Sustainable, Responsible &/or ESG Policy:

Screens and Exclusions

The mainstay of our Sustainable product range is to generate sustainable risk-adjusted returns for clients alongside improved long-term global outcomes for society and the environment. The process is derived from a combination of ‘exclusions’ of what we would always seek to avoid and ‘inclusions’ of what we consider to be part of our Sustainable investment spectrum (solution providers, balance stakeholders, and transition businesses). For complete clarity these exclusions apply only to equities and corporate bonds: Cash and liquid near cash assets, money market funds, derivatives and structured notes (e.g. alternative risk premia strategies) are not required to meet the sustainability criteria.

In our Sustainable portfolios, we seek to identify and select businesses that demonstrate the following attributes (and are classified accordingly):

Solution providers: These are companies that provide solutions (products and services) to environmental or social challenges or are in high-positive-externality industries.

Balance stakeholders: These are companies that can be evidenced as successfully managing the competing interests of key stakeholder groups. Fundamentally, this is primarily about the internal management of a company, rather than being about the impacts of its products and services, which are captured under the solution-providers classification. We are looking for leaders or best-in-class industry practices.

Transitions: These are companies that have the potential, or are already demonstrating a credible commitment, to a plan to transition their business models by reducing and mitigating their most material (to shareholders and other stakeholders) negative ESG externalities.

These classifications are guided by clear frameworks, developed and maintained by the Newton RI team, ensuring robustness and consistency in order to identify the strongest sustainable investment propositions. The overall framework is reviewed regularly and may evolve/shift over time.

The exclusions mainly seek to avoid investments in areas of significant social or environmental harm and are known as the ‘red lines’, which are hard exclusions and cannot be overridden for our sustainable strategies. Here we seek to avoid investments involved in areas of high negative externalities, those that cause significant long-term societal harm, investments that have been identified as having severe controversies and/or violating one or more of the ten UN Global Compact Principles covering areas including human rights, labour practices, corruption and the environment. We do not believe that exposure to such activities is aligned with the objectives of our sustainable range of products.

Red lines/hard exclusions

The red lines are hard coded into NIM’s order management system (Aladdin). Any potential violations are caught in the pre-trade compliance checks and noted as compliance-level violations. Compliance-level violations can only be overridden by the guideline compliance team before the order can be released to the dealers for trading. Any breaches are also logged with the operational risk team and are subject to root cause analysis and control effectiveness reviews.

Red lines**

UN Global Compact Fails*
The company is implicated in one or more controversies whereby it has been deemed to have violated one or more of the principles of the UN Global Compact (UNGC). The UNGC principles relate to human rights, labour, the environment, and anti-corruption.
Fail*

Tobacco Production
The company manufactures tobacco products.
> 0% revenue

Tobacco Retail and Supporting Products
Revenue from products that support the tobacco industry and /or retail or wholesale
> 10% revenue

Controversial Weapons Manufacture
Manufacturers of the following weapons: anti-personnel mines, cluster munitions, chemical weapons, biological weapons, nuclear weapons, Incendiary weapon, non-detectable fragment, blinding laser weapons, white phosphorus weapons, depleted uranium weapons.
> 0% revenue (clear evidence)

Alcohol Production
The company manufactures alcoholic beverages.
>= 10% revenue

Gambling Operations
The company owns and/or operates a gambling venue.
>= 10% revenue

Adult Entertainment
The company produces adult content or owns/operates adult entertainment venues.
>= 10% revenue

Thermal Coal Extraction
The company derives revenue from the extraction of thermal coal.
>= 10% revenue

*Which is a simple pass/ fail/ watch list test whereby Newton will screen out those companies that ‘fail’.
**We use a combination of external ESG service providers (currently MSCI, Sustainalytics and Moody's Analytics to inform our decisions.

Our process seeks to clearly distinguish between activities that are subject to hard exclusions (red lines) versus those activities that sustainability portfolio managers may be able to invest in in certain circumstances (precautionary pool).

Precautionary pool

For areas that have been identified as having controversies or the potential to cause harm (such as fossil fuels other than thermal coal, animal welfare, conventional defence and nuclear power) but are not covered by the red lines, sustainable portfolio managers are alerted, when considering such investments, to review the controversial activity through what is referred to as the “precautionary pool”. The precautionary pool includes companies that have been flagged in relation to their involvement in heavy-emitting industries, hold exposures to activities that are red lined, but at lower revenue thresholds, and areas such as nuclear power and animal welfare, where there may be nuances in the investment case that are deemed important to be highlighted.

