Industry Voice: What does net zero mean for portfolios?

We have aligned ourselves with the Science Based Targets initiative approach, 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, and 100% being covered by 2040.

We do not think it is 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 decarbonisation looks different depending on the portfolio, and DC schemes will need to think about what their approach to net zero looks like as climate change continues to move up the investment agenda.

Enabling the energy transition

We believe that there are significant opportunities to invest in companies or lend to entities that are going to enable this transition. On one of our investment teams, we have undertaken a mapping exercise to look at the emissions that are currently 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 mapping exercise has highlighted that the backbone infrastructure that our economy runs on is going to require a very 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 the supply-chain companies feeding into the mining operations, such as specialist underground 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 ultimately using these products, including the developers looking for the sites and doing the construction, along with the companies operating the facilities.

Rolling out renewables

Over the last 12 months we have seen some major macro and geopolitical events take place, from Russia's invasion of Ukraine to the cost-of-living crisis, to supply-chain issues. Before the Covid-19 pandemic hit, there was already a progressive renewable energy agenda being pushed out in Europe. During the pandemic, many policymakers were trying to pull the agenda forward to get the economy going again, but recently, with the energy crisis taking hold, energy independence has become a lot more important.

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 started breaking out between Russia and Ukraine, the European Union wasted no time in fully accelerating the permitting process. Understanding the direction of travel for regulation is therefore likely to be critical in order to determine 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 starting to see that the current crisis is accelerating the growth of renewables.

We have seen some of the most progressive policy in the UK, where, despite windfall taxes, the government is capping prices at a level at which companies still maintain plenty of profit, which provides a clear incentive for them to keep developing renewables.

Engagement

We think 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 these 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 companies 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.

We believe that the path to net zero presents a number of exciting opportunities, and DC schemes may wish to consider whether they have appropriate exposure to investment strategies that are seeking to capture this opportunity set.

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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 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 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) and Newton Investment Management North America LLC (NIMNA). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation. 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. 1371973. NIM and NIMNA are both registered as investment advisors with the Securities & Exchange Commission (‘SEC') to offer investment advisory services in the United States. NIM's investment business in the United States is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon').