“Europe faces carbon dioxide shortage” read the headlines at the end of June, with many fearing the knock-on effects on such barbecue staples as beer, meat and salads – and in the middle of the World Cup too!

Meanwhile, for the planet, quite the opposite remains true. Reducing carbon dioxide (CO2) emissions is vital to meet the challenge of limiting global warming to 2 degrees Celsius.  

At Newton, we see this as both a risk and opportunity for our clients’ investments, and, where we believe it is being ineffectively managed by companies, we will engage to seek comprehensive action.

Public letter to Royal Dutch Shell on climate change

The oil & gas industry is responsible for 50% of global CO2 emissions, yet we are still not seeing sufficient mitigating action. Consequently, we have been encouraging the industry to take full responsibility for its emissions and to improve the transparency of reporting in this area.

This AGM season, we wanted to deliver a message with a big impact, and so we 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. The letter, supported by 60 asset managers and owners with combined assets of over $10.5 trillion, gained excellent traction in the global press, first published by the Financial Times and then by other media outlets including The Wall Street Journal and Bloomberg. You can read the letter here.

Panel discussion on ESG engagement at Governance Week 2018

The public letter demonstrated the power of investor collaboration, and proved that the whole can certainly be greater than the sum of its parts when it comes to company engagement. This was also the strong message delivered to investors at a panel discussion we hosted at Governance Week in New York, a series of events dedicated to global environmental, social and governance (ESG) and sustainability issues.

At the event, entitled ‘Quantifying effective engagement and its impact on climate change’, we heard academic evidence from Dr Xi Li of The London School of Economics and The Newton Centre for Endowment Asset Management, which proves the beneficial financial effects of engagement with companies on ESG topics.

Dr Li’s research, which looked at 613 public companies over a 20-year period, made three key findings which we thought were particularly exciting for active ESG-integrated managers:
– Companies where successful engagements had taken place produced a 7% abnormal[1] return in the year which followed the initial engagement.[2]
– Collaboration between investors, particularly in relation to environmental and social issues, contributed positively to the success of engagements.
– Engagements on the themes of corporate governance and climate change were shown to produce the greatest abnormal returns.

With this in mind, the call to investors from one of our panellists Christiana Figueres (who led the UN’s climate-change work) to start making more rigorous demands of companies became particularly pertinent. Christiana impressed upon the audience that we have a rapidly closing window of time to reduce emissions to meet the 2-degree goal, and, if this isn’t met, the consequences of climate change will be more profound and the financial impact much greater.

We believe companies must take action before it is too late, and, as the academic evidence demonstrates, investors can successfully encourage them to do so. 

International Corporate Governance Network annual conference 2018

Governance Week was not the only global gathering to discuss ESG issues which we attended over the second quarter. In June, Ian Burger, our head of corporate governance, attended the International Corporate Governance Network’s (ICGN) annual conference, an organisation whose board he also sits on. This is an event we have been attending for well over a decade, and we have watched it grow as ESG considerations have become more and more of a focus for investors. This growth of the ICGN as a whole seems all the more noticeable in recent years, with the assets for which ICGN members are responsible now at $34 trillion, compared to $26 trillion just two years ago.     

What particularly grabbed our attention this year was that there were notably more non-ESG-related investment staff at the event, for example chief investment officers and fund managers, undoubtedly reflecting the huge growth in client demand which has made investors sit up and listen.

A number of presentations and discussions over the course of the conference confirmed our view that asset owners are thinking harder and becoming savvier about how they factor ESG considerations into their investment mandates. Asset managers who are guilty of ‘greenwashing’ should beware.

[1] Abnormal return is the difference between a stock’s actual observed return and its expected return as calculated by an asset-pricing model.

[2] https://academic.oup.com/rfs/article/28/12/3225/1573572