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Liontrust Investment Partners LLP

PRI reporting framework 2019

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
75 %
Percentage of active listed equity to which the strategy is applied
25 %
Percentage of active listed equity to which no strategy is applied
0 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

Liontrust Sustainable Investment team’s investment approach is one of full integration of ESG issues into investment decisions. The Sustainable team do not have separate fund management and ESG teams; instead every investment team member is responsible for all aspects of financial and ESG factors relating to the investment decision. Team members are responsible for clearly defined sectors and cover stocks within their respective sector. Each team member has responsibility for monitoring the major trends and themes in their sector, identifying investment opportunities, assessing the ESG performance of those opportunities, integrating that information into forecast earnings and valuation, submitting investment recommendations for our funds, engaging with companies and subsequently 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 e.g. screening criteria, sustainable investment themes and company-specific environmental, social and governance issues.

The team have developed this approach over more than 18 years that they have been investing responsibly as they believe it is the best way to deliver investment performance. Their track record strongly supports this view.

The team’s main focus is always on superior investment performance and following our investment principles. In a fast changing world, the team 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.

They 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 better returns for shareholders, with lower risk don't.

When they do decide to invest, it’s in high quality businesses with an attractive valuation, robust business fundamentals and strong management teams.

Ultimately they 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. They invest in progressive companies that are creating real and lasting value for their shareholders and for society, now and in the future.

The 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. Their 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, thematic ESG incorporation are also factored in. Companies need to be categorised higher than C4 in order to gain access to our Sustainable Future funds (Institutional clients with segregated funds are able to tailor the Matrix cut-off according to their own thresholds). To help with the rating process, the 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 they consider to be good practice. 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). The Sustainability Matrix rating of the company is integrated to the valuation and fundamental analysis of the investee company.

Their research has identified 20 areas of long-term growth within our economies that fall under three trends identified as: Better resource efficiency, Improved health, and Greater safety and resilience, with a number of underlying themes as outlined below. They team  believe that companies exposed to these themes are likely to see stronger and more persistent growth than those that are not, allowing the team to find growth even in an era of low economic growth.

Better resource efficiency

Improving the efficiency of energy use; improving the management of water; increasing electricity generation from renewable sources; improving industrial and agricultural processes; increasing waste treatment and recycling; making transportation more efficient.

Improved health

Providing affordable healthcare globally; connecting people; delivering healthier foods; building better cities; providing education; enabling innovation in healthcare; enabling healthier lifestyles.

Greater safety and resilience

Increasing financial resilience; saving for the future; insuring a sustainable economy; leading ESG management; improving auto safety; enhancing digital security; better monitoring of supply chains and quality control.

All our other assets under management (i.e. those not run using the Sustainable Teams investment process detailed above) are run using an integration approach without screening or an ESG thematic approach. The teams incorporate ESG factors directly into their stock selection as part of their analysis of investment opportunities. The portfolio managers regularly engage with companies they own and all companies are actively voted. 

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

The Sustainable Future philosophy is reflected in the investment team structure. ESG issues are integrated directly into the team’s bottom-up stock selection process by the analyst, who will combine their ESG analysis with their forecast of future earnings and the valuation of those earnings. This fully integrated analysis allows the team to map a company’s action on a material ESG issue through to any impact that may have on its financials.

Every Sustainable investment team member is responsible for all aspects of financial and ESG factors relating to the investment decision and has responsibility for monitoring:

  • 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. 


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

The Sustainable 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%.

https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=fc1bfe8f-110d-495b-8051-f448e9602d98

The team's UK ethical fund also:

excludes all companies that derive 5% of turnover from the production, distribution and/ or sale of alcohol products; and avoids investing in any company involved with animal testing. https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=f8d69848-d58b-4ba3-9d12-4b3eed35501f

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.

 

Screened by

Description

The team screens to exclude the following businesses from its Sustainable Future funds: companies that are directly involved in the construction of large dam projects in developing countries if those projects have not met best practice standards; and companies involved in the building of large scale infrastructure projects such as roads, airports or dams unless they are viewed as leaders within their sector with respect to stakeholder dialogue, environmental management and social and environmental impact assessment.

 

Screened by

Description

The team screens to exclude the following businesses from its Sustainable Future portfolios:

  • 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.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

The Sustainable Investment team reviews its screening criteria for the Sustainable Future funds in collaboration with its independent external advisory committee. Any change to the screening criteria is notified to clients and/or beneficiaries via the Insight section on our website (https://www.liontrust.co.uk/what-we-think/blogs?blogtype=Fund+manager+views). In 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%. This was publicised on our website https://www.liontrust.co.uk/what-we-think/blogs/How-our-themes-are-evolving. The following extract from the aforementioned update in July summarises details of the screening revision:

As part of the review, we have tightened thresholds for the revenues that companies can derive from unsustainable and unethical activities and still be included in our portfolios. From July, companies have been able to generate 5% of revenues from activities such as tobacco, gambling, intensive farming, weapon systems and nuclear rather than the previous threshold of 10%. This has been done to better communicate the low exposure to these activities across the funds the team manages as well as to reflect increased interest from clients in more stringent criteria.

