Achieving real-world outcomes

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Newton’s[1] global head of sustainable investment Therese Niklasson explains why it is vital for sustainability to run through the business and the importance of making a real-world impact with investments.

I have learned that there’s a difference between net zero portfolios and portfolios that work for net zero,” says Therese Niklasson, Newton’s recently appointed global head of sustainable investment. “Creating purified portfolios and claiming real world outcomes through divestment and asset allocation and having portfolios that seek to address sustainability issues, are two quite different things.”

It is this philosophy that informs her sustainable investment approach today. Adding a superficial layer of gloss to a portfolio is nowhere near as meaningful as being able to show the real-world impact of its investments, she says.

As an asset manager this is very important to me and I believe that, together with
allocating to solution providers, it is the best way forward in terms of addressing sustainability issues
,” she adds. “This decade presents a unique period of critical change and pressures which is ideal for active management and presents a fantastic opportunity to find alpha for our clients, build exciting new products, as well as being on ‘the right side of history’ and living our purpose statement.”
A passion for sustainability

Niklasson describes herself as one of the few people whose academic pursuits evolved into a career, saying she was part of that early, generation that was excited about the intersect between the financial industry and sustainability and jumped on some of the earlier university courses to explore this.

She completed a bachelor’s degree focusing on environmental policy at the London School of Economics, before taking a role at SustainAbility, founded by renowned sustainability expert John Elkington who coined the phrase ‘triple bottom line[2].
She then moved to one of the first environmental, social and governance (ESG) ratings services, CoreRatings.

That was a fantastic introduction, professionally, to the space,” says Niklasson. “It really set off an interest in how sustainability and financial value intersect, recognising that by failing to properly understand and account for environmental and social externalities we have created deeply challenging market failures, climate change being possibly the biggest.”

She further boosted her expertise in environmental policy with a master’s degree at the University of Oxford before landing her first role in asset management in 2007 with Columbia Threadneedle’s socially responsible investment (SRI) team. At that time, the industry’s focus was still on SRI that predominantly involved excluding certain business activities from portfolios, as opposed to today’s more common method of integrating ESG principles into the investment process and building products focused on outcomes. The SRI approach was also often characterised by the team sitting apart from the investment team and providing a separate service.

Niklasson says the global financial crisis threw into sharp relief the fact that the financial services industry had until then created an economy that was operating as if global resources were infinite – a straight line economy rather than a circular one and without proper active ownership in the mainstream. It had lost its way as acting as true owners on behalf of the underlying clients, she adds. From this, the term stewardship appeared and has been a cornerstone to responsible investing ever since.

In the years following the financial crisis, the pace of change in sustainable investment has been rapid, says Niklasson, especially in recent years. “I can estimate the change I’ve seen in the last two or three years is probably the sum of the changes I’ve seen over the previous 15 years.”

She adds: “While its now a bit overwhelming, the fundamental philosophy has stood firm, at least to me, which is that we cannot separate the system of financial markets from society and the natural environment. They are all dependent on each other in a complex system which inevitably will impact and influence markets over time.”

We have an opportunity to try and take control of the situation and this cannot be done by a subset of the financial industry (ESG) alone, it must involve the entire financial system. Therefore, we mustn’t waste this time by squabbling about acronyms, language and imperfect data sets. While risking oversimplifying a complex set of issues, we know also what needs to be done.”

Real-world opportunity

Prior to Newton, Niklasson was global head of sustainability at Ninety One Asset Management. She says the firm’s South African roots meant she witnessed first-hand the “exciting and impressive” impact of capital being allocated in a meaningful way to the African continent and other emerging markets.

She says: “Having the issues on your doorstep set in me the important notion of impact in the real economy; not just striving for portfolio purification, but actually thinking about the importance of taking on risk, investing in companies and asset classes that may have sustainability issues an active manager can address through engagement and by staying invested. Engaging with these issues in the real world also reminds us that they cannot be reduced to scores or ratings, there is nuance and context.”

Niklasson progressed to global head of ESG and then global head of sustainability at Ninety One before deciding it was time for a change. So, what attracted her to Newton?

