Links

• Triodos Sustainable Pioneer Fund
• Triodos SRI - investment strategy
• Triodos SRI - minimum standards
• Triodos Sustainable Pioneer Fund – Factsheets and Key Investor Information

SRI / Ethical Policy

The fund invests in companies that are pioneers in four areas: 

• Climate protection (sustainable energy) 
• Healthy people (medical technology) 
• Clean earth (environmental technology and water) 
• Corporate social responsibility (CSR)

At the heart of Triodos Investment Management’s SRI philosophy lies the belief that in the long term, the most successful businesses will be those that achieve the right balance between their social, environmental and economic performance. Any company that intends to deliver long-term
value must effectively manage its relations with all stakeholders and be responsive to their needs and demands. We believe companies that balance these interests effectively will deliver the greatest value to all stakeholders, including their shareholders.

As an investor, we aim to stimulate the transition to a society where growth is not just measured in numbers. We connect individual and institutional investors who want to invest in positive change of society with like-minded, innovative entrepreneurs and sustainable businesses.

Our research team selects the companies for inclusion in our sustainable investment universe. The team applies positive selection criteria. Companies that outperform their peers in environmental, social and governance impact qualify for inclusion. The team also sets the minimum standards that companies are required to comply with. The research team keeps track of the latest thinking on sustainability issues and monitors legislative and regulatory developments, ensuring that our selection process is based on the most relevant and reliable information available. We obtain basic sustainability data from Sustainalytics*, with whom we have an active and long-standing relationship. Our sustainability criteria are far-reaching and dynamic. Changes in these criteria may be prompted by legislation, public debate, best practice standards or company behaviour. For a broader perspective on what are often very complex issues, we maintain regular contact with leading international experts and stakeholder groups.

* Sustainalytics is an independent responsible-investment research firm who specialise in environmental, social and governance research and analysis. Triodos Bank is one of the founding partners of Sustainalytics.

Our research team screens companies for inclusion within the Triodos investment universe, for potential selection for the Pioneer Fund, on the strict sustainability criteria defined by Triodos Bank:

1. Sustainable activities 

Only companies that derive over 50% of their revenues from the climate protection, healthy people and clean earth themes are eligible for investment by Sustainable Pioneer Fund. 

2. Comparative 

We also identify a fourth group of companies: the absolute leaders in corporate social responsibility. We compare the sustainability performance of these companies with that of other companies in the same sector. Only companies that are head and shoulders above the rest of the sector are eligible for investment. 

3. Minimum standards 

All companies that are selected must meet strict minimum standards. The screening process takes a zero tolerance approach on five activities, completely excluding all investments in nuclear power, oil and gas, hazardous materials, and weapons. In addition to this there are strict minimum standards applied in other sectors such as alcohol, tobacco, and pornography. See full details of our strict minimum standards. 

Once companies have passed step 3, they are added to the sustainable investment universe.

Active engagement and dialogue with the companies we may invest in are key elements of our SRI strategy. We aim to raise awareness of sustainability, to stimulate action and to create lasting positive change.  Once selected for our sustainable investment universe, we continue to follow companies. When there is a potential breach of our minimum standards, we investigate in depth and usually approach the company about it. At all stages of our engagement, it remains a possibility that the company may end up being excluded from the Triodos sustainable investment universe.

Resources, Affiliations & Corporate Strategies

Triodos Bank’s investment activities are managed by wholly-owned subsidiary Triodos Investment Management.  Triodos Investment Management has its own Sustainability Research Department, responsible for keeping us up to date with the latest thinking on sustainability issues. It also monitors legislative and regulatory developments, and ensures that our selection process is based on the most relevant and reliable information available.

The research team assesses new candidates for sustainable investment and monitors companies
that have already been selected. Selected companies are reassessed every three years.

The financial management of this fund is handled by Delta Lloyd Asset Management NV, which invests in companies included in the Triodos investment universe that are likely to generate the highest financial returns.

Our partners and networks

We are part of an international network of organisations who share our commitment to impact and socially responsible investing in a transparent and sustainable way:

• We participate in the Global Impact Investing Network (GIIN), of which we are co-founder. 
• We are a signatory to the United Nations Principles for Responsible Investment (UNPRI).
• We are a member of the European Sustainable Investment Forum (Eurosif).
• We are a signatory to the European SRI Transparency code.
• We are a member of the International Corporate Governance Network.

