Sustainable, Responsible &/or ESG 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 22 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 wasted energy 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 the management of water

Water is essential for life. Companies that can manage, or produce products or services that can improve the efficiency of water distribution, waste water treatment 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 from burning fossil fuels 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 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), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as well as reducing waste from process errors as they help modernise and improve industry.

Delivering a circular materials economy

Resources are finite and the UN Environment Programme (UNEP) estimate 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.

Making transportation more efficient or safer

We look for companies whose products and services improve our transport system or make travel safer. We look for:

• Modal shift away from private car usage to public transport systems such as bus and rail. 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 as well as active transport.
• Reducing negative impacts of travel: Companies that produce equipment that reduces pollution from cars, or that improve safety, are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to reduce emissions from travel. To respond to tightening global regulation to reduce emissions from cars, we see rapid electric vehicle adoption as an area with many potentially interesting investments in this area.
• Asset sharing: We like systems that facilitate sharing of transport (bicycles or cars) as this can increase utilisation and reduce materials intensity in transport. For example, rental of efficient vehicles and technology that facilitates journey sharing.

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 in healthcare

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.

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.

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.

Providing affordable healthcare

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

Providing education

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

Enabling healthier lifestyles

Companies that promote healthier lifestyles, principally through increasing activity, taking exercise and sport help improve health. These include positive leisure activities such as gym operators and companies providing sports clothing and equipment.

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.

Encouraging sustainable leisure

Our sustainable themes focus enabling a cleaner, healthier and safer world, but beyond these fundamental issues a natural progression is to spend more time on leisure time and activities – as Aristotle puts it ‘the end of labour is leisure’. Or as Tim Jackson puts it in Prosperity without Growth;

“…in the advanced economies…material needs are broadly met and disposable incomes are increasingly dedicated to different ends: leisure, social interaction, experience… what really matters to us: family, friendship, sense of belonging, community, identity, social status, meaning and purpose in life”

Leisure time and social activities enable many of these human desires, for example picture going to a music concert with a friend, going on a date to the cinema, having dinner with family at a restaurant or playing a video game with an online community of friends. The social experience of these is positive and should be a growing part of the economy as we develop. Nevertheless, there can be negative aspect to some leisure activities – gambling addiction or excessive alcohol consumption – so we focus on those companies where the positive experience far outweighs any negatives. Examples include music events, and films.

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).

Enhancing digital security

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

Insuring a sustainable economy

Insurance can spread the risk faced by an individual or a corporation amongst many other actors. The benefits of good insurance are:

• Provides a safety net (at a small cost) to mitigate: death in family; medical emergencies; material loss from natural disasters
• Supplements state social protection for individuals
• Mitigates financial impact of catastrophes corporations
• Lowers the capital a firm needs to operate
• Increases investment by reducing uncertainty
• Provides a price for risk

But with poor oversight the insurance industry is prone to mis-selling, (PPI, with profits), miscalculation of its own exposure, taking on excessive investment risk, and rewarding shareholders at the expense of their customers. We look for well-managed companies providing good insurance products which effectively mitigate and manage their customer’s risk.

Saving for the future

Retirement funding has stemmed from three sources: government programmes, employer-based programmes, and individual savings. Diminishing tax revenues and budget pressures have led to reductions in public pensions through increased retirement age, less generous inflation indexing and possible increases in taxes. At the same time, companies have been retreating from a Defined Benefit (DB) framework and shifting towards a Defined Contribution (DC) one. Both of these mechanisms shift the responsibility of retirement funding and risk to the individual. For the eight largest economies in the world the World Economic Forum, using Mercer data, predict the retirement savings gap will increase to $400trn by 2050 (5% growth from 2015) if measures are not taken to increase overall savings rates. This theme identifies businesses that make it easier for individuals to access and manage their financial futures.

Enabling SMEs

This theme seeks to find companies enabling the foundation, scaling, and improved efficiency of innovative new businesses. Small to medium sized enterprises (SMEs) are the anchor of a resilient and sustainable economy, accounting for 44% of US GDP and creating two thirds of jobs in the US. According to the OECD, SMEs facilitate innovation, reduce inequality in society, and increase economic resilience within society. There are key barriers to SME success as they struggle to overcome complexity and reach scale. Within this theme, we look for companies enabling his journey from idea formation to value creation, helping increase SME productivity and efficiency, and ideally growing with the SMEs they support.

