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Liontrust Investment Partners LLP

PRI reporting framework 2019

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
30 All three strategies combined
70 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
87 All three strategies combined
13 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
76 All three strategies combined
24 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
93 All three strategies combined
7 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

The Sustainable Fixed Income investment team manage the majority of the fixed income assets within Liontrust, they believe that a combination of all 3 ESG incorporation strategies: screening, thematic and integration is the best way to apply their investment philosophy.

Within the fixed income funds managed by the team, the combination of strategies is slightly different. There is a greater degree of screening applied in the Sustainable Future Corporate Bond Fund relative to the Monthly Income Bond Fund (MIBF), which despite having a broader investable universe still incorporates all 3 strategies. This reflects the difference in the primary focus of the two fund strategies.

MIBF pre-dates the acquisition of the sustainable team and funds brought over from Aviva.  Initially MIBF was managed out-with the sustainable remit but over the years it has moved closer to the sustainable funds adopting a similar but less stringent screening process. 

Their investment process and screening criteria are available at https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=8ef3fc44-bcd3-45f5-92f1-4daf758b254a; https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=fc1bfe8f-110d-495b-8051-f448e9602d98 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. 

All Liontrust funds have no or very limited exposure to securitised debt.

01.3. Additional information [Optional].

The Sustainable Fixed Income investment team investment approach is one of full integration. Each member of the team is an investment analyst or investment manager with responsibility for all aspects of traditional and ESG investment relating to the companies they cover. Coverage is divided by iBoxx sectors. Each analyst/manager is responsible for monitoring the major trends of their sector(s), identifying investment opportunities, assessing the ESG performance of those opportunities, integrating that information into traditional fundamental credit analysis to deliver recommendations for the funds, as well as engaging with these companies. The team works closely with the Equity analysts and managers where companies are covered across both asset classes.

Their main focus is always on superior investment performance and following their investment principles. In a fast changing world, they believe the companies that will survive and thrive are those that focus on improving people's quality of life, be it through medical, technological or educational advances on driving efficiency in the use of our increasingly scarce resources and on building resilient, prosperous and stable societies.

Identifying emerging trends and long-term themes is the cornerstone of their process. From the development of personalised medicine to the transition to lower carbon fossil fuels, they are fascinated by the large scale growth trends that are changing the world and by the opportunities they create.

The team look closely at companies in terms of their resilience, responsiveness and understanding of the world around them, actively seeking out those that understand and manage their environmental and social impacts as they believe they will deliver stability and lower risk for bondholders. When they do decide to invest, it's in high quality businesses with an attractive valuation, robust business fundamentals and strong management teams.

Ultimately we look for adaptors and innovators that, through their core products and the way they manage their operations, are capitalising on change, accessing new opportunities and outperforming their competitors. We invest in progressive companies that are creating real and lasting value for investors and society, both now and in the future.

The Sustainable Investment team use a Sustainability Matrix to determine the eligibility of a company for inclusion in their funds. Their screening criteria are incorporated into the Sustainability Matrix rating for a company. The Sustainability Matrix helps to analyse how sustainable and responsible a company is. They analyse the product sustainability and management quality of each investee company in which screening and thematic ESG incorporation are also factored in. Product sustainability (rated from A to E): Assesses the extent to which a company's core business (the products or services it offers) 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/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 need to be categorised C3 or higher in order to gain access to our Sustainable Future Corporate Bond Fund, whilst anything rated D3 and above is eligible for the Monthly Income Bond Fund (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, their analysts maintain a set of guidelines that provide further guidance on what influences how they rate companies using their sustainability matrix for each sector. The sector guidelines also highlight the potentially material environmental, social and governance issues that they expect management to be addressing and provide an indication of what we consider to be good practice. The Sustainability Matrix rating of the company is integrated into the fundamental analysis of the investee company.

The teams’ research has identified 20 areas of long-term growth within our economies. They believe that companies exposed to their themes (More efficient; Safer and more resilient; Healthier and with higher quality of life) tend to be better managed, exhibiting greater stability and lower risk, which they believe are key drivers of long term bond returns.