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

• Kames Capital Ethical homepage
• Kames Capital Ethical microsite

SRI / Ethical Policy

All three of Kames Capital’s ethical funds apply the same ‘negative’ screen. This means that we screen companies out of the potential investment universe based on certain unacceptable activities. Because we apply stringent screening criteria, our funds are considered ‘dark green’. We do not screen out whole sectors, but some may largely be excluded because of the nature of their business activities.

Our screening criteria are clear and explicit. Certain ethical issues, however, are not black or white. Our 20 years’ experience of managing ethical investments means we can consider these issues appropriately when they arise.

We do not apply ‘positive screening’ criteria like some other funds. The funds may invest in themes that could be considered ‘socially responsible’, like alternative energy or social housing companies, but only if these companies pass our negative screens.

We aim for transparency in our screening process. This means it is easy for clients to understand the types of companies we exclude. Our underlying philosophy is to avoid companies that cause significant negative effects in society or the environment. 

We use both external screening databases and in-house research to ensure companies meet our ethical criteria and are suitable for investment. Our Corporate Governance team focuses on the screening and research, freeing our fund managers to focus solely on stock selection and portfolio construction.

Our ‘dark green’ screen is ideally suited to investors looking for a more stringent ethical philosophy. It adopts a negative approach that screens companies out of our funds’ potential investment universe if they engage in certain unacceptable activities. Examples of our screening process are shown below:

• Animal Welfare
• Military
• Nuclear power
• Environment
• Political Donations
• Genetic Engineering
• Gambling
• Alcohol
• Tobacco
• Pornography
• Banks
• Oppressive Regimes

Kames Capital aims to be a responsible investor. We ensure that we identify and understand the key environmental, social and governance (ESG) risks for each of the companies, industries and sectors that we invest in. We do this because evidence suggests that companies who rank among the leaders in governance and sustainability tend to outperform as investments over the long term.

Our approach to responsible investment is consistent with the UK Stewardship Code. The Code sets out good practice Principles on engagement with investee companies which UK-based institutional investors should aspire to. You can download our compliance statement from our website.

We are also a signatory to the United Nations Principles for Responsible Investment (UN PRI). The UN PRI is the principal international investor initiative to drive the integration of environmental, social and governance issues into investment decision making. The initiative places a formal requirement on signatories to be active, responsible shareholders and report annually on activities and progress in a transparent manner. 

Resources, Affiliations & Corporate Strategies

Our corporate governance team is responsible for the analysis of relevant environmental, social and governance (ESG) issues. They are responsible for identifying the key ESG risks for each of the companies, industries and sectors that we invest in and in turn providing our fund managers with succinct, relevant data that could have investment consequences. Our corporate governance team is linked to equivalent individuals in other Aegon Asset Management country offices.

We use a range of data sources for ESG research purposes and these resources have increased significantly in the last few years as the quality of the data available has improved.  Resources currently include:

• MSCI ESG Manager – company ESG research platform
• EIRIS Portfolio Manager – company ESG research platform
• ASSET4 assetmasterProfessional –  company ESG research platform
• RiskMetrics ProxyExchange – proxy voting research and processing
• The Association of British Insurers (ABI) IVIS proxy voting research service 
• BoardEx - corporate board and remuneration database
• Specialist databases, such as UN Principles for Responsible Investment (UNPRI), Carbon Disclosure Project (CDP) and Extractives Industry Transparency Directive (EITI)
• Specialist research from brokers and academics
• Various specialist journal subscriptions

A strong relationship exists between our corporate governance team and our fund managers, which enables material non-financial information to be incorporated into our investment processes. ESG research reports produced by our corporate governance team sit alongside all the other existing investment research undertaken by our fund managers on a given security. The corporate governance team also provide relevant news-flow and commentary on ESG issues to our fund managers that they might not receive from other sources.  

Our fund managers consider ESG research alongside other relevant financial and non-financial factors in the investment decision-making process. The importance that the fund manager attaches to ESG issues is in proportion to their ability to influence security prices.

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 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

• 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

• Liontrust Sustainable Future UK 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

• Janus Henderson SRI webpage
• Investment Critiera - Henderson Global Care Managed Fund
• Full Portfolio Holdings
• Fund Information

SRI / Ethical Policy

The Global Care Managed fund is comprised of three investment sub funds – international equities, UK equities and global fixed income. The international equities sub fund is managed according to the investment principles of the Global Care Growth fund. The UK equities sub fund is managed according to the investment principles of the Global Care UK Income fund. The global fixed income sub fund is managed with a focus on best-in-class companies with respect to their ESG criteria and applying the same avoidance criteria as for the Global Care UK Income fund.

