As at: 30/04/23

Contact: clientservices@liontrust.co.uk

Overview

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Policy

Our Sustainable Future investment process is a high-conviction, bottom-up approach whereby sustainability is explicitly integrated throughout.

The investment process starts with a thematic approach in identifying the key structural growth trends that will shape the global economy of the future and then invests in well-run companies whose products and operations capitalise on these transformative changes and, therefore, may benefit financially. The Sustainable Investment team invests in three transformative trends (Better resource efficiency, Improved health and Greater safety and resilience) and 20 themes within these trends as described below:

• Better resource efficiency (Cleaner)

Better resource efficiency focuses on companies helping the world make better use of scarce resources, driving improvements in areas as diverse as energy, industrial processes and transport.

Improving the efficiency of energy use

We see many ways of making energy cheaper by reducing waste, as well as emissions, through more efficient usage. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving the management of water

Water is essential for life. Companies that can manage waste water treatment, or produce products or services that 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

Electricity generation is a major emitter of carbon dioxide. Substituting carbon-intensive fossil fuel electricity generation (especially coal) with renewable power sources reduces carbon emissions as well as providing a cost-effective means to connect people to cleaner power sources. We like wind and solar and some biomass (using waste streams as opposed to feedstock grown on agricultural land).

Improving the resource efficiency of industrial and agricultural processes

We like companies providing products or services that help to make industrial processes more resource efficient, as well as safer for workers and users. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products) and manage supply chains, as they modernise and improve industry. We are looking for companies driving real improvements in energy and material use.

Delivering a circular materials economy

With finite resources on earth, recycling remains a huge part of the shift to a more sustainable world. But to make better use of materials, we need to consider the whole life cycle rather than just the ‘waste’ stage, moving beyond the current take-make-waste model towards a more circular economy. This is based on three core principles – designing out waste and pollution, keeping products and materials in use, and regenerating natural systems – and we believe companies built on these lines should benefit from this trend.

Making transportation more efficient

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

• Improved health (Healthier)

The team is seeking to invest in companies helping to extend life expectancy and enable people to be fit and healthy enough to reap the benefits of an improving world.

Enabling innovation within healthcare

Companies whose products or services help promote innovation within healthcare are helping to 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, services (such as measuring equipment, genetic sequencing equipment or high-quality consumables for research) or software to help to make treatments more effective.

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. This improved diet has positive health impacts: helping to reduce non-communicable diseases such as obesity and cardiovascular disease, for example.

Building better cities

Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this. We like well designed and built homes that are energy efficient and safe.

Providing education

Education brings important benefits, including longer life expectancy, increased job opportunities and helping to stimulate economic growth, as well as leading to overall higher satisfaction in life. Companies providing education services offer vital knowledge and skills, which help to improve people’s lives.

Providing affordable healthcare globally

Currently, the costs of healthcare are very high and we need more effective ways of delivering better patient outcomes. Companies that help to deliver affordable, positive patient outcomes in managing disease help to achieve this goal.

Enabling healthier lifestyles

Companies that promote healthier lifestyles, principally through increasing activity, taking exercise and sport, help to improve health. These include positive leisure activities such as 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 of a more sustainable economy.

Encouraging sustainable leisure

For most people in the twenty-first century, we are lucky enough to be living in an era where there is a natural progression to spend more time on leisure and these activities are increasingly seen as both a fundamental human need and a key part of mental health. Activities as diverse as going to a concert, to the cinema, having dinner at a restaurant or playing a video game all have clear externalities but the social experience is positive and we are looking to invest in companies involved in this growing part of a more sustainable future.

• Greater safety and resilience (Safer)

The underlying themes include transport safety, with a focus on the rapid developments in such areas as Automatic Emergency Braking (AEB).

Increasing financial resilience

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

Saving for the future

This is a positive trend that will persist. As people live longer and as governments and corporations retreat from providing long-term cover and pensions, so individuals will need to take control of their own affairs. Savings rates will have to increase and companies providing suitable products will see strong growth. For instance, in the UK, pension contributions are predicted to grow at 10% a year to £3.3 trillion by 2030.