More efficient

Improving the efficiency of energy use; Increasing electricity from renewable sources; Improving management of water; Improving industrial processes and food production; Increasing waste treatment and recycling; Making transport more efficient.

Safer and more resilient

Enhancing digital security; Assuring better supply chains; Improving auto safety; Leading ESG management; Saving for the future; Insuring a sustainable economy; Increasing financial resilience.

Healthier and with higher quality of life

Providing affordable healthcare; Enabling innovation in healthcare; Building better cities; Providing education; Enabling healthier lifestyles; Connecting people; Delivering healthier foods.

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Their investment process is available at https://www.liontrust.co.uk/-/media/LionTrust/files/fund-literature/process-documents/global-fixed-income-process.ashx?la=en&hash=92A074CE00E11A4C6AB1A3D88F7CB59D44FF071A 


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

03.2. Describe how your ESG information or analysis is shared among your investment team.

03.3. Additional information. [Optional]

For the Sustainable Investment team all their research, investment decision documentation, meeting notes, engagement is held in a centralised database commissioned from Factset. As they are an integrated team all correspondence is available to all members of the team.

Liontrust are currently in the process of engaging an ESG research provider with the aim to receiving research covering our investment universe thus we shall be in a better position to have a more centralised database accessible to all investment staff.  


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

The Sustainable Fixed Income investment team also screens to exclude the following businesses from its Sustainable Future fund portfolios: http://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=fc1bfe8f-110d-495b-8051-f448e9602d98

The team looks at three key sustainability themes that cover ESG issues and how businesses will be affected by these trends. The team identifies companies that are set to benefit from these longer-term changes and invests if, following fundamental analysis, the team believes they are undervalued.

The team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant factors like pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues tend to have higher quality management and therefore they are more likely to prosper from a business perspective. The team uses a sustainability matrix based on product sustainability (A-E) and management quality (1-5).

All Liontrust funds have no or very limited exposure to securitised debt.

04.3. Additional information. [Optional]

The Sustainable Fixed Income investment team also screens to exclude the following businesses from its Sustainable Future fund portfolios; the team has thresholds on the revenues that companies can derive from unsustainable and unethical activities and still be included in their funds. From July 2018, all funds managed by the team moved from a threshold of 10% of revenues from activities such as tobacco, gambling, intensive farming, weapon systems and nuclear to 5%.

Alcohol - Only invest in alcohol companies that have policies and practices to address responsible marketing, consumption and sale of their products.

Animal Welfare -

Excludes companies that derive >5% of turnover from the provision of animal testing services.

Excludes companies that derive >5% of turnover from the:

manufacture of cosmetics or cosmetic intermediates that are tested on animals

retail sale of own-brand cosmetics that are tested on animals

manufacture of household products that are tested on animals unless the company policies and programmes to minimise testing are considered good practice.

Climate Change -

Excludes companies that derive >5% of turnover from the extraction and production of coal, oil, and natural gas.

Excludes companies that derive >5% of turnover from airlines and the manufacture of cars* and trucks (*unless they are specialised in making components that improve the efficiency or safety of cars).

Excludes companies that derive >5% of turnover from the production of energy intensive materials unless they are making significant efforts and investment to make their processes more efficient and less energy intensive.

Excludes forestry and paper companies that do not have policies and practices in place to ensure that forests are managed in a sustainable way.

Excludes companies that are involved in the deforestation of primary or virgin forest or illegal logging practices.

Excludes companies that derive >5% of turnover from the management or ownership of gambling facilities.

Genetic Engineering - Excludes companies involved in the uncontrolled release of genetically engineered organisms into the environment.

Human Rights - Assess companies on a case-by-case basis and encourage those that are operating in weak governance zones to demonstrate their commitment to the integration of human rights standards into business practices and to put in place appropriate human rights policies, systems and reporting.

