Links

• Responsible investing at M&G
• Responsible investing policies and principles at M&G
• M&G Pan European Select fund

SRI / Ethical Policy

• Our sustainability focus is the cornerstone of the fund’s investment approach. The initial time horizon is 10 years and the average holding period is currently 6 years.

• The fund has a small number of negative screens coded into the prospectus. These are the exclusion of companies deemed to be in breach of UN Global Compact principles, as well as controversial weapons and tobacco.

• However, the fund’s sustainability focus centers on active engagement with companies that are on the fund’s investment watch-list or held in the portfolio. This is vital for the purposes of:

1)      Evaluating a company’s commitment to sustainability

2)      Assessing its corporate culture

3)      Encouraging management to address their ESG related issues

4)      Bringing ESG improvements

Resources, Affiliations & Corporate Strategies

• The fund’s exclusions (companies in breach of UN Global Compact, producing tobacco and controversial weapons) are implemented by external provider ISS Ethix.

• Individual stock research is conducted in house by the Select team’s three embedded analysists, with ESG factors incorporated at each stage of the analytical process: 

            * Identification of the durability or sustainability of a company

            * Delta analysis inclusive of ESG head/tail winds

            * Valuation, including ESG risks and opportunities on cash-flow, funding costs and asset life.

• One of the embedded analysts is dedicated to ESG. He oversees the team’s engagement efforts and collaborates with M&G’s Corporate Finance and Stewardship team when necessary.

• The fund manager actively participates in the engagement process and is the sole decision maker.

Links

• Liontrust Sustainable Future Cautious Managed Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection

There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios.

i.   Identifying Sustainable Companies

At the core of the investment process is the team’s proprietary Sustainability Matrix, which is used to identify those companies that are aligned with Sustainable Development.

Every company held in the portfolios is given a Sustainability Matrix Rating, which analyses the following aspects:

• Product Sustainability – rated from A - E. This assesses the extent to which a company‘s core business helps or harms society and/ or the environment. An A rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy). An E rating indicates a company whose core business is in conflict with sustainable development (e.g. tobacco).
• Management Quality – rated from 1 - 5. This assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance (ESG) risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material ESG issues are graded from 1 (excellent) to 5 (very poor). Companies must score C3 or higher in order to be considered. 

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Liontrust Sustainable Future Global Growth Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection

There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios.

i.  Identifying Sustainable Companies

At the core of the investment process is the team’s proprietary Sustainability Matrix, which is used to identify those companies that are aligned with Sustainable Development.

Every company held in the portfolios is given a Sustainability Matrix Rating, which analyses the following aspects:

• Product Sustainability – rated from A - E. This assesses the extent to which a company‘s core business helps or harms society and/ or the environment. An A rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy). An E rating indicates a company whose core business is in conflict with sustainable development (e.g. tobacco).
• Management Quality – rated from 1 - 5. This assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance (ESG) risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material ESG issues are graded from 1 (excellent) to 5 (very poor). Companies must score C3 or higher in order to be considered. 

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Liontrust Sustainable Future Absolute Growth Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage
• Liontrust Sustainable Future Funds Screening Criteria

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection
There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Liontrust Sustainable Future Corporate Bond Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection

There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios.

Identifying Sustainable Companies

At the core of the investment process is the team’s proprietary Sustainability Matrix, which is used to identify those companies that are aligned with Sustainable Development.

Every company held in the portfolios is given a Sustainability Matrix Rating, which analyses the following aspects:

• Product Sustainability – rated from A - E. This assesses the extent to which a company‘s core business helps or harms society and/ or the environment. An A rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy). An E rating indicates a company whose core business is in conflict with sustainable development (e.g. tobacco).
• Management Quality – rated from 1 - 5. This assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance (ESG) risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material ESG issues are graded from 1 (excellent) to 5 (very poor). Companies must score C3 or higher in order to be considered. 

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Responsible investing at M&G
• Responsible investing policies and principles at M&G
• M&G Global Select Fund

SRI / Ethical Policy

• Our sustainability focus is the cornerstone of the fund’s investment approach. The initial time horizon is 10 years and the average holding period is currently 6 years.

• The fund has a small number of negative screens coded into the prospectus. These are the exclusion of companies deemed to be in breach of UN Global Compact principles, as well as controversial weapons and tobacco.

• However, the fund’s sustainability focus centers on active engagement with companies that are on the fund’s investment watch-list or held in the portfolio. This is vital for the purposes of:

1)      Evaluating a company’s commitment to sustainability

2)      Assessing its corporate culture

3)      Encouraging management to address their ESG related issues

4)      Bringing ESG improvements

Resources, Affiliations & Corporate Strategies

• The fund’s exclusions (companies in breach of UN Global Compact, producing tobacco and controversial weapons) are implemented by external provider ISS Ethix.

• Individual stock research is conducted in house by the Select team’s three embedded analysists with ESG factors incorporated at each stage of the analytical process: 

             * Identification of the durability or sustainability of a company

             * Delta analysis inclusive of ESG head/tail winds

             * Valuation including ESG risks and opportunities on cash-flow, funding costs and asset life.

• One of the embedded analysts is dedicated to ESG. He oversees the team’s engagement efforts and collaborates with M&G’s Corporate Finance and Stewardship team when necessary.

• The fund manager actively participates in the engagement process and is the sole decision maker.

Links

• Pictet Asset Management - General
• Pictet Asset Management Thematics

SRI / Ethical Policy

Pictet Asset Management was an early adopter of the Principles for Responsible Investment (UNPRI) in 2007. In 2013, Pictet Asset Management initiated an ESG integration projects aiming to share ESG information with all investment teams and foster active ownership. Key features of this program include: 
1. ESG research in the portfolio management system
Pictet Asset Management has implemented a comprehensive program that provides access to ESG scoring of companies directly in our proprietary portfolio management system, PAMFolio. Through this tool, investment managers have a direct and real-time access to ESG research of over 5000 companies from 3 providers: ISS (corporate governance and proxy voting research), CFRA (accounting quality) and Sustainalytics (ESG controversies).
2. ESG in risk management 
As part of the Quality Review process led by our Investment Risk & Performance team, the exposure to companies with poor ESG ratings as well as the evolution of the portfolio ESG rating is discussed during the product quality reviews of equity strategies. Quality Reviews are held twice a year with investment managers, the CIO in charge of the asset class and the deputy CEO.