The following types of businesses may be captured within the precautionary pool:

• Those that have exposure to the above activities but applying a lower revenue threshold for awareness – for example, tobacco retail and supporting products where revenues exceed 0%, which means any tobacco retailer or supporting products company with revenues >0% and <10% will be highlighted under the precautionary pool.
• Businesses that have related exposures that we feel are important for visibility – such as those that provide supporting services to some of these areas - For example, alcohol retail at 10% or more revenue contribution.
• Those that are in heavy-emitting industries that fail a profitability test with a carbon tax and are deemed to have an insufficient climate strategy – supporting our view that investing behind the transition and supporting a shift from ‘brown’ to ‘green’ in a careful way is a key part of the global decarbonisation challenge.
• Other areas where there may be nuances in the investment case that are deemed important to be highlighted – for example, animal welfare or nuclear power.

The full list of activities caught currently under the precautionary pool is included below:

Tobacco retail and supporting products

Revenue from products that support the tobacco industry and /or retail or wholesale tobacco products manufactured by other companies.
> 0% Revenue

UNGC watchlist

The company is implicated in one or more controversies which have been deemed to be serious enough to warrant ongoing monitoring relative to UNGC principles.
Flagged

Controversial weapons manufacture

Company manufactures key weapon parts or the delivery system for the following weapons: Anti-Personnel Mines, Cluster Munitions, Chemical Weapons, Biological Weapons, Nuclear Weapons, Incendiary Weapon, Non-Detectable Fragment, Blinding Laser Weapons, White Phosphorus Weapons, Depleted Uranium Weapons.
Evidence of involvement

Companies that have historically been flagged as manufacturers of the following weapons or of delivery systems or key parts for the weapons: anti-personnel mines, cluster munitions, chemical weapons, biological weapons, nuclear weapons, incendiary weapon, non-detectable fragment, blinding laser weapons, white phosphorous weapons, depleted uranium weapons.
Evidence of involvement

Alcohol production

The company manufactures alcoholic beverages.
>= 5% Revenue

Gambling operations
The company owns and/or operates a gambling venue.
>= 5% Revenue

Adult entertainment

The company produces adult content or owns/operates adult entertainment venues.
>= 5% Revenue

Alcohol retail

The company distributes and/or engages in the retail sale of alcoholic beverages.
>= 10% Revenue

Gambling

The company provides supporting products or services to gambling operators.
>= 10% Revenue

Adult entertainment distribution

The company distributes adult entertainment materials.
>= 10% Revenue

Climate qualification test

Companies in heavy emitting industries that fail the profitability test with a carbon tax and are deemed to have an insufficient climate strategy.
Fail

Animal welfare

Revenue from products tested on animals, provision of animal testing services, production/sale of fur and intensive animal farming.
>= 10% Revenue or Flagged (for animal testing services)

Nuclear power

Revenue from the production of nuclear power.
>= 10% Revenue

Thermal coal extraction

The company derives revenue from extraction of thermal coal.
>0% Revenue

Arctic Oil & Gas Exploration

The company is involved in oil and gas exploration in Arctic regions.
>0% Revenue

Oil Sands Extraction

The company extracts oil sands.
>0% Revenue

Shale Energy Extraction

The company is involved in shale energy exploration and/or production.
>0% Revenue

Oil & Gas Production, Generation, or Supporting Products & Services

The company is involved in oil and gas exploration, production, refining, transportation and/or storage, and/or the generation of electricity from oil and/or gas.
>= 10% Revenue

Thermal Coal Power Generation

The company generates electricity from thermal coal.
>= 10% Revenue

Thermal Coal Supporting Products & Services

The company provides tailor-made products and services that support thermal coal extraction
>= 10% Revenue

Governance

Issuers with exposure to areas captured under the precautionary pool are considered to be part of the investible universe, but Sustainable portfolio managers considering such investments are alerted and encouraged to review the activity in consultation with the Newton responsible investment (RI) team (specifically an RI adviser), to ensure that the portfolio managers are comfortable that this investment is not in conflict with the objective of their strategy. Holdings of strategies that follow the Sustainable investment process are regularly reviewed at the sustainable investment forum (SIF).

Intended outcomes

Newton’s brand is built on the notion of ‘purpose’ – to deliver attractive outcomes to our clients, and help foster a healthy and vibrant world for all, through research-led investment.