Henderson Global Care Growth Fund

The Global Care Growth fund employs an integrated approach to sustainable and responsible investment (SRI), combining positive and negative investment criteria, and considering both the products of a business (what it does) and the operations (how it does it).

Positive selection criteria

The positive criteria lead the managers to invest in businesses that have a positive impact on society and the environment by virtue of the products or services they sell, and by the way in which they manage their operations, thereby supporting the Sustainable Development Goals adopted by the United Nations in 2015.

The managers use a thematic framework to identify those businesses that are strategically aligned with the four megatrends of climate change, resource constraints, population growth and an ageing population, and by virtue of this offer the potential for sustainable revenue growth. Derived from the four megatrends, the fund has ten sustainability themes of which five are environmental and five are social. For every investment it must be possible to identify at least one of the following themes as a value driver to the business. For a more detailed explanation of our themes please refer to our Ten themes for sustainable investment document. 

Five environmental themes: Cleaner Energy, Sustainable Transport, Water Management, Environmental Services, Efficiency

Five social themes: Health, Sustainable Property & Finance, Knowledge & Technology, Safety, Quality of Life

ESG integration

Environmental, social and governance (ESG) research is undertaken for all investments. The managers believe companies with sound governance practices and strong stakeholder relations, that manage relevant environmental and social risks responsibly, have a greater propensity to create sustainable value for shareholders.

Company engagement

Company engagement forms an important part of the investment process. Meetings incorporate a

wide range of topics including environmental and social issues where relevant. The managers take an active approach to communicating their views to companies and seeking improvements in performance, including appropriate standards of corporate responsibility.

Avoidance criteria

In many ways the negative criteria are a reflection of the positive criteria. The fund seeks to avoid those businesses that stand to be disrupted by the environmental and social megatrends (and that therefore have unsustainable business models), and also avoid those that are involved in activities regarded as being contrary to the development of a sustainable economy and harmonious society.

All holdings in the fund are compliant with the UN Global Compact, whose Ten Principles cover human rights, the International Labour Organisation’s declaration on workers’ rights, corruption and environmental pollution.

Further detail can be found on the fund’s website: https://www.henderson.com/ukpi/fund/92/henderson-global-care-growth-fund.

Henderson Global Care UK Income fund

The Global Care UK Income fund seeks to invest in responsibly run businesses that exhibit good dividend growth and generate good capital returns over the long term. In order to achieve these aims the fund manager spends a considerable amount of time assessing the sustainability of a company’s long term business model. This involves identifying any factors, including material environmental, social and governance issues which may impact long term profit, cash flow and dividend growth. Company engagement also forms an important part of the investment process.

The avoidance criteria are the same as for the Global Care Growth fund, with the exception of meat & dairy production and animal testing for medical purposes. Further detail can be found on the fund’s website: https://www.henderson.com/ukpi/fund/94/henderson-global-care-uk-income-fund.

Resources, Affiliations & Corporate Strategies

INTERNAL research resources

Henderson wide

The managers of the Global Care Managed fund have access to research conducted by Henderson’s wider team of investment professionals via the Henderson Research Hub. The Governance and Responsible Investment (GRI) team also provide advice and guidance on a range of ESG issues affecting existing and potential fund investments, market trends and development of ESG themes. The GRI team also assists with engaging with company management on ESG issues.

Internal research is sourced from company meetings, company financial statements and also sell-side analysts. The investment team integrates ESG considerations into investment decision making and ownership practices. They undertake an evaluation of each investee company’s business and workplace standards, social impact, and corporate stewardship. They believe that sustainability and corporate responsibility (CR) plays a vital role in the long-term performance of a company.

EXTERNAL research resources

Vigeo EIRIS is the main source of management for the Funds’ exclusion criteria. Vigeo EIRIS is one of the largest sustainable, responsible and ethical research companies globally. The Vigeo EIRIS research team covers over 3,000 companies and provides the managers with detailed reports into a company’s activities, to ensure adherence to the Fund’s strict ethical criteria. Should an investment idea not be covered already, then Vigeo EIRIS conduct bespoke research on behalf of the portfolio managers.