Insuring a sustainable economy

This recognises that insurance, when done well, allows risk to be spread across a community. This lessens the impact of any single event, providing greater peace of mind and encouraging greater risk taking and innovation. Economic development and insurance penetration are well correlated, a function, we believe, of the positive social impact of insurance services.

Leading ESG management

How a business is managed operationally, particularly in how it deals with the Environmental Social and Governance challenges, can provide a competitive advantage over peers. This includes how the company interacts with society.

Improving transport safety

We have identified companies whose products improve the safety of travel and reduce accidents. Much of our work has focused on autos, in areas such as collision avoidance, active braking and semi-autonomous driving, but we should not assume cars will remain dominant, particularly with safe, efficient mass transport key to reducing emissions. Whatever the mode of travel, we concentrate on the specialist companies making the kit to improve safety, from better lighting to more efficient braking.

Enhancing digital security

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

Better monitoring of supply chains and quality control

Companies cannot outsource responsibility for the environmental and social impacts of their supply chains and we see an opportunity in businesses improving their monitoring of these areas.

Exclusion of controversial or unsustainable businesses

We have identified a number of controversial business activities or those we believe to be inconsistent with sustainable development. We exclude companies with more that 5% of group sales from these controversial industries. A detailed explanation of what businesses activities we exclude, why and how we measure them is shown in the Sustainable Investment Screening Criteria which is published on our website, under Process and Literature  as follows:

https://www.liontrust.co.uk/fund-managers/sustainable-investment/sustainable-documents

Process

Sustainable Future Investment Process

Sustainable companies have better growth prospects and are more resilient than the market gives them credit for. We use this underappreciated advantage to deliver outperformance in our portfolios. In supporting these sustainable companies, we can also accelerate environmental and social improvements.

The investment process follows two stages:

Stage 1: identifying superior stocks for the equity portfolios.

Stage 2: constructing resilient portfolios

The first stage, stock selection has four key filters: thematic analysis; sustainability analysis; business fundamentals; and valuation.

1.Thematic analysis:

 We work to better understand the big sustainable trends that are happening and analyse these themes to check which companies will be potential winners or losers from major multi-decade changes in different parts of our economy. Why is this relevant to investors? This helps us identify potential areas of the economy and companies that will experience structural growth and helps inform our investment decision and give us conviction in the businesses we own. We feel most investors underestimate the speed, scale and persistency of such trends within our economy.

We therefore look at the world through the prism of three mega trends, Better resource efficiency (cleaner), Improved health (healthier) and Greater safety and resilience (safer), and 21 themes within these.

2. Sustainability analysis:

Our proprietary Sustainability Matrix assesses the whole company in two dimensions – the set of products or services offered; and the management of ESG exposures relevant to that industry sub-sector.

• Product sustainability (rated from A to E): Using our own proprietary model we quantify the sustainability of the products or services the company provides from the different business units within the company to come up with a business weighted overall sustainability score for the company. This enables us to go beyond industry classification generalisations and assess companies in more detail on an individual basis. This enables us to 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 a conflict with sustainable development (such as tobacco).
• Management quality (rated from 1 to 5): Using our own proprietary model we quantify how well the company is managing the material ESG aspects within the company to come up with a quantitative overall ESG management score for the company. This includes performance data on material ESG factors that can come from the ESG data provider or can be augmented by our own analysis. This enables us to go beyond industry classification generalisations and assess companies in more detail on an individual basis. This enables us to assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material social, environmental and governance issues are graded from 1 (excellent) to 5 (very poor).

How we use third party ESG data: The analysis and recommendation itself is always formed by the relevant team member. We initially look at the conclusions from our third party ESG data provider (MSCI ESG) to understand how well the company manages the aspects the provider have determined are most important as well as understanding any controversies surrounding the business. We use the ESG data they provide to understand how the business ranks relative to their peers. This is the start of our sustainability assessment.