The long-term viability of an investment requires decision-makers at issuers to understand and balance the needs of stakeholders. Our consideration of financially material environmental, social and governance (ESG)1 risks and opportunities is part of our broad investment approach that integrates financial analysis, thematic trends, macroeconomics and valuation considerations. This is at the heart of the “mosaic” theory approach to active asset management. We believe that a failure to consider ESG insights is likely to give an incomplete picture of the merits and risks of an investment opportunity

Key responsible investment (RI) principles for Newton include:

• Taking account of financially material and relevant ESG issues in our analysis of securities.
• Identifying opportunities for dialogue with corporate management and stakeholders on key ESG issues as part of our investment research.
• Using our informed judgement to vote at company meetings and on shareholder-proposed resolutions.
• Working with other investors and stakeholders to help drive and influence the consideration of financially material ESG factors.
• Having constructive dialogue with regulators; and
• Contributing to solutions to the systemic risks (such as climate change and social inequality) which might otherwise undermine our clients’ interests.

Our sustainable strategies seek to balance between the current, as well as the future needs of stakeholders so as to avoid short-termism and encourage a better allocation of capital that leads to improved long-term global outcomes for society and the environment alongside generating sustainable risk-adjusted returns for clients. As an investment house, NIM takes a long-term approach, which sustainable investing typically seeks to extend further than traditional approaches.

Process:

Dividends are a very important driver of the long-term returns from equity market returns; the objective of our process is to enhance that importance through active management to deliver a superior total return to global equity markets with lower volatility over the long term.

We aim to capture and enhance the tailwind of dividends in three ways:

• A strict yield buy-and-sell discipline: we employ strict yield buy-and-sell criteria to impose a valuation discipline on the strategy. To be able to buy a stock, it must yield 25% more than the FTSE World index, and if the yield falls below that of the FTSE World index it must be sold. This ensures that every stock and the portfolio always compound a higher yield than the market and forces the managers to overcome some key behavioral biases; they cannot ‘fall in love’ with companies and are forced to look at areas of potential undervaluation and admit their mistakes.
• We focus on the sustainability, and ideally the potential growth, of the dividend stream, thereby avoiding the main pitfall of the yield discipline (namely unsustainable dividends being cut), as well as enhancing returns through underlying growth. We do so by leveraging the three inputs to our dividend-paying stock selection:
  • Investment themes (being on the right side of structural change). Our thematic framework helps us to identify long-term structural tailwinds and headwinds which can be factored into valuation.
  • Bottom-up fundamental analysis which emphasizes the quality of the business. Key criteria include: returns in excess of the cost of capital; a strong market position; an appropriate balance sheet; and, crucially, strong cash-flow generation to maintain and grow dividends even if economic conditions are tough.
  • ESG* analysis, which seeks to consider material and relevant ESG issues, risks and opportunities, and in particular, considers the governance structure of the companies in which we invest; a sound governance structure is more likely to ensure that company management makes good capital-allocation decisions; the ESG analysis also takes into account material and relevant environmental and social reasons, particularly those that may affect the sustainability of the dividend stream.
• Valuation margin of safety: In order to account for the probabilistic nature of investment, we require an asymmetric risk-return profile: through a detailed scenario analysis (bull, base, bear) we try to understand the range of future outcomes and select stocks where we believe the risk/reward is skewed in our favor.

*Where material and relevant information exists. Analysis may vary depending on the type of security, investment rationale and investment strategy. Newton does not currently view certain types of investments as presenting ESG risks, opportunities and/or issues, and believes it is not practicable to evaluate such risks, opportunities and/or issues for certain other investments. The way that ESG considerations are assessed and the assessment of their suitability for Newton’s sustainable strategies may vary depending on the asset class and strategy involved. For Newton’s sustainable strategies, ESG analysis is performed prior to investment for corporate investments (single name equity and fixed income securities).

Finding a stock with a premium yield that is also sustainable, and ideally growing, requires disagreement among market participants about the prospects for the business.
To frame this disagreement and to generate ideas, we generally break the universe down into four buckets of controversy:

• Troubled compounding machines: these are businesses with high barriers to entry, but with temporary challenges which are masking high returns on capital, good cash conversion and good growth opportunities, where the power of compounding is underappreciated.
• Ex-growth cash generators: these are high-return businesses with good cash conversion, but these are businesses where the growth has disappeared, and the valuation fails to reflect the longevity of the returns or a return to future growth.
• Capital-intensive businesses: these are companies with more modest returns, but which have the opportunity to consistently deploy capital at a return in excess of the cost of that capital to grind out value.
• Profitability transformation companies: these are cyclical businesses with inconsistent returns, which are currently under-earning and not priced for a return to normality.

The BNY Mellon Sustainable Global Equity Income Fund is concentrated, consisting of between 35 and 70 holdings. The individual position size ranges are determined by factors such as which bucket a stock falls in, the scale of the asymmetry in return, and liquidity.