Other sources of external research are:

• MSCI, ISS, RepRisk, IVIS, CDP, TruCost, HOLT
• Stock broker research
• Strategist research

External resources such as MSCI and TruCost are used to populate the team’s monthly ESG exposure, benchmarking and risk monitoring report. This report shows the exposure of the portfolio to companies’ rated highest risk for environmental & social performance, ESG controversies, corporate governance issues and carbon exposure relative to the fund’s benchmark.

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

• Kames Capital Ethical homepage
• Kames Capital Ethical microsite

SRI / Ethical Policy

All three of Kames Capital’s ethical funds apply the same ‘negative’ screen. This means that we screen companies out of the potential investment universe based on certain unacceptable activities. Because we apply stringent screening criteria, our funds are considered ‘dark green’. We do not screen out whole sectors, but some may largely be excluded because of the nature of their business activities.

Our screening criteria are clear and explicit. Certain ethical issues, however, are not black or white. Our 20 years’ experience of managing ethical investments means we can consider these issues appropriately when they arise.

We do not apply ‘positive screening’ criteria like some other funds. The funds may invest in themes that could be considered ‘socially responsible’, like alternative energy or social housing companies, but only if these companies pass our negative screens.

We aim for transparency in our screening process. This means it is easy for clients to understand the types of companies we exclude. Our underlying philosophy is to avoid companies that cause significant negative effects in society or the environment. 

We use both external screening databases and in-house research to ensure companies meet our ethical criteria and are suitable for investment. Our Corporate Governance team focuses on the screening and research, freeing our fund managers to focus solely on stock selection and portfolio construction.

Our ‘dark green’ screen is ideally suited to investors looking for a more stringent ethical philosophy. It adopts a negative approach that screens companies out of our funds’ potential investment universe if they engage in certain unacceptable activities. Examples of our screening process are shown below:

• Animal Welfare
• Military
• Nuclear power
• Environment
• Political Donations
• Genetic Engineering
• Gambling
• Alcohol
• Tobacco
• Pornography
• Banks
• Oppressive Regimes

Kames Capital aims to be a responsible investor. We ensure that we identify and understand the key environmental, social and governance (ESG) risks for each of the companies, industries and sectors that we invest in. We do this because evidence suggests that companies who rank among the leaders in governance and sustainability tend to outperform as investments over the long term.

Our approach to responsible investment is consistent with the UK Stewardship Code. The Code sets out good practice Principles on engagement with investee companies which UK-based institutional investors should aspire to. You can download our compliance statement from our website.

We are also a signatory to the United Nations Principles for Responsible Investment (UN PRI). The UN PRI is the principal international investor initiative to drive the integration of environmental, social and governance issues into investment decision making. The initiative places a formal requirement on signatories to be active, responsible shareholders and report annually on activities and progress in a transparent manner.

Resources, Affiliations & Corporate Strategies

Our corporate governance team is responsible for the analysis of relevant environmental, social and governance (ESG) issues. They are responsible for identifying the key ESG risks for each of the companies, industries and sectors that we invest in and in turn providing our fund managers with succinct, relevant data that could have investment consequences. Our corporate governance team is linked to equivalent individuals in other Aegon Asset Management country offices.

We use a range of data sources for ESG research purposes and these resources have increased significantly in the last few years as the quality of the data available has improved.  Resources currently include:

• MSCI ESG Manager – company ESG research platform
• EIRIS Portfolio Manager – company ESG research platform
• ASSET4 assetmasterProfessional –  company ESG research platform
• RiskMetrics ProxyExchange – proxy voting research and processing
• The Association of British Insurers (ABI) IVIS proxy voting research service 
• BoardEx - corporate board and remuneration database
• Specialist databases, such as UN Principles for Responsible Investment (UNPRI), Carbon Disclosure Project (CDP) and Extractives Industry Transparency Directive (EITI)
• Specialist research from brokers and academics
• Various specialist journal subscriptions

A strong relationship exists between our corporate governance team and our fund managers, which enables material non-financial information to be incorporated into our investment processes. ESG research reports produced by our corporate governance team sit alongside all the other existing investment research undertaken by our fund managers on a given security. The corporate governance team also provide relevant news-flow and commentary on ESG issues to our fund managers that they might not receive from other sources.  

Our fund managers consider ESG research alongside other relevant financial and non-financial factors in the investment decision-making process. The importance that the fund manager attaches to ESG issues is in proportion to their ability to influence security prices.