Financing housing

Housing is a basic human requirement that is central to human wellbeing. A lack of housing also has detrimental effects to the wider economy; for instance rental and mortgage costs in many developed countries have outpaced wage growth, leading to declining disposable income for households and increasing inequality. In this theme we are looking to find companies that are allocating capital towards residential housing or making the market more efficient.

Transparency in Financial Markets

We believe that companies increasing the transparency of financial markets are set to benefit from increasing regulatory compliance measures and the increasing availability of data that can provide valuable insights for financial market participants to manage risk. In effect if there is equal information on both sides of a market then markets are likely to function better, risk is likely to be more accurately assessed, and the financial system will be more resilient.

Better monitoring of supply chains and quality control

We look for companies who are good at managing the complexities and potential risks in their supply chains as we believe this is not only the right thing to do but gives them a competitive advantage. We are also interested in finding companies whose products and services can help their customers manage their supply chains and ensure their products are of a consistent high quality.

Leading ESG management

How the business is managed operationally, in particular how they managed the Environmental Social and Governance challenges, can give them a competitive advantage over their peers if they can manage these challenges and opportunities more proactively. We believe this is a good proxy for the quality of management and the likelihood they will deliver on their strategy.

Process:

Sustainable Future Fixed Income Investment Process

In managing corporate bonds, we invest in a focused portfolio of bonds that are attractively valued and also take into consideration environmental, social and governance (ESG) factors by investing in companies that manage these exposures to minimise risk.

We aim to deliver strong outperformance for our clients. As active managers, we believe in a high conviction approach to ensure we develop a thorough understanding of our portfolio and the factors that influence its long-term value.

Within the fixed income team, individuals specialise in their areas of expertise with a focus on generating investment ideas and recommendations for their particular segment of the market. All investment decisions are discussed by the team in a structured way, ensuring that our process is rigorous and replicable. We also benefit from being part of a single wider investment team, combining both bond and equity investing.

We use a modern investment framework that we have developed and honed over years of successful investing for our clients. There are two main stages to this:

Stage 1: Identifying superior bonds

Stage 2: Constructing resilient portfolios and controlling risk

First we select the bonds that we believe will generate superior investment performance. We focus on high-quality issuers and believe this can enable us to reduce bond specific risk.

Stage 1: Identifying superior bonds

a. Finding high quality bonds

Our assessment of quality is a distinctive part of our process. We combine credit analysis with in-depth analysis of issuer specific factors, including ESG factors and macro-economic analysis. Our in-house research includes the following:

ESG analysis

For each company, we determine the key environmental, social and governance factors that are important indicators of future success and assess how these are managed. We do this through our proprietary sustainability matrix, which is used by both our bond and equity teams. Where relevant, we aim to identify companies whose core products or services are making a positive contribution to society or the environment in some way. We believe that evidence of excellent company management is instrumental in avoiding issues where tail risk is under-priced. Reducing tail risk is a key element that drives long-term returns in our bond portfolios. 

Our Sustainability Matrix

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

• Product sustainability (rated from A to E): 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 (e.g. tobacco).
• Management quality (rated from 1 to 5): 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). Companies must score C3 or higher to be considered further for inclusion in the SF Corporate Bond Fund (SFCB) and the SF European Corporate Bond Fund (SFECB).

Credit analysis

This involves a fundamental review of the Company to identify its ability to meet its debt obligations, including assessing the following factors:

• The Company’s management in terms of its track record, its consistency, level of cross involvement, level of control exercised and make up of non-executives.
• Company performance from earnings stability to growth patterns to relative performance and pricing power.
• The business strategy such as its investment strategy, funding and FX policy, type of growth (e.g. M&A versus organic) and the business risk.
• Industry factors including the barriers to entry, what its capped rating would be as well as industry threats and patterns.

Macro-economic analysis

Here we formulate strategy by looking at the interest rate positioning, asset allocation and aggregate credit rating exposure based on macro views. This approach ensures that the investment process remains balanced, incorporating top-down views as well as bottom-up analysis.