How we quantitively score the sustainability matrix: we further augment the research from the third party ESG data provider by using our own proprietary model which identifies what we have identified as the most material ESG aspects that need to be managed and we measure how well the company is managing these to form our own view on how well the material ESG aspects are being managed by the company. There is significant overlap with the third party data provider but also important differences which can generate a different conclusion, using our discretion, based on our experience and proprietary research.

3. Strong business fundamentals:

We target companies that exhibit growth above both their industry average and the economy as a whole. We also explicitly target companies which can illustrate recurring revenue streams and can consistently convert earnings to free cash flow.

We believe that those companies with a proven ability to generate and maintain high returns on equity (RoE) from a stable capital base will outperform the broader market. We look for companies with high asset turns and defendable margins. Typically these companies have a maintainable competitive advantage through scale, technology or business model. We avoid companies with excessive leverage.

A variety of metrics including return on equity, resilience, quality of earnings, free cash flow, and historic and predicted growth, are used to analyse a company’s business fundamentals. This allows the team to identify and forecast the growth prospects and underlying strength of a company’s finances.

4. Valuation:

This filter ensures that all the companies we invest in are undervalued. We model 5 years of future revenue, margin and expected earnings and free cash flow. Our forecasts deviate predominantly in the integration of different thematic growth rates and in our forecasting further out. We use these financial forecasts to derive a future share price target that the company can achieve. The analyst has to explicitly identify the appropriate type and magnitude of valuation multiple to use for this purpose.

Only companies that can pass all four of these “quality” filters are eligible for investment

Stage 2: Building resilient portfolios

From the superior stocks identified, we build portfolios combining the best 40 to 60 names to diversify risk and reduce volatility of returns. This results in exposure across a wide variety of industry sectors (via a spread of our sustainable themes) and benefits from potentially distinct and uncorrelated growth drivers. Outperformance will come from the stocks we choose, while disciplined portfolio construction aims to minimise the volatility of returns.

Sustainable Investment team

Sustainability is at the heart of the Sustainable Future investment process. Every member of the Sustainable Future investment team (17 investment professionals) is responsible for understanding all aspects of financial and ESG risks and opportunities – including factors linked to climate change, relating to the investment decision.

• the major trends and themes in their sector
• identifying investment opportunities and the ESG performance of those opportunities
• integrating that information into forecast earnings and valuation
• submitting investment recommendations for our funds
• engaging with companies and conducting all proxy voting for investee companies

Because of this integrated approach, investment team members engage with companies across a broad range of issues relating to steps in our investment process, such as screening criteria, sustainable investment themes and company-specific environmental, social and governance issues.

The Sustainable Future investment team conduct their own proprietary research however there are multiple and diverse sources of additional research:

• Advisory Committee: guides on themes and new challenges and opportunities facing companies.
• Academic Institutions: for example; Cambridge Institute for Sustainability Leadership to develop longer term thinking and to refine the set of themes or Government agencies and audit reports.
• ESG Research Providers: currently we use MSCI ESG Manager and Ethical Screening to provide initial analysis of sustainability factors. For independent validation, we commission MSCI to perform analysis on our portfolios to assess the quality of ESG and carbon intensity relative to relevant benchmarks. These reports consistently demonstrate that all of our funds have significantly higher quality ESG and lower carbon intensity (circa 60% less) than benchmark.
• Meetings with company management and site visits: we aim to meet with investee company management at least twice a year to discuss longer term strategy, this involves travelling to the region the company is headquartered in and conducts additional research and analysis from NGO reports and websites.
• Expert networks: We use Guidepoint to arrange calls with independent experts in a particular sector (e.g. cyber-security purchasers to develop a view on Palo Alto)
• Independent research providers: We pay for research from selected research providers who are unconnected with corporate finance or broking.
• Sell-side research: Selected research is purchased to develop a broader understanding of industry sectors and to provide financial models of companies under analysis.

It must be emphasised though that these research inputs provide a foundation to the assessment by each analyst. The analysis and recommendation itself is always formed by the relevant team member.

