SUSTAINABLE

INVESTING

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Sustainability is an increasingly important theme for today’s consumers, with companies expected to adopt more socially responsible behaviour, and investors, with a growing proportion keen for their financial assets to have a positive impact on the wider world.

At Liontrust, identifying emerging trends and long-term themes is the cornerstone of the Sustainable Investment team’s process. The focus is on companies looking to help in the transition to a cleaner, healthier and safer world: from the development of personalised medicine to the shift towards renewable energy, we are fascinated by the wide-ranging trends that are changing the world and the opportunities they create.

Many of these outcomes have been delivered by the power of capitalism and the creativity of businesses generating strong profit growth and investment returns. It is these innovative stocks in which our Sustainable Future funds have invested for two decades, and we feel most investors underestimate the speed, scale and persistency of such companies within our economy.

We therefore look at the world through the prism of three mega trends, Better resource efficiency, Improved health and Greater safety and resilience, and 20 underlying themes within these.

As ever, with popularity comes proliferation, and we continue to see more and more asset managers launching sustainable funds and promoting their ESG credentials. Avoiding ‘greenwash’ is key against this backdrop and we can point to a track record of more than 18 years of sustainable investing, with a 14-strong team.

A key differentiator is the fact all the sustainable elements are integrated within a single team. We do not have separate fund management and ESG divisions, for example; instead, every team member is responsible for all aspects of financial and ESG relating to an investment decision.

Our team therefore engages with companies across a range of issues including screening criteria, investment themes and stock-specific ESG issues and the following pages provide an insight into the breadth of our sustainable philosophy and process.

Approaches to sustainable investment

A short history of sustainable investment

Development of Liontrust Sustainable Investment

SF Annual Review 2018

SF Engagement Review

Themes review - How our themes are evolving

UN Sustainable Development Goals

Recent insights from the Liontrust Sustainable
Investment team

There are three main approaches to sustainable investment. The first is traditional ‘ethical’ investing, which is largely about avoiding certain industries because of the negative effects of their products, with the classic examples being tobacco companies and producers of weapons.

There are other, arguably more interesting, approaches, however. One is to invest in sustainable themes, referred to as positive screening because the focus on what to invest in rather than purely what to avoid. This is where the ESG side comes in, also known as impact investing, and we continue to develop ways to assesses companies on these criteria: ultimately, we are looking to invest in businesses that can profit from having a positive effect on the world.

Impact analysis shows how our funds focus on such companies, highlighted by exposure to our positive investment themes, the United Nations’ SDGs and other indicators. Our funds, for example, continue to emit significantly less CO2 – 70% on average – from their operations than their benchmarks.

A third approach is engagement, also known as active ownership, in which investors engage with the companies to influence management into changing their strategy or operations.

At Liontrust, we combine all three approaches in our Sustainable Investment process.

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Roots in religion – back to the 1800s (or beyond)

The earliest ideas behind sustainable or socially responsible investing can be found in the ideas of the Methodists and Quakers in the 1800s around temperance and fair employment conditions – and some might argue even further back in the principles of Sharia.

Whatever the provenance, the founding idea focused on shunning profit at the expense of your neighbours and therefore avoiding investment in areas that made money through alcohol, tobacco, weapons or gambling – the earliest version of what became known as negative or dark green screening.

Fast forward to the 1960s and broader demand for ethical investment started to take off in the US, with widespread aversion to companies involved in the Vietnam War. This culminated in the launch of the PAX fund in the early 1970s, widely regarded as the first proper ethical offering.

As social and environmental activism spread over the following decades, so the demand for more ethical and sustainable investment options grew. The first Earth Day was celebrated back in 1970 for example and disasters such as Three Mile Island in the US and Chernobyl in the Ukraine, plus growing evidence of the potentially catastrophic impact of climate change, focused attention on so-called green investment.

The fight against the apartheid regime in South Africa also accelerated the promotion of ethical investment in the 1980s, and EIRIS was established in 1983 as the UK’s first independent research service focused on these strategies.

Elsewhere in the UK, Friends Provident (founded in 1832 to provide life assurance for members of the Society of Friends, more commonly known – and bringing us right back to the start – as Quakers) offered to manage an ethical fund with investment criteria determined by a separate committee, and this led to the launch of the Stewardship range in the mid-1980s.

In the midst of this, the term ESG was coined in a landmark 2005 study entitled Who Cares Wins. This came out of then UN Secretary General Kofi Annan writing to multiple CEOs of financial institutions seeking ways to integrate ESG into capital markets. The report made the case that embedding ESG factors in markets makes good business sense and leads to more sustainable markets and better outcomes for societies.

This formed the backbone for the launch of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006 and the UN has continued to drive the sustainable agenda with its Millennium Goals, which became the Sustainable Development Goals (SDGs). These are an internationally recognised set of goals to aim for by 2030, which will help the world develop in a more sustainable way.

