A climate for engagement

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McAllister: Focusing on companies that are improving their behaviour allows investors to help drive positive change
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McAllister: Focusing on companies that are improving their behaviour allows investors to help drive positive change

Newton Investment Management's Lloyd McAllister looks at how an active approach could help DC schemes to tackle climate change

Before the Covid-19 pandemic took hold, climate change was increasingly in the spotlight. In 2019, greenhouse-gas emissions were the highest in history, and extreme weather events such as Australia's catastrophic bushfires attracted global media coverage. The growing focus on the implications of a warming climate has not escaped the pensions industry: DC schemes must now demonstrate how they are taking account of environmental, social and governance (ESG) considerations, while the pensions minister recently indicated he believes schemes should be mandated to report publicly in line with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD).

Furthermore, an energy transition which had already been gathering pace may now be accelerating. With the oil and gas sector having underperformed global equity markets for several years, the industry now faces a collapse in demand as efforts to curb coronavirus have led to severe restrictions on the global economy; this demand may never fully recover, especially as renewable-energy output continues to grow. Meanwhile, as people have experienced the benefits of reduced emissions and cleaner air during lockdowns, there is likely to be growing pressure on policymakers to make climate a priority.

Energy transition: The oil and gas sector has underperformed global equity markets for several years

In this context, it will become increasingly important for schemes both to ensure that their default strategies are appropriately positioned to address climate-related risks and opportunities, and to show that ESG factors are being taken seriously and integrated into investment decision-making. For example, how are their asset managers evaluating the companies in which they invest in relation to climate change? Do their asset managers clearly communicate their own activities and hold themselves to account through TCFD reporting?

To us, engagement with companies is critical in seeking to ensure that portfolios are positioned for changes brought about by climate change. Such an approach affords the opportunity to assess, for instance, how a higher cost of carbon or extreme weather events will affect a business, or how companies are considering opportunities around clean technology or renewable energy. Focusing on companies that are improving their behaviour (while reserving the ultimate sanction of selling a holding) allows investors to help drive positive change, while also potentially sharing in subsequent profit improvement over time.

With calls for climate action only likely to increase, we believe that adopting a purposeful and active approach to managing the investment implications of climate change is important in seeking to achieve positive financial and societal outcomes for members.

Lloyd McAllister is responsible investment analyst at Newton Investment Management

Important information: These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell investments in those 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 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.

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