Systematic and Fundamental Inputs

NIM’s approach is a combination of top-down themes and bottom-up fundamental analysis. We conduct fundamental analysis against a backdrop of investment themes. Themes help us to frame our view of the backdrop from a political, economic and market perspective. This framework provides a clear long-term view of where we see global trends helping or hindering certain industries or companies. Our Global Equity Income strategy sits within this broader philosophy, using additional income disciplines to drive a focus on what we believe to be an attractive sub-set of the global equity market, in order to lean the statistics to our clients’ advantage.

The compounding of reinvesting dividends composes a very significant part of total equity returns over the long term. We believe that an investment approach which centres on dividend income, targets the dominant source of long-term real return and can boost long term earnings growth and reduce volatility. However, such an approach must be active as yield is not necessarily an indicator of corporate strength and can disguise a host of fundamental flaws. Indeed, a high yield can often be a signal of corporate weakness as well as overvaluation. Our active approach aims to improve on the statistical tailwind of dividends in three key respects. First, by ensuring that dividends are backed by sustainable cashflow streams. Second, within an uncertain world, the range of future cashflows and intrinsic valuation is favorably asymmetric. Third, the current share price adequately reflects our bear case. In doing so we believe that, in each instance, we incrementally enhance the statistical tailwind of our process to our clients’ favor. Further, a focus on dividends to generate total return, by definition lowers the volatility of that return profile.

The Fund follows Newton’s ESG policy as noted in the response above.

Resources, Affiliations & Corporate Strategies:

RI Team

Newton has a centralised responsible investment team headed by Therese Niklasson, global head of sustainable investment. This team is the centre of excellence for all matters related to responsible investment, and with its deep functional knowledge of the responsible investment space and how it is evolving, it provides guidance, support and subject-matter expertise to our wider investment team. The responsible investment team, as you can see below, is global in its footprint and diverse in its employee base. The team is organised into three pillars of expertise – stewardship, research and analytics: these specialisations under the responsible investment umbrella allow us to bring further depth and expertise to each of these activities. The team’s compact size enables it to work cohesively and operate as one team.

Stewardship: Oversees the firm’s engagement framework and advocacy initiatives, focusing its efforts on meaningful outcomes for clients, and also undertakes the firm’s proxy voting activities. Provides subject-matter expertise to the investment team on governance risks and evolving expectations.

Sustainability research: Subject-matter experts consulting the investment and research teams, driving deep insights on sustainability-related subjects. The team manages Newton’s sustainability standards, definitions and frameworks.

Responsible investment analytics: Has strong quantitative and RI data expertise and owns the data ecosystem, creating and managing responsible investment data models, frameworks and tools that support ESG integration and sustainable investing. The team has built an innovative suite of building blocks that can be leveraged to develop scalable solutions to meet specific client requirements.

The role of the responsible investment team is to be a support function to the investment teams, to set standards around sustainable investment, and to coordinate and ensure effectiveness around our stewardship efforts. It guides the business around policies and direction of travel for sustainability and stewardship more broadly. The responsible investment team also owns and manages the overall governance systems to ensure we deliver against key codes and commitments including stewardship codes, industry principles such as the UN Principles for Responsible Investment, and industry pledges such as the Net Zero Asset Managers Initiative (NZAMi).

Supporting the team, and the wider business, are various external organisations and vendors including ESG service providers, memberships, and internal systems for monitoring and reporting.

Please see page 16 of the linked report for full RI team details:

https://www.newtonim.com/uk-institutional/special-document/responsible-investment-and-stewardship-annual-report/

ESG Governance

Management oversight

The Board has ultimate responsibility for ESG governance. They are supported by the following committees and working groups:

• Newton Executive Management Committee. The purpose of the Newton Executive Management Committee (NEMC) is to ensure the effective operational and strategic management of Newton. Newton’s Global Head of Sustainable Investment, Therese Niklasson, is a member of this committee and submits a formal update each month to the committee. Membership includes the CEO and Chief Risk Officer, and the committee provides formal approval of Newton’s annual sustainability and stewardship report. Reporting to the Board and the NEMC are Newton’s operating committees, some of which play varying roles in relation to Newton’s sustainability efforts, as described below.
• Newton Sustainability Committee. The Sustainability Committee (SC) meets on a quarterly basis and oversees all aspects relating to sustainability at Newton, including Newton’s sustainable framework, sustainable investments, direct impacts and engagement with communities, and engagement with financial markets (advocacy) regarding sustainability and stewardship matters. The SC review’s Newton’s investment universe from an ESG risk perspective, including climate and net-zero efforts. The committee was formed in 2022 and seeks to oversee the wider sustainability strategy, including climate and risk management, and ensure that it is delivered by Newton. It also reviews our strategy and progress around diversity, equity and inclusion (DE&I). The SC is chaired by Newton’s Global Head of Sustainable Investment and includes members of the NEMC as well as representatives from the investment team and risk and compliance.
• Newton Risk and Compliance Committee. This committee is supported by the Newton Conflicts of Interest Committee. These committees deal with various stewardship and responsible investment aspects on an ad-hoc basis, including any relevant internal audit findings and actions as well as climate risk updates from internal groups such as the Emerging Risks Working Group.