As demand for ethical and sustainable investing has grown, so have the types of strategies available and the terms used to describe them: from ethical, to SRI (socially responsible investing), to sustainable, to ESG.

While there remain a number of funds that maintain the ‘traditional’ approach of avoiding industries because of the negative effects of their products, others have emerged that focus on sustainable themes, or positive screening. Due to the growing importance of climate change as an issue, areas such as environmental technology and renewables have led the way here, but other themes include healthcare, resource efficiency and education.

What do London Fashion Week and Usain Bolt have to do with sustainable investing? The Liontrust Sustainable Investment team explain how this approach impacts your everyday life and can lead to a cleaner, safer and healthier world.

This report showcases the key themes we invest behind and highlights the positive impact aligned companies have on our world. We also summarise our engagement work – improving the companies we own and promoting sustainable, responsible finance more broadly. Finally, we look beyond 2019 to explain what the future holds for Sustainable Investment.

Those familiar with our Sustainable Future funds and investment process will be aware of our focus on transformative trends. We start our process with a thematic approach, identifying key structural growth trends that will shape the global economy of the future and then investing in high-quality companies whose products and operations capitalise on these changes and which, therefore, may benefit financially.

Our latest Engagement Review highlights the Sustainable Investment team’s activities in this area over the year and outlines ongoing priorities for the future.

There is growing demand for sustainable investing. This demand is being driven by the fact that the economy of the future will be cleaner, safer and healthier and is coming from an increasing number of people who care about how they make their money as well as how much money they make. In this video, the Liontrust Sustainable Investment team explain why it is important for investors not to underestimate how rapidly this transformation is happening and how the UN Sustainable Development Goals help investors to benefit from these developments.

Recent insights from the Liontrust Sustainable Investment team

MIKE APPLEBY

Investment Manager

CHRIS FOSTER

Investment Analyst

Climate change remains a hugely emotive topic around the world, with awareness and activism both surging in recent months.

With so many so-called sustainable funds coming to the market, it is increasingly important to identify ‘greenwashing’ in practice, where groups are talking up their credentials in this space without the expertise or track record to back it up.

As part of our ongoing commitment to measure and publicise the impact of our Sustainable Future Funds, clients have asked us to show how the companies we hold are aligned with the United Nations’ Sustainable Development Goals (SDG).

Plastic pollution has quickly ascended the list of global priorities in recent years, driven by support from figures such as David Attenborough and what has come to be called the Blue Planet Effect.

SIMON CLEMENTS

Investment Manager

NEIL BROWN

Investment Manager

Anyone who has suffered bemused looks when trying to pay with cash in a shop or pub will be aware how rapidly we are moving towards a cashless society. Increasing financial resilience remains a key theme across our Sustainable Future portfolios and as part of this, we believe the shift from cash to digital payments provides overall net benefits to society. With this in mind, we are looking to invest in profitable companies exposed to this structural trend.

Rising interest in robotics and artificial intelligence is broadly seen as a double-edged economic sword, improving efficiency for many companies but potentially putting thousands of people out of work. For sustainable investors, that trade-off is a poor one and the debate around automation looks set to be a key battleground over the coming years.

As sustainable investors, we focus on the biggest issues of our time, hunt for companies that can solve them and invest in the opportunities of maximum impact for maximum returns – and one of the key issues of this era is transport.

1.4 billion people around the world have no access to power. Leo Johnson outlines how investment in technology can create value by putting power into people’s hands to make their lives better.

Food and farming are responsible for around 25% of total global emissions so we cannot have a sustainable world without changing global diets. Jonathon Porritt explains why the food industry is facing as great a transformation as fossil fuels.

From the move towards a circular economy to self-driving cars, our team takes a look into the future.

A greater sense of urgency from policymakers tops our team’s wishlist for a more sustainable world.

Our team pledges to reduce their own carbon emissions, be more active in the garden and spend time less flying in 2020: enjoying the world we have helped to protect.

Key risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Investment in Funds managed by the Sustainable Future Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. The Monthly Income Bond Fund has a Distribution Yield which is higher than the Underlying Yield because the fund distributes coupon income and the fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining the fund’s capital appreciation. The Distribution Yield and the Underlying Yield is the same for the SF Corporate Bond Fund.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. © 2019 Morningstar, Inc. All rights reserved. The information contained herein:(1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

© 2019 FE. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FE, (2) may not be copied or redistributed, (3) do not constitute investment advice offered by FE, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FE shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. FE does not guarantee that a fund will perform in line with its FE Crown Fund Rating as it is a reflection of past performance only. Likewise, the FE Crown Fund Rating should not be seen as any sort of guarantee or assessment of the creditworthiness of a fund or of its underlying securities and should not be used as the sole basis for making any investment decision. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The document contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. 2019.11