Exclude companies judged not to be addressing serious allegations (narrowly interpreted) of violations of international human rights laws and standards including the OECD Guidelines for Multi-National Enterprises (2000) and the UN Global Compact (2000), among others.

Infrastructure Projects - Excludes companies that are directly involved in the construction of large dam projects in developing countries if those projects have not met best practice standards.

Will only invest in companies involved in the building of large scale infrastructure projects such as roads, airports or dams if they are viewed as leaders within their sector with respect to stakeholder dialogue, environmental management and social and environmental impact assessment.

Intensive Farming -

Excludes companies that derive >5% of turnover from intensive meat and fish farming.

Excludes companies that derive >5% of turnover from the manufacture of chemical pesticides.

Excludes companies that derive >5% of turnover from the fur trade.

Labour Standards - Assess companies on a case-by-case basis, and encourage those that are operating in weak governance zones to demonstrate their commitment to the integration of

International labour standards into business practices by putting in place appropriate labour standards policies, systems and reporting.

Exclude companies judged not to be addressing serious allegations (narrowly interpreted) of breaches of labour standards such as those on child labour, forced labour, discrimination, union rights, working hours and health & safety.

The international laws and standards, which we refer to when making this assessment, include the conventions which are regarded and promoted by the ILO as "core" conventions. In summary these are: child labour; forced labour; equal opportunities; freedom of association/collective bargaining.

Nuclear -

Excludes companies that derive >5% of turnover from owning or operating nuclear power stations, unless the company has made significant investment (>5% generation capacity) in renewable energy and does not have the option to divest its nuclear capacity.

Excludes companies that derive >5% of turnover from uranium mining or reprocessing of nuclear fuel.

Excludes companies that derive >5% turnover from the development or manufacture of non-safety related products for nuclear power plants.

Ozone depleting substances - Excludes companies that derive >5% of turnover from the manufacture or sale of ozone depleting substances.

Pornography - Excludes companies that derive >5% of turnover from the production or distribution of pornographic material.

Excludes companies that derive >5% of turnover from owning or operating adult establishments.

Tobacco - Excludes companies that derive >5% of turnover from the manufacture or sale of tobacco products.

Weapons systems -

Excludes companies that are major producers of full weapons systems or critical components of weapon systems. Major producers are defined as having >5% of turnover and/or >£100m revenue from offensive weapons systems.

Excludes companies with confirmed involvement in the manufacture of anti-personnel mines or cluster munitions, or their critical components, as defined by the Ottawa Mine Ban Convention and the Oslo Convention on Cluster Munitions.

Companies judged not to be addressing serious allegations (narrowly interpreted) of violations of international human rights laws and standards including the OECD Guidelines for Multi-National Enterprises (2000) and the UN Global Compact (2000), among others; and companies judged not to be addressing serious allegations (narrowly interpreted) of breaches of labour standards such as those on child labour, forced labour, discrimination, union rights, working hours and health safety.

Occasionally, positive benefits may be considered to outweigh the negative activities outlined in the team's screening criteria. In these cases, a balanced judgement is made on the recommendation of the sector specialist with oversight from the independent external advisory committee.

 


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?

other description

          The Sustainable Fixed Income Investment team engage a third party provider Ethical Screening, to check portfolios regularly to ensure compliance.
        
Positive/best-in-class screening

other description

          The Sustainable Fixed Income Investment team engage a third party provider Ethical Screening, to check portfolios regularly to ensure compliance.
        
Norms-based screening

other description

          The Sustainable Fixed Income Investment team engage a third party provider Ethical Screening, to check portfolios regularly to ensure compliance.
        

06.2. Additional information. [Optional]

For the Sustainable Fixed Income Investment team, as well as internal checks, Ethical Screening provide an external assessment of our fund holdings to ensure that companies held do not conflict with or breach otheir screening criteria.

The Sustainable team has up to six months to sell securities if they breach any fund screening criteria. Typically they divest within a much shorter time frame than this - as soon as they have found a suitable alternative which is typically weeks, not months. In some circumstances where they are uncertain about the eligibility of a company for the funds, the team consults its independent external advisory committee to clarify our understanding of the ESG issues facing the company, before investing in the security. Therefore, reducing the possibility of owning a security that should have been excluded. 