3. Active ownership
Pictet Asset Management systematically exercises voting rights on all actively & passively managed strategies. Voting recommendations are provided by ISS and based on its Sustainability Policy. We reserve the right to override ISS’ recommendations on an ad-hoc basis based on specific circumstances. For segregated accounts, proxy voting may be based on the client’s own voting policy. 
In 2015, Pictet Asset Management voted at 3’231 meetings and 37’695 resolutions. We supported 89% of proposed resolutions, and voted “Against” (or “Abstain”) to at least one resolution at 1’503 meetings.   
Pictet Asset Management has also implemented an engagement programme in partnership with Hermes on behalf of its environment strategies (Pictet-Global Environmental Opportunities, Pictet-Agriculture, Pictet-Clean Energy, Pictet-Timber and Pictet-Water). 
In 2015 Hermes conducted a dialogue with 29 companies held in the strategies mentioned above. 44% of the discussions were on governance issues, 30% on environmental issues, 16% on social issues, and 10% on transversal issues. Out of the 29 companies, 16 were subject to repeated and in-depth contacts and 11 have changed their practices or are committed to doing so in the near future.
4. Industry initiatives 
Pictet Asset Management actively participates to several investor initiatives aimed at sharing best practices between asset managers and owners and encouraging corporate disclosure on ESG issues. We are notably involved in the IIGCC (Institutional Investors Group on Climate Change), SSF (Swiss Sustainable Finance) and similar organisation in the UK, Germany and Spain. 
Pictet Asset Management is further committed to the fight against climate change and the transition to a low carbon economy. In 2016, we supported the special report on renewable energy of the World Energy Outlook, the flagship publication of the International Energy Agency (IEA), and held a high-level conference in Geneva for some of our major institutional clients on the impacts of the energy transition on long-term investments. 
 

Resources, Affiliations & Corporate Strategies

Research:  Research is vital in identifying the winners within each theme. The investment managers, who have a strong knowledge of the sector, draw on a range of internal and external research inputs. 
 
Internal: the majority of research for the strategy is undertaken by the key investment managers who have dual role responsibilities. In addition to their investment management duties, they are also respon-sible for analysing stocks in their dedicated areas. Furthermore, the team can count on the support of our Equity Research, Developed and Emerging Markets, Small Cap teams and wider Thematic Equities teams. The output of this approach is a global view of sectors and stocks. 

External: our external research comes from the following two sources of specialist information: 
 
1. Advisory Board: to identify future megatrends, and hence find the companies with the greatest growth potential, each Pictet Thematic Equities strategy has its own Advisory Board composed of distin-guished professionals who are acknowledged thought leaders in their fields. The Advisory Board con-tributes mainly to the first stage of the investment process – strategic definition of the investment theme.  
2. Broker research and external databases: we have established close working relationships with the analysts that we believe are the best in the market covering both macro and specialist areas. Brokers’ research is mainly used for actual financial data rather than for buy and sell recommendations. It can also be a good indicator of trends which will drive liquidity. Industry white papers provide de-tailed information on a product or service that we want to understand better. In order to obtain and screen fundamental company data we use a variety of external databases and data delivery systems such as CSFB HOLT, Starmine or FACTSET, which give us access to profit and loss, balance sheet and cash flow statement data for companies, as well as providing IBES EPS forecasts for each of them. 
 
INVESTMENT TEAM   The key investment managers responsible for the Pictet Water strategy are all part of Pictet Asset Management’s Thematic Equities team. In addition, a dedicated external Advisory Board helps the investment managers to track trends impacting the various investment segments of relevance to the Water industry. The output of this approach is a global view of sectors and stocks.

Links

• Stewardship & Governance
• Insights
• Real Estate Funds

SRI / Ethical Policy

The Fund seeks to achieve long-term growth though investment in the shares of global real estate companies and the global real estate investment trust markets with an overlay of sustainable criteria.

Sustainable research is undertaken on all real estate equities. This leads to many companies being excluded from the investible universe. The main criteria for the assessment of sustainability are the risks and opportunities linked with an investment. For example, this may relate to social issues, products and production methods on one hand and the opportunities arising out of environmentally friendly and/or socially favourable products and technologies on the other hand.

The application of exclusion criteria and the best-of-class approach help avoid certain activities and industries with an unfavourable return-/risk-profile. The best-in-class-approach helps is to identify companies which are not only lower risk but which also offer some opportunities as these are better Sarasin & Partners LLP (S&P) Sustainable REIT RFP for retail purposes | March 2016 7
prepared / placed for a future (more sustainable) industry. We regard proxy-voting as a necessary part of an SRI mandate in order to assume the full responsibility of equity ownership.

The sustainability analyst is responsible for interpreting the information on the basis of a comprehensive list of criteria. The results are converted into scores and entered into a proprietary database (Sustainable Value Builder). It is then assessed using a numerical scoring system. The analyst conducts a plausibility check and refines it where required. Finally there is a peer review. The scoring is then put into the Sarasin Sustainability Matrix®. The SRI criteria include the following:

• Energy-efficiency (e.g. policy & goals, energy consumption/m2)
• Responsible land use, in the face of increasing urbanisation and lack of urban green spaces
• Sustainability of building materials, due to potential for environmental and health damages. Resource-efficient construction & maintenance (energy, water, waste)
• Labour standards. The construction sector is a big employer of low-skilled labour and it needs to implement controls to guarantee minimum labour standards
• Quality of living. Real estate planners need to focus on the quality of living for the residents. Architectural concepts related to housing for the elderly / disabled etc.
• Building flexibility in case requirements change in the future
• Good connection to public transport infrastructure

Resources, Affiliations & Corporate Strategies

The funds are managed in accordance with the sustainability criteria, as defined by the Bank J Safra Sarasin Sustainable Team (BJSSST) in Switzerland. The S&P Developed Property Index universe is screened by BJSSST to produce an investable universe of sustainable global listed real estate stocks.