Links

• Sarasin announces launch of Responsible Corporate Bond
• Prices and Performance
• Sarasin Responsible Corporate Bond

SRI / Ethical Policy

The Sarasin Responsible Corporate Bond offers an environmental, social and governance (ESG) proposition to investors seeking exposure to the UK non-gilt (credit) bond market. The Fund will seek to reduce clients’ exposure to ESG risks, and give them greater exposure to ESG opportunities.

The Fund will seek to achieve its investment objectives by active management, both from a "top-down" and "bottom up" perspective. Being a relative return credit fund, corporate credit selection is at the heart of the investment process. In addition to the standard Sarasin credit research process, the Fund uses sector exclusions and an ESG protocol to ensure that investments are appropriate for a responsibility-oriented corporate bond fund.

The fund will exclude companies operating in certain ‘sin’ sectors and avoid exposure to borrowers with poor environmental and social profiles, and which fail to employ acceptable standards of governance from a creditor’s perspective. The fund will not be exclusively a "Green Bond" or "ESG Bond" fund. It will not unconditionally favour any sector, and will aim for appropriate sector diversification.

The Fund will also actively manage country and currency exposure, interest rate risk (duration), yield curve positioning (convexity) and credit sector risk. Yield is a key driver of fixed income clients’ return expectations and this fund will usually seek a running yield in excess of the index.

Resources, Affiliations & Corporate Strategies

The Fund Manager is responsible for the efficient construction and maintenance of the portfolio. The primary role of the Fund Manager is to select investments for the portfolio that have been reviewed by the Credit Analysts and meet the criteria for inclusion. The Manager structures and maintains the portfolio’s investment allocations, giving careful regard to the prospective returns and risks adopted by the portfolio as a whole and the exposures to individual holdings and market sectors. Tactics discussed and agreed by the Fixed Income Committee and the Credit Committee are also implemented. In addition, the Fund Manager is responsible for effecting, directly or indirectly, purchase and sale transactions with trading counterparties, such as brokerages and market makers. As a result, the Fund Manager is ultimately responsible for the day-to-day management and implementation of the Responsible Bond Fund strategy, including ensuring that all of its guidelines are adhered to and that its objectives are pursued.

Credit Analysts specialise in the rigorous examination and monitoring of the financial and business profile of a borrower and the characteristics of its bonds. Their role is to assess the investment merits of an entity or a bond from a creditor’s perspective. This will include a review of the various protections, covenants and collateral offered by a borrower and an assessment of its Environmental, Social, and Governance attributes. Analysts also examine the market valuation of bonds, both relative to other securities from the same borrower and bonds issued by other entities. Ultimately, the Credit Analysts must decide two things. First, whether an investment meets and maintains the high standards for the timely payment of principal and interest that the manager considers necessary before it is willing to commit investors’ capital. Second, form a judgement about whether the risk profile of the investment is appropriately reflected in the prevailing market price.

Sarasin & Partners are signatories to the UN’s Principles for Responsible Investing, have a long history of ethical investment solutions, and an experienced fixed income team.

We draw on the joint expertise of a dual resource: our dedicated stewardship team works alongside our fixed income specialists, providing day to day advice as well as direct involvement in the examination of borderline cases. Our Stewardship team also has the right to add a debt issuer to the Credit Committee agenda, prompting a review and discussion.

Our responsible investment process adds a screening system and an ESG protocol to our core credit process, which is already used for over 30 existing segregated mandates with ethical requirements.

Links

• Liontrust Sustainable Future European 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 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

• M&G Website
• M&G Responsible Investment

SRI / Ethical Policy

M&G has a significant volume and breadth of fixed income investments – lending to companies, governments, infrastructure projects, housing associations and other borrowers.

We believe we will do our best for our clients if we consider every factor that can have a meaningful impact on the long-term performance of the investments we make on their behalf. This includes the full range of environmental, social and governance (ESG) issues.

We embed responsible investing into our fixed income investment processes, so that all of our investment professionals have a duty to assess and evaluate the role of ESG issues and risks in a given investment. Such assessments are factored into credit analysis and investment decision making, and are a contributing component of valuations.

Analysis and investment

We have a large analytical platform, covering public and private debt, and our investments span a diverse range of fixed income asset classes. Across this breadth of interests our investment processes share many commonalities, including meticulous analysis of each borrower.

These assessments focus on all issues that could impair the future creditworthiness of a borrower and interrupt expected future investment returns – ESG risks are assessed in conjunction with all other risks.