 


(B) Implementation: Thematic

FI 07. Thematic investing - overview (Private)


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

There have not been any instances of holdings within the Sustainable Fixed Income portfolios that have breached the ruling to date.  If on the occasion that this did occur, the team would engage with the issuer to obtain more details contributing to this, and approach the 3rd party assurer to obtain results of this work.  Management would then be given a reasonable time period to rectify this issue and if after this time they had reached an unsatisfactory conclusion then they would either pursue getting their investment returned or divest of their holding in the company.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]

The Sustainable Investment team use a Sustainability Matrix to determine the eligibility of a company for inclusion in their funds. Their screening criteria are incorporated into the Sustainability Matrix rating for a company. The Sustainability Matrix helps to analyse how sustainable and responsible a company is. They analyse the product sustainability and management quality of each investee company in which screening and thematic ESG incorporation are also factored in. Product sustainability (rated from A to E): Assesses the extent to which a company's core business (the products or services it offers) 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/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 need to be categorised C3 or higher in order to gain access to our Sustainable Future Corporate Bond Fund, whilst anything rated D3 and above is eligible for the Monthly Income Bond Fund (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, their analysts maintain a set of guidelines that provide further guidance on what influences how they rate companies using their sustainability matrix for each sector. The sector guidelines also highlight the potentially material environmental, social and governance issues that they expect management to be addressing and provide an indication of what we consider to be good practice. The Sustainability Matrix rating of the company is integrated into the fundamental analysis of the investee company.

The teams’ research has identified 20 areas of long-term growth within our economies. They believe that companies exposed to their themes (More efficient; Safer and more resilient; Healthier and with higher quality of life) tend to be better managed, exhibiting greater stability and lower risk, which they believe are key drivers of long term bond returns.

More efficient

Improving the efficiency of energy use; Increasing electricity from renewable sources; Improving management of water; Improving industrial processes and food production; Increasing waste treatment and recycling; Making transport more efficient.

Safer and more resilient

Enhancing digital security; Assuring better supply chains; Improving auto safety; Leading ESG management; Saving for the future; Insuring a sustainable economy; Increasing financial resilience.

Healthier and with higher quality of life

Providing affordable healthcare; Enabling innovation in healthcare; Building better cities; Providing education; Enabling healthier lifestyles; Connecting people; Delivering healthier foods.

In-house research is supported and supplemented by several external ESG information sources. Sustainalytics provides in depth reports on sectors/industries, as well as ESG ratings, Governance Metrics and ESG controversies reports for individual companies. MSCI provide carbon reports, analysing the carbon emissions of the overall funds and their constituent holdings. Ethical Screening also provide reports assessing companies against their internal screening criteria, and run regular checks to ensure invested companies remain within these screening thresholds. The team also consults an independent external advisory committee which meet three times per year made up of a panel of industry leaders and academics, who provide guidance and expertise in key areas of environmental and social impact. Whilst also drawing on information from company meetings, broker research, ISS Governance reports, academia and non-governmental organisations.

The team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant factors like pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues generally tend to have higher quality management and therefore, they are more likely to prosper from a business perspective.

The team uses a sustainability matrix based on product sustainability (A-E) and management quality (1-5). For product sustainability, the team assesses how a company's product or area of business helps or harms society and/or the environment. For example, an 'A' rating could be awarded to a company involved in renewable energy or education. An 'E' rating would be assigned to a firm that conflicts with the principles of sustainable development, for example, a tobacco company. For management quality, the team assesses a company's practices, policies and structure relating to its environmental impact as well as social and governance related issues. A firm with excellent practices would be graded 1, whilst one with poor management practices would be a 5. For a company to be considered for inclusion in the Sustainable Future Corporate Bond Fund and the European Corporate Bond fund must rank C3 or higher on the matrix, whereas for the Monthly Income Bond Fund D3 or higher is eligible.

