economy. The footprint analysis also highlights those companies that have science-based targets and helps monitor performance over time. We are now measuring the carbon footprint of all our clients holdings and our largest investment portfolios in order to form a clearer view of how our portfolios are positioned, and we will start reporting on this during As a starting point, the GHG emissions of our clients' investments as of 31 December 2017, calculated using the World Business Council for Sustainable Development (WBCSD) GHG Protocol operational control methodology, are disclosed below. We have assessed the World Resources Institute (WRI)/WBCSD 15 categories of Scope 3 emissions⁶ and concluded that our material Scope 3 emissions source is our clients investments. The emissions from our clients investments have been calculated using a methodology developed by an independent research consultant that uses percentage of shares held combined with actual and modelled (where emissions data is not published) carbon data. As part of our client offering, through our climate-change research provider we can also measure the carbon footprint and conduct climate-change analysis across our different investment portfolios. This analysis identifies a portfolio s overall carbon footprint and carbon intensity, and highlights emissions-heavy As of 31 December 2017, our clients Scope 3 emissions are 3,850,000 tonnes of carbon dioxide equivalent (tco2e), 25.9% less than the emissions of our benchmark portfolio.⁷ To put this into context, 3,850,000 tonnes of tco2e is the equivalent of powering around 415,000 homes for a year. 8 Newton s Scope 1-3 carbon emissions vs. benchmark Note: ⁶ ISS Ethix Climate Solutions definition: Indirect emissions of a company are known as 'Scope 3' emissions, following the GHG protocol, and are classified into 15 sub-categories including supply chain, business travel, investments and others. ⁷ The benchmark used is custom designed and comprised of 60% equities and 40% fixed-income holdings, in order to best reflect our house holdings. 8 United States Environmental Protection Agency: 9

10 Climate change and Newton s assets In terms of the emissions from our own operations and the energy we buy to support them, Newton forms part of BNY Mellon s (our parent company) GHG measurement and target-setting process. Since 2008, BNY Mellon has reduced its footprint by 52% from a 2008 baseline, achieving its target of a 40% reduction by 2020 two years early. A new target-setting process at BNY Mellon is currently underway. The data below shows Newton s Scope 1 and 2 emissions. Category Tonnes of carbon dioxide equivalent (tco2e) Scope 1 58 Scope 2 location-based methodology 1,329 Total Scope 1 and 2 (location-based methodology) 1,387 Scope 2 market-based methodology 0 9 Total Scope 1 and 2 (market-based methodology) 58 Data as of 31 December 2017 Note: 9 Newton's electricity use is included in BNY Mellon's electricity purchases. As a result we procure renewable electricity products globally, including Renewable Energy Credits (RECs), Guarantees of Origin (GOs) and PowerPlus instruments (i.e. International RECs), equal to the amount of Scope 2 electricity purchased. Therefore, Newton also uses 100% renewable electricity through the instruments described above which results in zero market-based Scope 2 emissions. Continuing our journey Reporting in line with the TCFD recommendations on how climate change is being considered within our business will be a complicated, multi-year process; this report is the very beginning of that journey. There is more information to explore, including climate scenario analysis and portfolio-level exposures, and complexity to navigate as approaches are still being developed by experts and regulators. However, this complexity does not mean we should avoid the challenge. Throughout 2019, we will work to better understand how this complex issue will affect Newton and, most importantly, our clients assets over the short, medium and long term, and how we can play a part in limiting global warming to well below 2 degrees Celsius. This document is issued by Newton Investment Management, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Newton and/or the Newton Investment Management brand refers to the following group of affiliated companies: Newton Investment Management Limited (NIM), Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIM & NIMNA Ltd are authorised and regulated by the Financial Conduct Authority. NIMNA Ltd is registered as an investment adviser under the Investment Advisers Act of Both NIM & NIMNA Ltd are registered in England as Nos and respectively. 10