March 4, 2021
Andrew Parry is Head of Sustainable Investment at Newton Investment Management. He is responsible for the firm’s sustainable investment business, as well as communicating its approach to purposeful ownership. Andrew has over 30 years of investment experience, most recently as head of sustainable investing at Hermes Investment Management. He’s also a member of the Diversity & Inclusion Committee of CFA Society UK and acts as an advisor on a range of external sustainability activities.
Can you tell us more about your role at Newton?
My role has a dual function. Firstly, I have oversight of the Responsible Investment Team at Newton. Our core focus is studying and then integrating environmental, social, and governance (ESG) considerations into our investment approach. This includes data analysis, sustainability research, and stewardshiprelated issues like voting and corporate engagement, as well as public policy advocacy. The other part of my job involves developing and implementing our sustainable suite of strategies.
I joined Newton in October 2019, so I’m relatively new to the company. That said, I have been involved in responsible investing for well over a decade. In my former life, I was the head of sustainable investing at a London-based asset manager, so I've been heavily involved in the sustainability and impact space for quite a while.
What prompted you to go into asset management?
After graduating in 1984 with a degree in mathematics, I became a trainee actuary at an insurance firm. I will be honest and say that I hated every minute of it! However, one day, the company's investment team gave a talk on their various activities, and a lightbulb flicked on in my head. I realized that is what I wanted to do. And I have never looked back.
Fast forward a few years, and ESG-related investing found me. I became increasingly aware of the climatology world when I attended a friend's event at the Science Museum in London to launch their climate gallery. It was fascinating because I was involved in a series of discussions on climate science and policy and business-model changes. It brought home to me the importance of altering behavior: from governments to corporates and individuals.
It's worth noting that I often get asked whether ESG and sustainable investing places limits on my choices or constrains my ability to make money for our investors. Quite the opposite. ESG investing is an excellent way of encouraging me to think about the evolution, transitions, and adaptations that businesses must go through to remain relevant in an ever-changing world. Thinking ahead and trying to establish tomorrow's opportunities allows me to expand my investment universe. If I join the dots and try to anticipate how events will unfold, then I often find I have more options rather than less.
How do you cut through the 'noise' around ESG metrics and the various competing terminologies and criteria?
I think that ESG metrics are sometimes overemphasized. People still tend to think about ESG as a thing, like an object sitting on your desk. In reality, it's a complex series of inputs. By looking at it in terms of metrics or labels, we risk glossing over ESG's subtleties and the dynamic nature of what's going on. It's not that numbers don't matter – I’m a mathematician, so numbers matter a lot, but we have to understand there’s more to ESG than 'good' and 'bad' labels. It's more nuanced than that. So, we have to understand how these issues impact business models.
I'll give you an example: if we take an electric power utility, then some people may automatically see it as 'bad' because it is still burning some fossil fuels. Yet that company could have a series of measures in place to ensure that it is actively transitioning its business model to renewable energy. This is important not only to reduce GHG emissions; it can also help preserve the jobs of staff by managing the inevitable transition in its industry in a considered and just manner. Some ESG-focused investors may be comfortable investing in this business because of the future impact it will have by eliminating harm.
At the same time, specific client mandates firmly stipulate what can and cannot be held, regardless of the behaviors of the underlying businesses. This is also fine. Here, ESG insights are doing their intended job by helping investment managers avoid companies not aligned with the stated values of their clients. Ultimately, it's essential to be transparent with your investment decisions and how you measure then report them.
What may be driving the current momentum behind ESG investing?
I think the best answer here is people. When we talk about funds or portfolios, we sometimes forget there’s an individual at the end of the chain – someone who may be saving for their child's education or their own retirement. In reality, a fund is a collection of individuals.
But technology is now democratizing the sense of ownership and participation. People are becoming better informed about the significant environmental challenges and social issues we face because it’s much easier to examine a company and what it’s doing. In turn, investors are increasingly active, asking businesses questions that are similar to those posed by professional investment managers.
There are age-driven factors too. We have a younger generation with different values, and they’re beginning to shape their attitudes to the companies in which their money is invested, and the products they buy are altering the broader economy. Evidence shows that customers are increasingly exhibiting preferences for brands with more robust sustainability profiles.1
How would you summarize your Sustainable investment approach?