Where we believe we can play a positive role in shaping markets and regulation in a way that contributes to boosting sustainable economic growth, we will engage in policy outreach. We undertake much of our policy work in collaboration with other investors:

Membership organisations and investor discussion groups related to responsible investment include:

• UN Principles for Responsible Investment (UNPRI)
• The Pensions and Lifetime Savings Association (formerly the National Association of Pension Funds, NAPF) – active in promoting Stewardship within the UK.
• International Corporate Governance Network (ICGN) – Natasha Landell-Mills is a member of the Accounting and Auditing Practices Committee 
• Global Investors Governance Network (GIGN) - an informal network of investors on governance matters
• Asian Corporate Governance Association – providing current research on Asian corporate governance matters, and a platform for engagement with companies and policy-makers in the region.
• The UK Sustainable Investment and Finance Association (UKSIF) – promotes responsible investment and other forms of finance that support sustainable economic development.
• Centre for the Study of Financial Innovation – hosts regular roundtable discussions with thought-leaders on key issues facing the financial sector, from stewardship, to financial sector litigation or carbon risks.
• The Local Authority Pension Fund Forum – We have actively supported for many years

Investor coalitions/initiatives related to responsible investment include:

• Institutional Investors Group on Climate Change (IIGCC) – Brings together investors keen to promote a more robust action to counter climate change. 
• Energy Futures – A facilitated investor–corporate dialogue which explored the key long-term energy challenges facing the world, and implications for investors. 
• The Investor Forum – constituted as a Community Interest Company to represent the interest of the entire investment chain
• Investor coalition on Audit - to promote high quality and independent audits. This group was coordinated by Natasha Landell-Mills since its formation in 2012, and culminated in a position paper (signed by over 30 institutions representing over EUR 2 trillion in assets) and outreach in the European Union to deliver audit market reform.
• Investor coalition on International Financial reporting Standards (IFRS) and Going Concern – This group coordinated by Natasha Landell-Mills was formed in 2012, and is reaching out to policy-makers in the UK and EU to ensure an accounting framework that supports and promotes stewardship for the long-term. 
• Corporate Reporting and Auditing Group convened by the IMA – bringing together representatives from the largest long-term investor associations to discuss topical accounting and auditing issues, and feed into government consultations.
• Banking Futures – A facilitated investor-company dialogue around a vision for a sustainable banking sector for the future. This involves thought leaders in long-term investment sector as well as senior executives from large UK based banks.

Links

• Unicorn Ethical Fund
• Unicorn Asset Management

SRI / Ethical Policy

There are three principal strands to the ethical screening process:
1)    MSCI negative screen (monthly)
2)    ESG Impact Monitor (quarterly)
3)    Unicorn Assessment 

MSCI negative screen
Adult Entertainment - Zero tolerance (absolute exclusion) - To companies with an industry tie to adult entertainment, including producer, distributor, retailer, and ownership categories
Alcohol - 5% maximum revenue threshold - Based on the recent-year % of revenue, or maximum estimated %, a company has derived from manufacturing, distributing, retailing, licensing, and supplying alcoholic products
Animal Welfare - Zero tolerance (absolute exclusion) - To companies involved in animal testing (including those on the PETA and USDA lists), factory farming, exhibiting animals, breeding animals, and ownership of or by a company in these categories
Defence and Weapons - 5% maximum revenue threshold - The recent-year % of revenue, or maximum estimated %, a company has derived from weapons systems, components, and support systems and services. Profiles are provided for companies that meet MSCI’s Global Weapons definitions but not for companies that are classified as US DOD Weapons Producers only
Nuclear Power - 5% maximum revenue threshold - The recent-year percent of revenue, or maximum estimated percent, a company has derived from nuclear power activities
Genetic Engineering - Zero tolerance (absolute exclusion) - To companies involved in the production of genetically modified organisms
Gambling - Zero tolerance (absolute exclusion)- To companies that have an industry tie to gambling through the operation, support, licensing or ownership categories
Tobacco - Zero tolerance (absolute exclusion) - To companies that manufacture tobacco products, such as cigars, blunts, cigarettes, beedis, kreteks, smokeless tobacco, snuff, snus, and chewing tobacco. This also includes companies that grow or process raw tobacco leaves

ESG Impact Monitor

• MSCI ESG Research analysts investigate and assess controversies involving the impact of company operations and/or products and services that allegedly violate national or international laws, regulations, and/or commonly accepted global norms.
• The ESG Impact Monitor analytical framework organizes controversies within the three pillars of Environment, Social, and Governance. 
• In addition to the negative screens, the ESG Impact Monitor identifies cases which may have a reputational risk for a company
• Controversies are organised into three pillars (Environmental, Social and Governance) and are measured according to 28 underlying ‘Key Performance Indicators’
• Any controversies are highlighted via the MSCI ‘flagging system’

Unicorn Assessment 

• Regular company meetings
• Daily monitoring of news flow
• Open dialogue with management teams
• All company ethical statements and policies reviewed by ethical officer
• Investments made in line with Unicorn corporate governance policy

Resources, Affiliations & Corporate Strategies

Unicorn specialises in smaller and mid cap UK equities / equity income funds.  

This fund is an 'ethically screened' version of the Unicorn UK Equity Income fund.

Simon Moon & Fraser Mackersie are Co-Managers; they are also lead managers on the Unicorn UK Income fund since 31/12/13. They have worked on the UK Income fund since the summer of 2008. Alex Game acts as the Ethical Officer and is responsible for the oversight of the screening process and Max Ormiston offers support to the investment and ethical screening process as Junior Fund Manager.  

MSCI are used for third party screening capabilities.  MSCI performs a negative business involvement screen on the portfolio on a monthly basis and an ESG screen on a quarterly basis, which helps to identify any potential conflicts that are not picked up by the initial strict negative screen.  The ethical screening process in re-enforced by an internal assessment, whereby the investment team, through open dialogue with the investee company, may decide not to include a stock in the portfolio.

All stock research is conducted internally by the investment team and then trades are placed by the investment team, directly to the broker/dealers.  The company does not make use of a specified dealing desk, either internally or externally.