This assessment is then combined with traditional fundamental credit analysis, through our credit templates. The templates look at fundamental metrics such as relative valuation, SWOT analysis and company financials to determine how robust or risky an investment is, and how the company's management of ESG issues impacts upon each metric. For example a key driver of long-term bond returns is the effective management of tail-risk, and identifying companies that have strong governance and management scores helps the team to avoid issues where the tail-risk is underpriced.

The following document outlines the Sustainable Fixed Income investment process and how they integrate ESG factors: https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=8ef3fc44-bcd3-45f5-92f1-4daf758b254a


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

The Sustainable Investment team use a Sustainability Matrix to determine the eligibility of a company for inclusion in our funds. Their screening criteria are incorporated into the Sustainability Matrix rating for a company. The Sustainability Matrix helps to analyse how sustainable and responsible a company is. They analyse the product sustainability and management quality of each investee company in which screening and thematic ESG incorporation are also factored in. Product sustainability (rated from A to E): Assesses the extent to which a company's core business (the products or services it offers) 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/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 need to be categorised C3 or higher in order to gain access to our Sustainable Future Corporate Bond Fund, whilst anything rated D3 and above is eligible for the Monthly Income Bond Fund (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, their analysts maintain a set of guidelines that provide further guidance on what influences how we rate companies using our sustainability matrix for each sector. The sector guidelines also highlight the potentially material environmental, social and governance issues that we expect management to be addressing and provide an indication of what we consider to be good practice. The Sustainability Matrix rating of the company is integrated into the fundamental analysis of the investee company.

The teams’ research has identified 20 areas of long-term growth within our economies. They believe that companies exposed to our themes (More efficient; Safer and more resilient; Healthier and with higher quality of life) tend to be better managed, exhibiting greater stability and lower risk, which we believe are key drivers of long term bond returns.

More efficient

Improving the efficiency of energy use; Increasing electricity from renewable sources; Improving management of water; Improving industrial processes and food production; Increasing waste treatment and recycling; Making transport more efficient.

Safer and more resilient

Enhancing digital security; Assuring better supply chains; Improving auto safety; Leading ESG management; Saving for the future; Insuring a sustainable economy; Increasing financial resilience.

Healthier and with higher quality of life

Providing affordable healthcare; Enabling innovation in healthcare; Building better cities; Providing education; Enabling healthier lifestyles; Connecting people; Delivering healthier foods.

In-house research is supported and supplemented by several external ESG information sources. Sustainalytics provides in depth reports on sectors/industries, as well as ESG ratings, Governance Metrics and ESG controversies reports for individual companies. MSCI provide carbon reports, analysing the carbon emissions of the overall funds and their constituent holdings. Ethical Screening also provide reports assessing companies against our internal screening criteria, and run regular checks to ensure invested companies remain within these screening thresholds. The team also consults an independent external advisory committee which meet three times per year made up of a panel of industry leaders and academics, who provide guidance and expertise in key areas of environmental and social impact. Whilst also drawing on information from company meetings, broker research, ISS Governance reports, academia and non-governmental organisations.

The team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant factors like pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues generally tend to have higher quality management and therefore, they are more likely to prosper from a business perspective.

The team uses a sustainability matrix based on product sustainability (A-E) and management quality (1-5). For product sustainability, the team assesses how a company's product or area of business helps or harms society and/or the environment. For example, an 'A' rating could be awarded to a company involved in renewable energy or education. An 'E' rating would be assigned to a firm that conflicts with the principles of sustainable development, for example, a tobacco company. For management quality, the team assesses a company's practices, policies and structure relating to its environmental impact as well as social and governance related issues. A firm with excellent practices would be graded 1, whilst one with poor management practices would be a 5. For a company to be considered for inclusion in the Sustainable Future Corporate Bond Fund and the European Corporate Bond fund must rank C3 or higher on the matrix, whereas for the Monthly Income Bond Fund D3 or higher is eligible.