If the team needs to adjust its portfolios owing to a change to its screening criteria, it has six months from the change to sell the relevant securities.

The Sustainable Investment screening criteria are disclosed and publicly available on our website https://www.liontrust.co.uk/handlers/DownloadDocumentsHandler.lion?itemids=fc1bfe8f-110d-495b-8051-f448e9602d98 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

The Sustainable team has an independent external advisory committee which the team consults regarding its screening practices at meetings that take place three times throughout the year.

The Sustainable team relies on its own considerable experience in sustainable investing to peer-review stocks through their Sustainability matrix rating at team meetings. All potential investments for the Sustainable Future funds go through this process.

The Sustainable team pay considerable sums for the best possible ESG data to help us in our ESG analysis. The team employ the services of Ethical Screening to validate a potential investment in a company as being in compliance with out publicly stated negative screening criteria, as well as review holdings on a quarterly basis to ensure these companies remain in compliance.  The team currently use Sustainalytics, ISS and Ethical Screening to provide initial analysis of sustainability factors.

Liontrust continue to work on providing all our investment teams with more and better ESG data to include in their investment processes. This is being further developed in 2019 with controversy monitoring, more detailed ESG analysis services on a portfolio by portfolio basis and carbon reporting.

In addition to the Sustainable Investment team's robust screening process, some of the segregated mandates managed by the other investment teams apply controversial weapons/cluster munition screens.   

 

 


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

The Sustainable team have identified 20 areas of long-term growth within our economies that fall under three trends identified as: Better resource efficiency, Improved health, and Greater safety and resilience, with a number of underlying themes as outlined below. They team  believe that companies exposed to these themes are likely to see stronger and more persistent growth than those that are not, allowing the team to find growth even in an era of low economic growth.

Better resource efficiency

Improving the efficiency of energy use; improving the management of water; increasing electricity generation from renewable sources; improving industrial and agricultural processes; increasing waste treatment and recycling; making transportation more efficient.

Improved health

Providing affordable healthcare globally; connecting people; delivering healthier foods; building better cities; providing education; enabling innovation in healthcare; enabling healthier lifestyles.

Greater safety and resilience

Increasing financial resilience; saving for the future; insuring a sustainable economy; leading ESG management; improving auto safety; enhancing digital security; better monitoring of supply chains and quality control.

The team have done some work to show how their positive investment themes are aligned with the SDGs by analysing where each theme is directly linked to Key Performance Indicators in the SDG text. Each of their themes are limited to one main SDG, although in reality there are overlaps and most companies are exposed to more than one goal. An article showing which of their themes are aligned to which SDG, along with which specific Key Performance Indicator they improve, is available at https://www.liontrust.co.uk/what-we-think/blogs/how-the-sustainable-future-funds-are-aligned-with-the-sustainable-development; the updated version represents 2018 https://www.liontrust.co.uk/what-we-think/blogs/Mike-Appleby-Aligning-our-funds-with-the-UN-Sustainable-Development-Goals .

All 20 of the Sustainable Future investment themes are contributing in a positive manner to the SDGs as they can be linked to Key Performance Indicators in the text. As a reminder, their  positive investment themes are at the core of Sustainable investment process (it is where the team get their investment ideas) and are a key component in the investment decision, the others being quality of management, business fundamentals (essentially the investment returns the business can make) and valuation.

The Sustainable Development Goals where the Sustainable funds have largest exposure are:

Good health and well-being (SDG #3)
Affordable and clean energy (SDG #7)
Decent work and economic growth (SDG #8)
Industry, innovation and infrastructure (SDG #9)
Responsible consumption and production (SDG #12)

In addition to these, the team also have exposure to: Quality education (SDG #4), Clean water and sanitation (SDG #6), and Sustainable cities and communities (SDG #11).

 


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

The Sustainable Investment team analyses how a company's ESG factors affect its valuation. For example, the team assesses relevant material factors to the business which can include pollution incidents, staff satisfaction and carbon emissions. Companies which have integrated these issues, 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 funds, it must rank C3 or higher on the matrix.

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          The Sustainable Investment team is fully integrated. All ESG analysis is integrated into each stock review and recorded in our database.
        

09.6. Additional information.[Optional]

The Sustainable Investment team integrates ESG fully into the investment process. Sustainability (ESG), business fundamentals, and valuation analysis on an investee company is conducted by the same analyst/investment manager. The Investment Managers within the team consider all three aspects of our investment process prior to buy or sell decision to ensure robust integrated approach to ESG.

The team has an independent external advisory committee which the team consults regarding its screening practices at meetings that take place three times throughout the year.

The team relies on its own considerable experience in sustainable investing to peer-review stocks through their Sustainability matrix rating at team meetings.

The team currently use Sustainalytics, ISS and Ethical Screening  to provide initial analysis of sustainability factors to help us in our ESG analysis.  We employ the services of Ethical Screening to validate a potential investment in a company as being in compliance with out publicly stated negative screening criteria.

Liontrust are in the process of engaging an external provider to provide ESG and controversy data for all investment teams. All investment teams receive data on Governance of their holdings supplied by ISS. 

Some segregated mandates managed by the other investment teams apply controversial weapons/cluster munition screens.  


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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