Links

• Responsible Stewardship & Governance
• Insights
• Equisar

SRI / Ethical Policy

Our core investment philosophy and process, along with stewardship oversight, applies to all the funds we manage on behalf of clients. The key aim of this process is to identify companies that offer long-term value enhancement opportunities, which are currently undervalued by the market. We select companies by virtue of their fit with our:

• Opportunity sets: We look for companies well-placed to benefit from global change, ranging from rising resource scarcity, to the growing wealth and aspirations in emerging markets, to productivity trends and policy changes.
• Corporate themes: We look for companies with credible strategies to transform an ‘Opportunity Set’ into enduring value, as well as the governance structures that will deliver this for shareholders. We currently focus on five core themes which describe the underlying corporate characteristics we seek – Corporate Restructuring, Security of Supply, Disruption & Innovation, Strong-get-Stronger and Franchise Power.
• Attractive valuation: We bring together our assessment of the long-term prospects for the company and the returns that will flow to investors, to form a view of a likely future security price. This is compared with the current price to ensure that we are buying securities with attractive risk-adjusted return profiles.

Environmental, social and governance concerns are fully integrated into our investment process. ESG issues are part of the assessment conducted by each analyst on every stock considered for inclusion on our buy list. The impact of ESG issues considered as part of modelling the revenue and cost projections of every stock, as well as how we consider threats to the business case. Our Stewardship analysts undertake research into specific ESG issues and manage policy engagement and governance.

Exclusions
Our Responsible Global Equity fund excludes investment in companies which are materially involved in the production and distribution of ethically unacceptable products, including but not limited to:

• Gambling
• Pornography
• Alcohol
• Tobacco
• Armaments
• Extraction of thermal coal or the production of oil from tar sands

We seek to avoid investing in companies which are materially involved in ethically unacceptable practices, such as:

• Corruption
• Environmental degradation
• Poor labour practices
• Breaches of human rights
• Companies which persistently, knowingly and materially breach international legal standards

Resources, Affiliations & Corporate Strategies

These range from our support for membership organisations, to investor discussion groups that allow for regular information sharing amongst like-minded investors, to active investor coalitions focused on specific company or policy matters. 

Membership organisations and investor discussion groups related to responsible investment include:

• UN Principles for Responsible Investment (UNPRI)
• The Pensions and Lifetime Savings Association (formerly the National Association of Pension Funds, NAPF) – active in promoting Stewardship within the UK.
• International Corporate Governance Network (ICGN) – Natasha Landell-Mills is a member of the Accounting and Auditing Practices Committee 
• Global Investors Governance Network (GIGN) - an informal network of investors on governance matters
• Asian Corporate Governance Association – providing current research on Asian corporate governance matters, and a platform for engagement with companies and policy-makers in the region.
• The UK Sustainable Investment and Finance Association (UKSIF) – promotes responsible investment and other forms of finance that support sustainable economic development.
• Centre for the Study of Financial Innovation – hosts regular roundtable discussions with thought-leaders on key issues facing the financial sector, from stewardship, to financial sector litigation or carbon risks.
• The Local Authority Pension Fund Forum – We have actively supported for many years

Investor coalitions/initiatives related to responsible investment include:

• Institutional Investors Group on Climate Change (IIGCC) – Brings together investors keen to promote a more robust action to counter climate change. 
• Energy Futures – A facilitated investor–corporate dialogue which explored the key long-term energy challenges facing the world, and implications for investors. 
• The Investor Forum – constituted as a Community Interest Company to represent the interest of the entire investment chain
• Investor coalition on Audit - to promote high quality and independent audits. This group was coordinated by Natasha Landell-Mills since its formation in 2012, and culminated in a position paper (signed by over 30 institutions representing over EUR 2 trillion in assets) and outreach in the European Union to deliver audit market reform.
• Investor coalition on International Financial reporting Standards (IFRS) and Going Concern – This group coordinated by Natasha Landell-Mills was formed in 2012, and is reaching out to policy-makers in the UK and EU to ensure an accounting framework that supports and promotes stewardship for the long-term. 
• Corporate Reporting and Auditing Group convened by the IMA – bringing together representatives from the largest long-term investor associations to discuss topical accounting and auditing issues, and feed into government consultations.
• Banking Futures – A facilitated investor-company dialogue around a vision for a sustainable banking sector for the future. This involves thought leaders in long-term investment sector as well as senior executives from large UK based banks.

Links

• M&G’s approach to responsible investment

SRI / Ethical Policy

We believe that ESG investing is more nuanced and complex than simply screening out companies perceived to be unsavoury and our research and engagement is carried out on a case-by-case basis.  This is the reason why we believe that the positive effects of ESG integration are one of the elements that make active investing so powerful.

In 2017, M&G became a member of the UK Sustainable Investment and Finance Association (UKSIF), which promotes responsible investment and other forms of finance that support sustainable economic development. We also became a signatory to the 30% Club investor group statement of intent. This commits us to raising the issue of gender diversity with our investee companies, with a view to supporting the achievement, by 2020, of: 30% women on FTSE350 boards and 30% women at senior management level in FTSE100 companies.

During the year we participated in a number of initiatives and events addressing the risks and opportunities of climate change, including the COP 23 climate change talks in Bonn, Germany, and the ‘One Planet’ climate change summit organised by President Macron in Paris. We expressed our public support for the Task Force on Climate-related Financial Disclosures, signed up to the landmark Climate Action 100+ initiative and signed a global investor letter encouraging G20 countries to reaffirm their commitments to the 2015 Paris Climate Accord.

Resources, Affiliations & Corporate Strategies

The Corporate Finance & Stewardship team also supports M&G’s fund managers and analysts on the incorporation of ESG in their investment processes. The team holds regular and ad hoc interactions with fund managers on ESG matters, and also provides a more formal oversight of ESG risks in our portfolios, as well as providing ESG overviews of potential new holdings.

M&G’s Responsible Investment Advisory Forum coordinates Responsible Investment developments across M&, and maintains our relationship with Responsible Investment oriented bodies, in particular the UN-backed Principles for Responsible Investment (UNPRI) und the UK Sustainable Investment and Finance Association (UKSIF).

Links

• Liontrust Sustainable Future Managed Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection

There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios.

i.  Identifying Sustainable Companies

At the core of the investment process is the team’s proprietary Sustainability Matrix, which is used to identify those companies that are aligned with Sustainable Development.