We also incorporate other macro influences in our analysis, including political factors, economic analysis, regulatory issues and ESG analysis. For government bonds, this involves a review of the sovereign from an ESG perspective in order to assess its suitability for investment. MSCI Sovereign rating data is used as an input to the process, overlaid with our own analysis. We specifically focus on the following:

• Environment – Fossil & Nuclear usage, Water usage, energy management and C02 & GHG emissions
• Social – Education & Technology, Provision of Basic Needs and the Economic Environment
• Governance – Financial Capital & Management, Political Governance and Democratic Rights
• Controversies – General controversies, Involvement in armed conflicts and international sanctions

This information is distilled into a Sovereign rating (completed annually) and presented to the broader team for discussion and approval.

b. Assessing returns versus downside risk

The fund managers assess individual bonds for whether they believe the bonds offer attractive long-term returns. However, given the asymmetric risk associated with corporate bond investing, the probability of default is fully assessed alongside a view of recovery values for each individual investment.

c. Valuing the bond

Valuations are assessed on the basis of both absolute and relative returns. Simply put, there is no point in investing in a bond merely because it is cheap relative to other bonds in the sector if we believe that the total returns are not attractive to the end investor. As such, we look for opportunities across the capital structure of an issuer and across markets, specifically the UK, US and European markets. We also evaluate the value of a bond relative to both other corporate and government bonds. This approach is consistent with our principal aim of delivering attractive long-term returns to our clients.

Stage 2: Constructing resilient portfolios and controlling risk

From the available buy recommendations identified in stage 1, we select the best combination of 60 to 100 bonds for inclusion in focused portfolios that are constructed to aim to safeguard against sustained downside risk. Investment managers look to deliver positive investment performance relative to a relevant performance measure over the medium term while adhering to defined risk parameters and fund-specific investment restrictions.

Portfolio construction is reviewed continually to ensure that it reflects the high-level strategy of the team and is consistent with the policy objective. The portfolios are also assessed to ensure that it has appropriate levels of diversification and to identify correlation within the portfolios, with consideration given to factors such as asset allocation, duration and yield curve, sector positioning and stock selection. Portfolio positioning is reviewed by an independent performance and risk team via both daily analysis and a more formal review cycle.

Active management

The portfolios are actively managed using a high conviction approach with a focus on access to market liquidity. We believe that having a more concentrated, lower turnover approach improves investment performance.

Risk controls

The team ensures that it minimises unwanted risk, but will use risk where there is a high level of conviction in a particular bond or theme. The team considers the risk/return potential of each position and aims to deliver a return that is commensurate with the level of risk undertaken. In addition, consideration is given to the risk profile of the portfolio as a whole and each holding’s contribution to the overall risk.

Derivatives, dealing and counterparty permissions

Where permitted, derivatives are used for the purposes of hedging and/or to implement strategic and tactical overlays

in accordance with efficient portfolio management guidelines. The use of derivatives is subject to Liontrust’s derivative policy. All derivative positions are reconciled and collateralised on a daily basis to ensure all relevant systems are accurately reflecting positions and market valuations.

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.
• Expert networks: We use Guidepoint to arrange calls with independent experts in a particular sector.
• 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:

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.

Liontrust Asset Management Plc’s Board of Directors is responsible for those aspects of ESG relating to the listed company, including reporting and obligations that the Plc has to related bodies, such as NZAM and TCFD reporting.

Liontrust’s ESG and stewardship-related practices are divided into two. The ESG work for the Plc is overseen by the Board Sustainability Committee, and the Product, Stewardship and Governance team works with the investment teams on reporting how and the extent to which they integrate the consideration of ESG-related risks.

As part of their remit and oversight, Liontrust’s department heads take into consideration a number of areas in which Liontrust has exposure, including attracting and developing talent, cyber and data security, adherence to regulatory requirements and ESG-related activities. These factors contribute to the Group’s culture and the efficient running of its business and may be linked to pay.

The oversight of the Fund’s achievement of its sustainability objective, cyclical assessment of the robustness of the sustainability standard and the regular monitoring and management of any escalations required will be performed by the ACD’s Independent Risk Oversight Committee (IROC).

Liontrust works with groups and associations in the financial sector to keep up-to-date with regulatory changes; contribute experience and thought leadership; gain knowledge which helps employees service clients more effectively; promote best practice in markets; and ultimately to help ensure global markets run efficiently and effectively. Liontrust staff attend conferences and industry-related meetings. The groups and associations that Liontrust actively worked with in 2024 are shown on p. 20 of our Stewardship Report.

SDR Labelling:

Not eligible to use label (out of scope)

SDR Literature:

• SDR labels: what they mean for investors
• Liontrust Sustainable Investment Funds
• Prospectus & KIID