Newton’s policy is to integrate ESG analysis across all strategies. For sustainable strategies we go further. At the security-selection level, we aim to invest in three classes of company. Firstly, businesses that provide solutions to pressing social or environmental needs like renewable energy, health-testing services, education, and training.
We call our second pillar the balanced stakeholders. These are the firms producing our daily needs. So, if we want a sustainable future, such enterprises need to take the cue from the solution providers and embed their ideas into their business practices to improve resource efficiency and generate brand value.
The third and possibly most controversial pillar consists of the transition enterprises whose products or services are currently associated with environmental harm. However, these firms also have a clear, explicit, and measurable strategy for eliminating or reversing that harm. Returning to the theoretical power utility mentioned earlier, a successful 'transition' could be a complete shift from burning fossil fuels to renewable energy.
Of course, some firms fail to meet any of the above criteria for inclusion in our strategies, like gambling operations. These entities have a high social and environmental deficit because they rarely offer answers to environmental issues, provide little in the way of social benefit, and may lack the scope to transform their operating models. From a long-term investment perspective, we believe they represent a potential future risk: online gambling is still illegal in roughly half the world’s countries, and casino operators face the threat of more stringent regulations.
What are the potential risks that investors need to consider when investing according to ESG criteria?
Getting back to my point about looking beyond ESG labels, investors need to know that the companies in which a portfolio invests have been adequately scrutinized financially and not selected solely because they have a high ranking on an ESG scorecard. You have to dig deeper and understand how a company is run and integrates environmental and social management to create a better business. ESG is an important input that helps give you the full mosaic of information alongside more traditional factors such as macroeconomic conditions, valuation and cashflow.
Many so-called ESG' darlings' are trading at elevated valuations, particularly in the solution-provision space. But, in our view, quite a few aren't necessarily growing at a rate that justifies their valuation. As such, discipline and balance are essential. We take a more holistic view of sustainable firms, encompassing ESG values and changing dynamics in the economy.
Do you have any thoughts on what future ESG trends investors should be thinking about?
I was recently asked where I see ESG in 10-years' time, and in response, I said that it hopefully wouldn’t exist. By that, I mean that ESG should be so deeply integrated into a company's operations that it’s no longer treated as a standalone 'issue' with its own unique status. It would be fantastic to reach a point when ESG becomes so natural that it's no longer spoken about as a label.
We also need to think beyond the here and now and focus on where value will be accrued in the next few years or even decades in sustainable trends. Television is a good example. The manufacturing of TV sets stopped being an attractive industry long ago but the content producers, such as Netflix and Amazon, benefitted from a transformation in the way we consume television programs. So, we must think in these terms. For renewable energy, it's not just the service providers who will be the primary beneficiaries of the shift toward green power. The component producers will be supported, too – those smaller competitors currently supplying connectors, cabling, or other materials could be the value creators of the future. The question should always be: what is the direction of travel? There will be many transitionary forces happening behind the headline numbers, and we need to think outside of the box.
What are the strengths of Newton in ESG investing?
We live in a world of constant change and challenge. Taking a thematic perspective ensures that our investment approach remains relevant and adapts to changing opportunities, alongside actively considering the social consequences and the environmental impacts that we all have on the planet. Newton's strength is that we view investment in its totality, forging an integrated view that helps navigate these changes for the benefit of our clients. A critical aspect of our approach is a deep fundamental analysis at the security level to identify the enduring winners.
As investors, we are increasingly being heard, as our clients want us to engage ever-more closely with companies. Indeed, engagement is fully embedded in our ESG research.
We will often connect with a business even before we purchase it, gaining feedback from the management team to better understand their attitudes and address any problems we think may exist. In summary, we don't just react, we interact. Our goal is to work with firms to encourage and support the sustainability of their operations. This approach is accelerating some of the ESG-related changes that we're beginning to see.
1 Barron’s: Two-Thirds of North Americans Prefer Eco-Friendly Brands, Study Finds. January 10, 2020
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Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.
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