Every company held in the portfolios is given a Sustainability Matrix Rating, which analyses the following aspects:

• Product Sustainability – rated from A - E. This assesses the extent to which a company‘s core business helps or harms society and/ or the environment. An A rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy). An E rating indicates a company whose core business is in conflict with sustainable development (e.g. tobacco).
• Management Quality – rated from 1 - 5. This assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance (ESG) risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material ESG issues are graded from 1 (excellent) to 5 (very poor). Companies must score C3 or higher in order to be considered. 

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Fund Information
• Prices and performance
• About Us
• Contact and Sales
• How to Invest

SRI / Ethical Policy

SRI Policies:

• Environmental policy:   Has a policy which states that the fund considers environmental issues (e.g. pollution, climate change, resource management, environmental impact
• Limits exposure to carbon intensive industries:   Aims to reduce or limit exposure to carbon intensive industries which are considered to be major contributors to climate change. Funds vary - but this is likely to mean a fund has below average levels of investment in areas such as oil & gas, mining or airlines. 'Best in sector' companies may, however, be allowable. 
• Sustainability policy:   Considers issues relating to the sustainability agenda (e.g. resource usage, environmental impact and/or social issues such as equal opportunities, human rights and adherence to recognised codes). 
• Ethical policies:   Has a policy that states the fund considers 'ethical' issues (e.g.armaments, tobacco, gambling and/or pornography). These vary significantly. Check fund literature for details. 
• Social policy:    Considers social issues (e.g. human rights, labour standards, equal opportunities, child labour and adherence to internationally recognised codes such as the UN Global Compact). 
• Animal welfare policy:    The fund has a policy that requires specific animal welfare standards to be adopted by companies in order for them to be allowable for investment within the fund.
• Nuclear policy:    Has a published policy that sets out the fund's position with regard to nuclear power. In most cases this is likely to mean avoidance of companies with significant involvement in the nuclear industry, although some funds may require absolute avoidance. 
• Animal testing policy:    The fund has criteria that guide when it can or can not invest in companies that are involved in testing their products on animals. This may mean the fund avoids pharmaceutical companies even where testing is required by law (for safety reasons). 
• Tobacco (production) avoided:    Does not invest in manufacturers or tobacco (or related) products. The fund, however, may invest in retailers of such products (e.g. supermarkets or hotels.) 
• Armaments manufacturers avoided:     Avoids companies that manufacture products intended specifically for military use. (Funds may, however, invest in manufacturers of products that are used by the military but are not specifically intended for military/defence use.) 
• Coal, oil &/or gas majors excluded:    This fund will not invest in the largest coal, oil and/or gas producing companies. Funds vary. Some may invest in smaller producers or companies where this is considered to be a relatively minor part of their business. 
• Climate change / GHG policy:     Considers climate change related issues such as greenhouse gas/carbon emissions. Funds that consider such issues typically require careful management of such issues in order for a company to be considered acceptable/attractive. 
• Invests in clean energy/renewables:    This fund invests in companies in the clean technology/renewable energy related industries. Fund strategies vary. In practice some may invest a small percentage in this area whereas others may have significant exposure to this area. Check fund literature for details.

SRI Features:

• Balances company 'pros and cons'/best in sector:    This fund manager will look at both the 'positive' things companies do and the 'negative' things they do. They will make balanced judgements, in line with their published strategy, before deciding whether or not to invest. Such funds often invest in the best/most ethical companies across most industries, rather than excluding entire sectors. The fund manager may couple this with 'responsible engagement' activity, where they aim to encourage better, more responsible business practices. 
• RSMR Rated Fund rating agency 'Rayner Spencer Mills Research' have awarded this fund 'rated' status.
• Faith friendly:   These funds are likely to have attributes that some faith based investors may welcome such as opposition to armaments, gambling and alcohol. 
• Favours companies with strong social policies:    This fund invests in line with positive strategies that relate to 'people' issues - such as human rights, labour standards and equal opportunities. Such funds are likely to invest in companies that have market leading standards with regard to employee and supplier practices. 
• Sustainability themed:    This fund pays significant attention to sustainability issues either as its primary strategy or alongside other ethical criteria and approaches. This means that environmental and social challenges and opportunities are likely to influence stock selection decisions. 
• Eurosif transparency:    This fund has met the standards of the EUROSIF transparency Code. This means that they are a leading fund in terms of openness and transparency, publishing - for example - extensive information about where they invest and how they deal with companies. 
• Norms focus:    This fund uses international standards, conventions and 'norms' to help direct where the fund can and cannot invest (e.g. the UN Global Compact). 
• Positive selection bias:    The ethical focus of this fund is around the consideration of the positive/good or useful things companies do. The fund may also have negative avoidance criteria - but this may not be the main ethical strategy applied by the fund managers. 
• Negative selection bias:    The ethical strategy of this fund relates primarily to avoidance criteria. In practice this means that positive company behaviours will not normally be allowed to override negative activities. 
• Specialist/boutique fund manager:    The fund management company that offers this fund specialises in SRI or sustainability focused investment options. They are likely to be a smaller but more focused business and unlikely to have significant investment in companies that are typically avoided by SRI/ethical funds. 
• Over 50% large cap:    This fund invests more than half of its money into very large companies. This will typically mean that the market capitalisation (or value) of the companies they hold will be over £5 to £10 billion. 
• Favours cleaner, greener companies:     This fund is likely to invest in companies with strong environmental policies and practices. This may mean it invests in smaller companies offering market leading environmental services or products and/or larger companies that are working towards the improved management of their negative impacts.

Corporate Activity

• Integrates ESG factors into all/most fund research:    This fund manager researches environmental, social and governance issues when deciding whether or not to invest in a company. This applies to all funds, not only those which are promoted as being 'ethical' or 'SRI themed'.

We believe that the fund offers the opportunity to invest in a fixed income fund with high quality investment grade bonds whilst applying a broad range of both positive and negative screening criteria that will appeal to consumers with ethical concerns.
The fund manager will initially identify corporate bonds that represent an attractive investment proposition.  The entities issuing these bonds will then be investigated by Rathbone Greenbank’s ethical researchers. Issuers identified as being suitable will then be subject to the consensus approval of at least two senior members of the Rathbone Greenbank team.