I’ve known of Newton throughout my career, I knew it had an excellent platform and I knew the team,” she says. “It felt like a natural next step to move to an organisation that had RI in the DNA but was also going through change through the merger with the Mellon equity assets. Together it presented an exciting opportunity to take RI at Newton to the next phase.”

Reaching the next level

For Niklasson, this next phase is about taking Newton’s sustainability credentials to the “next level”, and she spies opportunities to do this from both a client and market perspective. On the client side, she says there is both an opportunity and a challenge from the reallocation of capital into sustainable strategies that offer a financial return. In terms of the market, she says the shifting focus on a circular economy [3], regulation, and planetary boundary realities is starting to force negative externalities to become priced in which is throwing up opportunities for active managers to generate alpha in terms of how they allocate capital.

Active managers thrive on important structural changes in markets and, therefore, we think it’s an exciting time,” she adds. “If we haven’t found a way to make good investment decisions for our clients on the back of certain sustainability related themes in the next decades, we will not have done a good job.”

These changes are shifting the way teams operate within asset management houses, Niklasson says. Functions that were once the preserve of RI teams such as stewardship, monitoring and reporting are now expanding across other areas of the business.

One of the things I’m keen to do is ensure that ESG and sustainability are not just the role of a separate department; it needs to find a natural hold throughout the organisation,” she says. “We need to have sustainability running through Newton, not just in the way we invest, but in everything we do.”

For Niklasson this means proper integration of sustainability throughout the investment, analysis and risk processes that is conducted internally rather than outsourced. This will require raising the knowledge base of, for example, the commercial teams so they can have high quality conversations with clients without having to lean on other departments.

Niklasson also says it is vital for Newton to have integrity when it comes to the industry initiatives it signs up to, especially in a market saturated with commitments to address climate risk. “There are an awful lot of initiatives and pledges, all of which come from a good place, but not all of which will actually achieve that real-world decarbonisation we are looking for. Also, managers should focus on where they can add most value rather than trying to be everywhere on everything.”

Bravery and trust

Net zero[4] is one of Newton’s key commitments and Niklasson would like to refine the firm’s thought leadership in this space, being sure to call out incidents where information or dialogue only speaks to portfolio decarbonisation rather than to real world economy changes. This is especially pertinent when it comes at the expense of emerging markets where investment is needed the most.

The commitment to achieving net zero and integrating sustainability more widely, requires Newton to “be brave”, she adds. “This means ensuring we are bold enough to recognise that there are no linear pathways, and the context and direction of the carbon footprint is what matters over linear carbon intensity reduction.”

Trust is also a key facet of Newton’s relationship with clients and stakeholders, says Niklasson, in terms of investing in risk and being good stewards of capital and actively engaging on the right issues. Breaking that trust would not only be detrimental to the industry but also come at an enormous cost to society in the long term, she adds.

Naturally, she adds, this means there must be a line drawn in the sand when companies are not committed to and planning for their transition. Companies that ignore their externalities would not present the best investment opportunities for Newton over the long term.

While we must make sure we strive to make it as just as possible there will be winners and losers from this,” she concludes.

Four things Therese Niklasson is focusing on at Newton.
Therese Niklasson CV

Newton Investment Management

– Global Head of Sustainable Investment (Feb 2022 – present)

Ninety One Asset Management

– Global Head of Sustainability (Dec 2020 – Feb 2022)
– Global Head of ESG (Apr 2015 – Dec 2020)
– Global Head of ESG research (Aug 2011 – Mar 2015)

Columbia Threadneedle Asset Management

– Head of Governance and Responsible Investment (Sep 2007 – Aug 2011)

Innovest

– ESG analyst (Dec 2004 – Sep 2005)

SustainAbility

– Analyst (May 2004 – Nov 2004)

“We need to have sustainability running through Newton, not just in the way we invest, but in everything we do.”
“We cannot separate the system of financial markets from society and the natural environment.”

Therese Niklasson

[1] Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

[2] ‘Triple bottom line’ refers to the notion that companies should focus just as much on social and environmental concerns as they do on profit.

[3] The circular economy is a systems solution framework that tackles global challenges like climate change, biodiversity loss, waste and pollution. Source: The Ellen MacArthur Foundation.

[4] Achieving a balance between the amount of greenhouse gas emissions produced and the amount removed from the atmosphere.

996970 Exp: 25 November 2022

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