Our fund managers factor such analysis into their investment decision making, determining whether an investment offers good value to our clients in the light of present and future risks – cognisant of the fact that ESG issues often develop over the longer term.

Engagement

The scale of M&G’s resources and participation in debt markets means we are well placed to represent our clients’ interests on ESG initiatives. This can range from responding to public consultations to acting as a sounding board for, and consulting with, government departments and regulatory bodies. M&G also engages directly with borrowers on ESG issues to enhance the value of our clients’ investments. We are very aware of the responsibility that comes with our market position and always seek to represent the best interests of our clients.

Sustainability

M&G’s commitment to making investments that support socially responsible and sustainable economic growth can be seen in many sectors. For example, M&G is a significant lender to UK social housing borrowers, where we have continued to provide much-needed long-term financing, at a time when banks have withdrawn their support. We have also provided financing for a range of socially or environmentally beneficial investments in areas including affordable housing, education, healthcare, green property developments, low carbon transport and renewable energy. All investments in these areas must meet our usual, stringent requirements for providing appropriate returns for our clients relative to the risks taken.

The fund utilises the following ESG screens.

• Norms-based screen (Stage 1): Companies that are assessed to be in breach of UN Global Compact principles on human rights, labour rights, bribery & corruption and the environment are excluded from the funds’ investment universes.

• Sector screening (Stage 2): companies that derive more than 5% of their revenues for producers, or 10% of their revenues for distributors, from the following sources: tobacco, alcohol, adult entertainment, gambling or thermal coal. In addition, and on a best-efforts basis subject to source/s and MSCI data, we seek to exclude companies that derive any of their revenue from defence and weapons. 

• The third stage is called ESG integration and filters companies according to their ESG credentials based on ratings provided by MSCI. Companies are assessed on an industry-adjusted basis, taking into account the key issues which are relevant for that sector and with comparison to the standards and performance of its industry peers. The fund focuses on both the industry leaders (ESG score 7.2-10) and companies with an average rating for their industry (ESG score 3.0-7.0), but excludes formally the industry laggards (ESG score below 3.0). In addition the investment team will work with companies to encourage improved ESG outcomes. 

Resources, Affiliations & Corporate Strategies

As environmental, social and governance factors are incorporated into our investment processes, everyone at M&G who is involved in investing shares in this responsibility. We also have individuals with specific responsibility for coordinating activity within each asset class. M&G's Corporate Finance & Stewardship Team supports the Equities business in all matters related to ESG and stewardship of our clients' assets.

Finally, M&G's Responsible Investment Advisory Forum oversees the governance and management of responsible investment activities across the group. The committee’s members include representatives from each business unit involved in investment management as well as from the distribution teams.

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

• Responsible Stewardship at Sarasin and Ptns

SRI / Ethical Policy

Sarasin & Partners are active owners and devote considerable time to actively monitoring and staying close to the companies we hold on behalf of clients. While we aim to invest in companies where we believe executives are acting in our clients’ long-term interests, in certain instances concerns may arise over a company’s strategy, operational performance, treatment of minority shareholders, or particular activities. Where we believe the issues could have material ramifications for performance, and place our clients’ capital at risk, we do not hesitate to speak directly with the company’s executives and Board directors. 

Where our interests are aligned with other shareholders, and we believe we will have greater impact by working with others, we may engage with companies as part of a larger group of investors. As far as possible, we report on our engagement activity (recognising that managements can, on occasion, respond best when issues are tackled in confidence).

We also believe a considered approach to voting is vital because it is key avenue through which we can express our views to a company and because it keeps us close to companies’ leadership. Our votes are guided by our Corporate Governance and Voting Policy, which sets out the broad principles that guide how we vote on individual company resolutions from director nominations, executive remuneration, corporate financing, to common environmental and social matters. This policy is publicly available and regularly reviewed to ensure it continues to reflect our views on best practice. An overview of our votes is made available quarterly on our website, with disaggregated records provided to clients on request. In the case of segregated accounts, clients may decide to vote differently.

Our intention is to purchase securities for the long-term. There will be cases, however, where our investee companies do not live up to our expectations, the commercial environment changes such that the investment case is significantly weakened, or security prices move above our view of fair value. Where the value proposition no longer applies, and/or problem(s) are unlikely to be resolved by management, we sell the position on behalf of our clients.

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

• Liontrust Sustainable Future Defensive 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

• 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.