ETHICAL CRITERIA  
Exclusions
The fund applies negative screening criteria to exclude from its universe any issuers of corporate bonds whose ultimate holding company is in breach of any of those criteria, before ensuring that issuers satisfy at least one of the fund’s positive criteria requirements. 

The fund shall exclude bonds issued by companies wholly or predominately involved in the following activities or whose ultimate holding company is similarly involved:

• Alcohol:    

Manufacture of alcoholic beverages.

• Animal welfare:

Provision of animal testing facilities, or the use of animals in the discovery or development of pharmaceutical or healthcare products; manufacture or retail of cosmetic or household products without a fixed cut-off date policy for the testing of finished products (and their ingredients); production or retail of fur or fur products; rearing or processing of animals for food without evidence of policy, management or reporting on farm animal welfare. 

• Armaments

Manufacture or sale of strategic weapon systems, munitions or combat vehicles.

• Environmentally unsustainable or high-impact activities

Mineral or aggregate extraction, fossil fuel exploration and production, agrochemical production, production of genetically modified seeds or foodstuffs; manufacture or sale of timber products from non-sustainable sources; manufacture of vehicles based on hydrocarbon fuels.  Also, companies with convictions for serious or persistent pollution offences.

• Gambling

Operation of betting or gaming facilities (including casinos, betting shops and internet-based services).

• Human rights

Non-compliance with standards set by the International Labour Organization and United Nations Universal Declaration of Human Rights, including direct use of child, forced or bonded labour.

• Nuclear power

Construction of nuclear power plants, generation of electricity from nuclear power, or handling or reprocessing of radioactive waste.

• Pornography

Production or sale of pornographic material.

• Predatory lending

Unfair lending practices imposing high-interest rates or fees.

• Tobacco

Manufacture of tobacco or tobacco products.

Positive aspects
To qualify for inclusion in the fund’s universe, companies issuing bonds should demonstrate progressive or well-developed practice or policies in one of the following key areas:

• Corporate community investment

Long-term involvement in programmes of benefit to the community, either via cash donations or gifts in kind (e.g. staff time, use of buildings or office facilities) or membership of corporate community investment benchmarking groups.

• Employment

Commitment to workplace diversity and equal opportunities; additionally they could facilitate employee work/life balance by offering flexible working arrangements, carers’ leave and/or childcare facilities.

• Human rights

Compliance with local and national standards in accordance with minimums set by the International Labour Organisation and United Nations Universal Declaration of Human Rights. Alternatively, companies may implement their own codes of conduct to ensure compliance with local laws covering child labour, working conditions and health and safety.

• Management of environmental impacts

Publication of a clearly defined policy for managing their environmental impact.  This should include monitoring and reporting on progress against key performance indicators in areas such as waste disposal and recycling, consumption of resources, emissions to air, and discharges to land and water.

• Provision of beneficial products and services

Provision of products or services that offer social or environmental benefits.  Such activities might include designing or implementing cleaner or more efficient industrial processes; companies involved in enabling compliance with health and safety legislation; supplying educational products or services; providing waste recycling or acceptable forms of waste management; providing social housing; manufacturing, installing or operating renewable energy infrastructure; building or operating sustainable transport systems.

• Green, climate, sustainability, social bonds

 ‘Ringfenced’ bonds, where proceeds are intended for a specific social or environmental purpose, will be approved subject to the following requirements: identifiable use of proceeds; third-party project evaluation; ongoing management of proceeds; and project reporting. Approval will be granted in the context of the specific use of proceeds rather than the issuer’s principal activity.

THE 'FOUR C'S PLUS'

These decisions are primarily taken, based on the core investment principle of the ‘four Cs plus’ model.  This is a text book way of managing fixed income assets, with the added level of investment philosophy of Conviction.  The four Cs are:

• Character – Looks at management integrity, and the likelihood of repayment of loans.  Operating records of management are important
• Capacity – Looks at the availability of cash-flows and assets to repay its obligations.
• Collateral – Looks specifically at assets offered as security as well as other assets managed by the company.
• Covenants – This looks at the prospectus and the details within that affect the lending agreement and any restrictions on the bond.

The plus is:

• Conviction – To achieve long term above average performance, investors must think differently to the market.  This may involve contrarian investing, a sceptical evaluation of orthodox thinking, patience and discipline, but ultimately a determined conviction.

INVESTMENT PROCESS

The process has various layers to achieve superior results:
1.    Theme-based investment – idea generation
2.    Credit analysis – the ‘four Cs plus’ model
3.    Valuation – relative value
4.    Evaluation of risk
5.    Ethical screen (as outlined above)

Idea Generation 
The thematic approach is where the process starts.  Individual ideas are generated from a blend of top-down and bottom-up views.  It is quite often problematic to quantify specifically how the themes are developed.  Themes are developed from all the opportunity sets based on our macro research and the thought processes that go into the development of those analytics.  There is no distinct value of how much is assigned to short-term and how much is assigned to longer-term investments.  What is important is that all investment themes are not always executed – the final weight is as a result of the current opportunities that exist.
A list of areas where themes are generated from are included below.  This is not an exhaustive list, but gives a general view of how ideas are generated.

• Macro
• Sectoral
• Regional
• Supply
• Demand
• New issuance
• Regulatory issues
• Interest rate policy

Once the themes have been developed we then carry out credit analysis to find assets that are best within the thematic framework.  Here we carry out the core investment principles of the ‘four C’s plus’.

Resources, Affiliations & Corporate Strategies

(a)    Ethical research for the fund is carried out by researchers working for Rathbone Greenbank Investments, the specialist ethical investment unit of Rathbone Investment Management Limited (part of Rathbone Brothers Plc).  The team at Rathbone Greenbank has been at the forefront of developments in the ethical investment industry since 1992, launching one of the first bespoke ethical portfolio services.
(b)    The fund’s policy and strategy are reviewed annually at a meeting which takes place before the annual short report is issued in May.  This involves the ethical researchers, fund manager and representatives from Rathbone Greenbank Investments and Rathbone Unit Trust Management.  The portfolio, ethical criteria, investment process and research process are all reviewed at this time.
The fund manager will initially identify corporate bonds that represent an attractive investment proposition.  The entities issuing these bonds will then be investigated by Rathbone Greenbank’s ethical researchers. Issuers identified as being suitable will then be subject to the consensus approval of at least two senior members of the Rathbone Greenbank team.
(c)    The investment team for the Rathbone Ethical Bond Fund comprises Bryn Jones and Noelle Cazalis.