Resources, Affiliations & Corporate Strategies

Liontrust Initiatives /Affiliations:

•  Financial Reporting Council (FRC) Stewardship Code

Liontrust Investment Partners LLP is a signatory to the FRC’s 2022 Stewardship Code.

• The United Nations Principles for Responsible Investment (UNPRI)

Liontrust became a signatory to the PRI on 24 April 2018. Liontrust’s PRI Assessment report for 2021 is available on our website together with our transparency report Corporate sustainability | Liontrust Asset Management PLC

• Taskforce on Climate-Related Financial Disclosure (TCFD)

Liontrust became supporters of the TCFD in September 2018. Liontrust reported against the TCFD recommendations in its annual report and financial statements (p.60-73) as per the FCA listing rules Annual Report | Liontrust Asset Management PLC

• Net Zero Asset Managers Initiative (NZAMI)

Liontrust joined NZAMI on 25 May 2022. We have 12 months (until end May 2023) to submit our plan and our initial % of AuMA to be covered by the commitment. We plan to meet this deadline and provide details on several points including our 5-year targets for our funds, our engagement outline for our highest emitters, as well as our plan for the Plc to become carbon neutral (the Group is currently carbon neutral due to offsetting.)

• Institutional Investor Group on Climate Change (IIGCC)

Liontrust became a member of the IIGCC in April 2022. The mission of the IIGCC is to support and enable the investment community in driving significant and real progress by 2030 towards a net zero and resilient future. This will be achieved through capital allocation decisions, stewardship and successful engagement with companies, policy makers and fellow investors.

• CDP (formally Carbon Disclosure Project)

Liontrust has supported CDP since July 2017. CDP is a not-for-profit charity that runs the global disclosure system for investors and companies to manage their environmental impacts from climate, forests and water.

Liontrust reported to the CDP on its climate disclosures in 2022 scoring a ‘D’ rating. Liontrust submitted its 2022 report to the CDP in July, we expect to receive our rating in November.

Liontrust also supported two CDP campaigns, which included encouraging non-disclosure companies to disclose and encourage high carbon emitting companies to report science based targets.

• The Montréal Carbon Pledge

Liontrust became signatory to the Montréal Pledge in 2021. By signing the Montréal Carbon Pledge, investors commit to measure and disclose the carbon footprint of their investment portfolios on an annual basis.

• Workforce Disclosure Initiative (WDI)

Liontrust Investment Partners LLP became supporters to the WDI in May 2019.  The WDI aims to improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide.

• UK Sustainable Investment and Finance Association (UKSIF)

Liontrust became a member of UKSIF in July 2017. UKSIF exists to bring together the UK’s sustainable finance and investment community and support our members to expand, enhance and promote this key sector.

Endorsed Statements:

• 2022 Global Investor Statement to Governments on the Climate Crisis - Endorsed statement
• PRI Statement of Investor Commitment to Support a “Just Transition” on Climate Change - Endorsed statement
• PRI Statement to support the SEC’s reporting changes – Endorsed Statement
• Global Investor Statement to Governments on Climate Change - Endorsed statement
• PRI Investor statement on deforestation and forest fires in the Amazon- Endorsed statement
• Access to Medicine - Global Investor Statement in support of an effective, fair and equitable global response to Covid-19
• CDP Science Based Target Campaign – endorsed campaign
• CDP Non-Disclosure campaign – endorsed campaign

Sustainable Investment team historic involvement:

• PRI Listed Equity Advisory Committee
• PRI Sustainable Palm Oil Investor working Group
• PRI Global Investor Taskforce on Tax & the PRI Tax Advisory Committee
• PRI Cyber Security
• PRI SDG and Active Ownership Committee
• PRI Investor Working Group on the Just Transition
• Access to Nutrition Index

Literature

• Fund overview & literature (including factsheet)
• Sustainable Investment
• Corporate Sustainability
• Sustainable literature

Disclaimer

Investment in the Fund involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

Last amended: 29/08/23 09:49