This assessment is then combined with traditional fundamental credit analysis, through our credit templates. The templates look at fundamental metrics such as relative valuation, SWOT analysis and company financials to determine how robust or risky an investment is, and how the company's management of ESG issues impacts upon each metric. For example a key driver of long-term bond returns is the effective management of tail-risk, and identifying companies that have strong governance and management scores helps us to avoid issues where the tail-risk is underpriced.

The following document outlines the Sustainable Fixed Income investment process and how they integrate ESG factors: https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=8ef3fc44-bcd3-45f5-92f1-4daf758b254a

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

The Sustainable Fixed Income team ESG approach to securitisations is consistent with that detailed in FI 10.1. 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Corporate (financial)

The Sustainable Fixed Income team within Corporate financials apply the same methodology as above, however focus on sector specific ESG factors. For example within the banks sector they favour the more traditional savings & lending banks over investment banks. Factors that we consider, include capital liquidity & risk, governance, environmental issues, social issues and product governance. For UK Banks they would review evidence of bad corporate behaviour, law breaches in areas such as mis-selling, LIBOR fixing, money laundering and breaking sanctions.

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Corporate (non-financial)

The Sustainable Fixed Income team apply the same approach to non-financial organisations; however different sector specific ESG issues are taken into consideration. In the retail sector we favour companies where they place strong emphasis on sustainable sourcing, auditing of their supply chain, robust labour practices and healthy eating. Where as in the utilities sector they favour power companies with a higher renewable exposure, over traditional fossil fuel burning generators due to emissions issues.

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Securitised

The Sustainable Fixed Income team ESG approach to securitisations is consistent with that detailed in FI 10.1. As whole business securitisation structures can be used by companies in various industry sectors, each securitisation is assessed on its own merits using the approach detailed in FI 10.1.

All Liontrust funds have no or very limited exposure to securitised debt.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer's ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify

11.2. Additional information [OPTIONAL]

The Sustainable Investment team use a Sustainability Matrix to determine the eligibility of a company for inclusion in their funds. Their screening criteria are incorporated into the Sustainability Matrix rating for a company. The Sustainability Matrix helps to analyse how sustainable and responsible a company is. They analyse the product sustainability and management quality of each investee company in which screening and thematic ESG incorporation are also factored in. Product sustainability (rated from A to E): Assesses the extent to which a company's core business (the products or services it offers) 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/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 need to be categorised C3 or higher in order to gain access to our Sustainable Future Corporate Bond Fund, whilst anything rated D3 and above is eligible for the Monthly Income Bond Fund (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, their analysts maintain a set of guidelines that provide further guidance on what influences how they rate companies using their sustainability matrix for each sector. The sector guidelines also highlight the potentially material environmental, social and governance issues that they expect management to be addressing and provide an indication of what we consider to be good practice. The Sustainability Matrix rating of the company is integrated into the fundamental analysis of the investee company.

The teams’ research has identified 20 areas of long-term growth within our economies. They believe that companies exposed to their themes (More efficient; Safer and more resilient; Healthier and with higher quality of life) tend to be better managed, exhibiting greater stability and lower risk, which they believe are key drivers of long term bond returns.

More efficient

Improving the efficiency of energy use; Increasing electricity from renewable sources; Improving management of water; Improving industrial processes and food production; Increasing waste treatment and recycling; Making transport more efficient.

Safer and more resilient

Enhancing digital security; Assuring better supply chains; Improving auto safety; Leading ESG management; Saving for the future; Insuring a sustainable economy; Increasing financial resilience.

Healthier and with higher quality of life

Providing affordable healthcare; Enabling innovation in healthcare; Building better cities; Providing education; Enabling healthier lifestyles; Connecting people; Delivering healthier foods.