Bryn Jones has been managing the Rathbone Ethical Bond Fund since November 2004 and reports to Julian Chillingworth, Chief Investment Officer.

Bryn Jones - investment Director, Fund manager 
Bryn is the Fixed Income Director for Rathbone Unit Trust Management, and lead manager on the Rathbone Ethical Bond Fund and the Rathbone Strategic Bond Fund.  He joined Rathbones in November 2004 from Merrill Lynch, where he managed $2 billion of fixed income assets. 
Bryn is a member of the Rathbone Strategic Asset Allocation Committee, Chairman of Rathbones' Fixed Income Committee, and a member of the Rathbone Banking Committee.  
He is a WMA representative for the HMT DMO’s (Her Majesty’s Treasury - Debt Management Office) Gilt market consultation process.  He holds the Investment Management Certificate and sits on the IA Fixed Income Committee. 
Bryn graduated from Birmingham University with a Bachelor of Arts degree in Geography in 1995.  Bryn has also been appointed as one of a select number of ethical investors to the UKSIF Impact Investing Reference Group.

Noelle Cazalis 
Noelle joined Rathbones in July 2011 as a Credit Analyst, and works alongside Bryn Jones, providing in-depth credit analysis for the Rathbone Ethical Bond Fund, the Rathbone Strategic Bond Fund, and Rathbones’ Fixed Income Committee.
Having spent some time as a financial analyst for the Bank of France in Paris, Noelle spent five months in Cambodia, where she undertook due diligence on the Cambodian banking sector on behalf of the French Embassy. 
Noelle achieved two masters degrees with distinction in 2010, from the University of Montesquieu in Bordeaux - a Magistere of International Finance, and a Masters in Banking, Finance and Financial Assets Trading.  She holds the Investment Management Certificate and is a candidate for the CFA (Chartered Financial Analyst).

(d)    RUTM complies with the UK Stewardship Code; as part of Rathbone Brothers plc, RUTM is also a signatory to the UN-backed Principles for Responsible Investment.  The fund’s submission under the European SRI Transparency Code v3.0 (1 April 2015 to 31 March 2016) was approved by Eurosif.
 

Links

• Liontrust UK Ethical Fund
• Liontrust Sustainable Future Hub
• Liontrust Homepage

SRI / Ethical Policy

We have identified 22 positive, structural investment themes or trends, which help us find areas of growth across the economy. We get our investment ideas by analysing these themes as they represent potentially interesting areas to invest in and generate good investment returns. These investment themes are grouped into three broad categories which help society to:

·        Use finite resources more efficiently;

·        Live healthier and higher quality lives;

·        Be safer or increase the resilience of systems that we all rely on.

A brief explanation of each of these investment themes is laid detailed below:

Increased Efficiency

Improving the efficiency of energy use - We see many ways of making energy cheaper by reducing waste while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving sanitation and access to clean water - Water is essential for life. Companies that can manage waste water treatment, or produce products or services that can improve the efficiency of water distribution, are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources - Substituting coal intensive fossil fuel electricity generation with renewable power sources reduces carbon emissions as well as providing a cost effective means in some off-grid situations to connect people to cheaper more reliable power sources.

Improving industrial processes - We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. These improved industrial processes help reduce the negative impacts on people and the environment and are making a positive contribution. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as they all help modernise and improve industry.

Increasing waste treatment and recycling - Resources are finite and the UN Environment Programme (UNEP) estimates we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Accelerating the transition to lower carbon fuels - Companies that provide services or equipment, particularly in upgrading the power grid network to be able to deal with changing production and consumption patterns of electricity are an important requirement to achieve affordable clean energy.

Improving the fuel efficiency of cars - Companies that produce equipment that increases the fuel efficiency of cars are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to increase fuel efficiency in cars.

Making transportation more efficient - Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses.

Health and Increased Quality of Life

Providing affordable healthcare globally - Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Delivering healthier foods - There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Building better homes - Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this.

Providing education services and content - Education brings massive benefits including longer life expectancy, increased job opportunities, higher economic growth as well as leading to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling innovation within the healthcare system - Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Enabling healthier lifestyles - Companies that promote healthier lifestyles, principally through increasing physical activity, help improve health. These include gym operators and companies providing sports clothing and equipment.

Connecting people - We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Safety and Resilience

Improving auto safety - We have identified companies whose products improve the safety of travel and reduce road traffic accidents, principally through active safety, which involves collision avoidance, active breaking and semi-autonomous driving. We concentrate on the specialist companies making the kit to improve safety (or reduce emissions) rather than the car manufacturers which we believe are challenged to meet tightening regulations to improve safety as well as reducing emissions.

Increasing financial resilience - We believe a resilient financial services sector is necessary for economic well-being through utility-like provision of banking, lending, and effective ways of appropriately saving for the future as well as mitigating risks through insurance. This does not mean any company in the financial sector is automatically investable, but we do see positive ways that these companies contribute to society when appropriately and proactively managed.

Enhancing digital security - As more and more of our lives and critical services are carried out online, we need to protect the data from theft. Digital security helps make this growing area of the economy secure.

Making food production sustainable - The current industrial agricultural system, while able to produce huge quantities of food, also uses huge amounts of resources (land, water and inputs) as well as having meaningful negative externalities that need to be managed. Companies that help make this system more sustainable by using smarter farming methods that reduce these negative externalities represent a potentially interesting investment opportunity.

Reducing pollution from cars and industry - Pollution from industrial processes needs to be minimised to improve our collective environment and reduce the negative externalities that harm health from water air and soil pollution. Companies whose products or services help to reduce this pollution are set to potentially benefit from tightening regulations.

Companies with leading governance - How a business is managed operationally, in particular how it manages the Environmental Social and Governance challenges, can give it a competitive advantage over its peers if it can manage these challenges and opportunities more proactively.