We have an oversight group, the Newton Sustainable Investment Forum (SIF), to provide support and challenge in relation to investments held in our sustainable strategies. This group is not a decision-making body but reports and escalates material issues to the Investment Oversight Committee, as well as to the Sustainability Committee, depending on the issue. The Investment Oversight Committee looks at process-oriented issues and the Sustainability Committee looks at framework and policy-related aspects stemming from the SIF. The SIF meets regularly and alternates between generic meetings and strategy-specific meetings that reflect different areas of sustainability focus (from sustainable to more impact-aligned products).

The formal role of the SIF is to:

• Conduct a review of existing and new holdings against portfolio objectives (where those objectives include specifically reference sustainability), our sustainable investment framework and any regulatory standards.
• Foster debate by bringing together a wider set of sustainability experts within the business.
• Provide support by educating, training and sharing knowledge and insights among the group.

While it is vital to monitor our existing sustainable strategies, it is equally important that we are thoughtful about launching any new products in this space. Therefore, we have the Newton Sustainable Products and Commercial Advisory Forum (SPCAF), which meets on an ad-hoc basis when new strategies are being planned with a sustainability proposition. This forum brings together members from the SIF and is intended as a peer review of the proposals in order to make sure we launch robust and thoughtful sustainability propositions that help our clients achieve their goals. The group provides advice back into the Newton Product and Commercial Committee.

Memberships and Affiliations

NIM has been a PRI signatory since February 2007, ten months after the PRI’s inception.

As investors and an intermediary in the financial system we play an important role in providing investors with access to investment solutions, and that with this comes an inherent responsibility to do what is right on behalf of our clients, as well as wider asset owners and stakeholders in the financial system. Our advocacy focus involves supporting or seeking to influence various issues and areas for the long-term interest of our clients and Newton.

A full list of collaborative initiatives in which we participated in 2023 is provided below.

Organisations and initiatives related to ESG matters in which Newton played a formal role in 2023:

• 30% Club – Investor Group
• Member of Race Equity Working Group
• Farm Animal Investment Risk and Return (FAIRR)
• Institutional Investors Group on Climate Change
• Member of Proxy Advisory Working Group (from 2022)
• Investment Association
• Member of Green Gilts Working Group
• World Benchmarking Alliance
• Member of Just Transition Coalition Impact Committee
• Asian Corporate Governance Association
• Education, research and policy influencer across Asian markets on governance matters.
• Global Investor Commission on Mining 2030
• CDP
• Climate Action 100+
• Council of Institutional Investors
• ShareAction Good Work Coalition
• ShareAction coalition focused on quality work, including a specific living wage campaign.
• ShareAction Investor Decarbonisation Initiative
• Investor Alliance for Human Rights
• Investor Coalition on Food Policy
• Taskforce for Nature-related Financial Disclosure Forum
• Investor Stewardship Group
• Transition Pathway Initiative

Newton is a signatory to or a supporter of the following industry principles and pledges:

• Net Zero Asset Managers initiative
• Principles for Responsible Investment
• Taskforce for Climate-related Financial Disclosures
• UK Stewardship Code
• UK Financial Reporting Council’s principles for stewardship expectations of UK investors.

Dialshifter

Our organization is helping to support the Paris Climate Agreement and the Race to Net Zero by...

NIM became a signatory to the Net Zero Asset Managers Initiative in March 2021. We have published details of our approach here: https://www.newtonim.com/uk-institutional/insights/net-zero/.

We have aligned ourselves with an independent methodology produced by the Science Based Targets initiative (SBTi). We are committing to having 50% of our financial emissions covered by credible net-zero plans by 2030, with the aim of reaching 100% by 2040.

We seek to meet these headline targets via a range of transparent measures around investments in climate ‘solution providers’, engagement with fossil-fuel companies to support their energy transition and advocating for supportive government and industry regulation.

SDR Labelling: Unlabelled with sustainable characteristics