In-house research is supported and supplemented by several external ESG information sources. Sustainalytics provides in depth reports on sectors/industries, as well as ESG ratings, Governance Metrics and ESG controversies reports for individual companies. MSCI provide carbon reports, analysing the carbon emissions of the overall funds and their constituent holdings. Ethical Screening also provide reports assessing companies against their internal screening criteria, and run regular checks to ensure invested companies remain within these screening thresholds. The team also consults an independent external advisory committee which meet three times per year made up of a panel of industry leaders and academics, who provide guidance and expertise in key areas of environmental and social impact. Whilst also drawing on information from company meetings, broker research, ISS Governance reports, academia and non-governmental organisations.

The team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant factors like pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues generally tend to have higher quality management and therefore, they are more likely to prosper from a business perspective.

The team uses a sustainability matrix based on product sustainability (A-E) and management quality (1-5). For product sustainability, the team assesses how a company's product or area of business helps or harms society and/or the environment. For example, an 'A' rating could be awarded to a company involved in renewable energy or education. An 'E' rating would be assigned to a firm that conflicts with the principles of sustainable development, for example, a tobacco company. For management quality, the team assesses a company's practices, policies and structure relating to its environmental impact as well as social and governance related issues. A firm with excellent practices would be graded 1, whilst one with poor management practices would be a 5. For a company to be considered for inclusion in the Sustainable Future Corporate Bond Fund and the European Corporate Bond fund must rank C3 or higher on the matrix, whereas for the Monthly Income Bond Fund D3 or higher is eligible.

This assessment is then combined with traditional fundamental credit analysis, through their credit templates. The templates look at fundamental metrics such as relative valuation, SWOT analysis and company financials to determine how robust or risky an investment is, and how the company's management of ESG issues impacts upon each metric. For example a key driver of long-term bond returns is the effective management of tail-risk, and identifying companies that have strong governance and management scores helps them to avoid issues where the tail-risk is underpriced.

The following document outlines the Sustainable Fixed Income investment process and how they integrate ESG factors: https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=8ef3fc44-bcd3-45f5-92f1-4daf758b254a

All Liontrust funds have no or very limited exposure to securitised debt.

 

 


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

As described in the additional information section below, the Sustainable Investment Fixed Income team consider a number of ESG factors in their integration process. These vary from governance aspects (gender balance of the board, number & independence of non-execs), pay & remuneration, contracts to carbon footprint, safety records etc. These factors will be reviewed on an on-going basis and/or at the time of the issuers' results. 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

All Liontrust funds have no or very limited exposure to securitised debt.

Corporate (financial)

As described in the additional information section below, the Sustainable Investment Fixed Income team consider a number of ESG factors in their integration process. These vary from governance aspects (gender balance of the board, number & independence of non-execs), pay & remuneration, contracts to carbon footprint, safety records etc. These factors will be reviewed on an on-going basis and/or at the time of the issuers' results. 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Corporate (non-financial)

As described in the additional information section below, the Sustainable Investment Fixed Income team consider a number of ESG factors in their integration process. These vary from governance aspects (gender balance of the board, number & independence of non-execs), pay & remuneration, contracts to carbon footprint, safety records etc. These factors will be reviewed on an on-going basis and/or at the time of the issuers' results. 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

Securitised

As described in the additional information section below, the Sustainable Investment Fixed Income team consider a number of ESG factors in their integration process. These vary from governance aspects (gender balance of the board, number & independence of non-execs), pay & remuneration, contracts to carbon footprint, safety records etc. These factors will be reviewed on an on-going basis and/or at the time of the issuers' results. 

Liontrust’s Global Fixed Income team consider ESG-related risks as part of their bottom up investment process, but do not screen, filter or engage with individual companies on ESG factors. For credit decision-making, they use their PRISM research template. The ‘S’ in PRISM stands for ‘Sustainability’ and the ‘M’ stands for ‘Motivations’. In these sections, they explore how ESG-related risks might impact the credit quality of individual borrowers. This assist to form a view around the risk versus reward characteristics of the individual investment. They believe the priorities within their PRISM template, gives something of a quality bias. For example, they prefer listed over non-listed business due, in part, to greater likelihood of transparency and better governance standards.

All Liontrust funds have no or very limited exposure to securitised debt.