These investment themes essentially help us find structural growth. They are also all related to Sustainable Development Goals.

In addition to our analysis on investment themes (which help us identify structural growth opportunities) we also analyse:

·        the Environmental, Social and Governance aspects of the business (using our Sustainability Matrix) which helps gauge the quality of the business;

·        business fundamentals, essentially to ensure the company has a competitive advantage and is profitable;

·        as well as financial modelling to check the company is likely to be worth significantly more in the future.

This investment process is designed to produce diverse portfolios of high quality companies, benefitting from positive change which will outperform the market.

Resources, Affiliations & Corporate Strategies

The Sustainable Future Team has a rigorous and repeatable investment process which aims to deliver superior investment performance, with sustainable development and responsible business practice at its core. This disciplined process identifies companies with strong sustainable and Environmental Social and Governance credentials and robust business fundamentals. It then integrates this assessment into in-depth analysis of valuations to form its investment theses, which are used to create high-conviction, long-only portfolios. All members of the investment team identify potential investments and participate in the fully-integrated investment process - from assessment for inclusion in the portfolios on ESG grounds, to the final investment recommendations.

The team also uses its shareholder votes to encourage the management of the companies in which it invests to make improvements in how they run their business, and to hold them to account where necessary.

Investment Selection

There are three elements to investment selection for the Sustainable Future fund range: sustainability, strong business fundamentals and attractive valuation. Only stocks which meet all these criteria will be considered for selection in the portfolios.

i.   Identifying Sustainable Companies

At the core of the investment process is the team’s proprietary Sustainability Matrix, which is used to identify those companies that are aligned with Sustainable Development.

Every company held in the portfolios is given a Sustainability Matrix Rating, which analyses the following aspects:

• Product Sustainability – rated from A - E. This assesses the extent to which a company‘s core business helps or harms society and/ or the environment. An A rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy). An E rating indicates a company whose core business is in conflict with sustainable development (e.g. tobacco).
• Management Quality – rated from 1 - 5. This assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance (ESG) risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material ESG issues are graded from 1 (excellent) to 5 (very poor). Companies must score C3 or higher in order to be considered. 

The Sustainable Future team goes to considerable lengths to ensure that its information on the environmental, social, ethical and corporate governance performance of companies is current and correct. It uses a number of external ESG data providers, and adds to this information from company meetings, broker research, market data, academic research, and NGOs. This information is all analysed internally by the relevant analyst to form a final rating, which is then presented to, and formally reviewed by, the whole team. Current external data providers are MSCI IVA and Ethical Screening. The team also consults an external Advisory Committee, which is able to see the companies held in the portfolios and query any companies it feels may be inappropriate, as well as give guidance on areas which are controversial or where the team wishes to clarify its position.

Each holding has a Sustainability Matrix Report which highlights material ESG issues, any recent controversies, and areas for discussion with company management. All the holdings are audited regularly to ensure compliance with the team’s guidelines.

ii.    Business Fundamentals

A variety of valuation metrics are used to analyse a company’s business fundamentals, which allows the team to identify and predict the growth prospects and underlying strength of a company’s financial performance. 

Business Fundamentals are assessed on the following metrics:-

• Returns - The team looks for businesses which make a Return on Equity (ROE) higher than their peers, demonstrating an ability to sustain higher returns than their industry sector. Return on Capital (ROC) – must become greater than the cost of capital (WACC) and ROE should be driven by net income/sales or the asset turnover rather than being driven by debt ratios, e.g. assets over equity. The team considers that these factors are characteristics of companies which can sustain a high Return on Equity.
• Resilience - The team searches for high returning companies, those that are able to sustain their levels of Return on Equity. Net debt must be stable and not at an excessive level. Margins are expected to be stable and predictable.
• Quality of Earnings - The team prefers to invest in companies which have enough free cash flow to drive growth forward and whose earnings and operational cash flows are highly correlated.
• Growth - Historic and predicted growth are analysed and forecast. The emphasis is on companies which will deliver future growth through gains in their current market share, or by the development of new products and entry into new markets.

The team also distinguishes between growth through acquisition and organic-led growth. It is important that expansion into new areas does not happen at the expense of overall returns - growth should be compounded rather than diluted.

Meetings with senior management and industry experts form an important aspect of assessing future prospects and the financial dynamics of the company.

The Sustainable Future team expects companies to be delivering on these business fundamentals now, but may allow a lower level of ROE if it has confidence that this will improve in the future.

iii.    Valuation Analysis

Each stock is assessed on the valuation metrics relevant to its sector. Using a standard template, each member of the team takes consensus forecasts, and flexes these according their own research and assumptions, using independent research, company meetings, site visits and sell-side analysis.

• The team forecasts sales growth, EBIT margins and Free Cash Flows where relevant over one, two and three years, taking consensus forecasts and adapting these inaccordance with its own views.
• Ratios are calculated which are relevant to the particular sector, e.g. Price to Earnings; EV/EBITDA; Price to Free Cash Flows; Price to NAV (amongst others).
• These ratios are compared to historic ratios for the company and its industry sector; and to anticipate three year growth in earnings or free cash flows.
• From these the Sustainable Future team derives price targets to indicate the value that can be achieved on a one to three year view. 

Utilising all this data, a thesis document is then created for each stock. Combined with the sustainability rating, this integrated analysis provides consistency and transparency and ensures that the team will only invest in companies which have suitable ESG criteria and ethical characteristics, but are also undervalued by the market. The final recommendations are presented to the team for debate and challenge at formal meetings and the investment recommendations are recorded. The ultimate decision whether to include the stock in a portfolio lies with the fund manager.

Links

• Socially Responsible Investment

SRI / Ethical Policy

Corporate Activity

• Responsible Ownership policy for non SRI funds:   This fund manager applies Responsible Ownership or 'Stewardship' policies to all or most of their investment assets. This means that active involvement (e.g. voting, dialogue) with the companies they invest in is not limited to ethical or SRI options

Corporate Governance and Stewardship

Resources, Affiliations & Corporate Strategies

Corporate Governance Committee – 10 investment management professionals responsible for overseeing all proxy voting.