 

12.3. Additional information.[OPTIONAL]

The Sustainable Investment team use a Sustainability Matrix to determine the eligibility of a company for inclusion in their funds. Their screening criteria are incorporated into the Sustainability Matrix rating for a company. The Sustainability Matrix helps to analyse how sustainable and responsible a company is. They analyse the product sustainability and management quality of each investee company in which screening and thematic ESG incorporation are also factored in. Product sustainability (rated from A to E): Assesses the extent to which a company's core business (the products or services it offers) 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/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 need to be categorised C3 or higher in order to gain access to our Sustainable Future Corporate Bond Fund, whilst anything rated D3 and above is eligible for the Monthly Income Bond Fund (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, their analysts maintain a set of guidelines that provide further guidance on what influences how they rate companies using their sustainability matrix for each sector. The sector guidelines also highlight the potentially material environmental, social and governance issues that they expect management to be addressing and provide an indication of what we consider to be good practice. The Sustainability Matrix rating of the company is integrated into the fundamental analysis of the investee company.

The teams’ research has identified 20 areas of long-term growth within our economies. They believe that companies exposed to their themes (More efficient; Safer and more resilient; Healthier and with higher quality of life) tend to be better managed, exhibiting greater stability and lower risk, which they believe are key drivers of long term bond returns.

More efficient

Improving the efficiency of energy use; Increasing electricity from renewable sources; Improving management of water; Improving industrial processes and food production; Increasing waste treatment and recycling; Making transport more efficient.

Safer and more resilient

Enhancing digital security; Assuring better supply chains; Improving auto safety; Leading ESG management; Saving for the future; Insuring a sustainable economy; Increasing financial resilience.

Healthier and with higher quality of life

Providing affordable healthcare; Enabling innovation in healthcare; Building better cities; Providing education; Enabling healthier lifestyles; Connecting people; Delivering healthier foods.

In-house research is supported and supplemented by several external ESG information sources. Sustainalytics provides in depth reports on sectors/industries, as well as ESG ratings, Governance Metrics and ESG controversies reports for individual companies. MSCI provide carbon reports, analysing the carbon emissions of the overall funds and their constituent holdings. Ethical Screening also provide reports assessing companies against their internal screening criteria, and run regular checks to ensure invested companies remain within these screening thresholds. The team also consults an independent external advisory committee which meet three times per year made up of a panel of industry leaders and academics, who provide guidance and expertise in key areas of environmental and social impact. Whilst also drawing on information from company meetings, broker research, ISS Governance reports, academia and non-governmental organisations.

The team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant factors like pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues generally tend to have higher quality management and therefore, they are more likely to prosper from a business perspective.

The team uses a sustainability matrix based on product sustainability (A-E) and management quality (1-5). For product sustainability, the team assesses how a company's product or area of business helps or harms society and/or the environment. For example, an 'A' rating could be awarded to a company involved in renewable energy or education. An 'E' rating would be assigned to a firm that conflicts with the principles of sustainable development, for example, a tobacco company. For management quality, the team assesses a company's practices, policies and structure relating to its environmental impact as well as social and governance related issues. A firm with excellent practices would be graded 1, whilst one with poor management practices would be a 5. For a company to be considered for inclusion in the Sustainable Future Corporate Bond Fund and the European Corporate Bond fund must rank C3 or higher on the matrix, whereas for the Monthly Income Bond Fund D3 or higher is eligible.

This assessment is then combined with traditional fundamental credit analysis, through their credit templates. The templates look at fundamental metrics such as relative valuation, SWOT analysis and company financials to determine how robust or risky an investment is, and how the company's management of ESG issues impacts upon each metric. For example a key driver of long-term bond returns is the effective management of tail-risk, and identifying companies that have strong governance and management scores helps them to avoid issues where the tail-risk is underpriced.

The following document outlines the Sustainable Fixed Income investment process and how they integrate ESG factors: https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=8ef3fc44-bcd3-45f5-92f1-4daf758b254a


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