Liontrust GF SF US Growth Fund Launch Sales Aid - Flipbook - Page 10
The Sustainable Future investment process
The investment process is based on the belief that in a fastchanging world, the companies that will thrive are those which
improve people’s quality of life, make usage of increasingly scarce
resources more efficient and help build a more stable, resilient and
prosperous economy. The Sustainable Future investment process
has a four-stage process to identify these companies.
1. Themes: The investment process starts with a thematic approach in
identifying the key structural growth themes that will shape the global
economy of the future, such as the development of personalised
medicine and the transition to a lower carbon economy.
Why is this relevant to investors? 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 businesses in which the managers have invested
for two decades, and we believe most investors underestimate the
speed, scale and persistency of such trends within our economy.
Management quality (rated from 1 to 5): This assesses whether
a company has appropriate structures, policies and practices in
place for managing its ESG risks and impacts. Management quality
in relation to the risks and opportunities represented by potentially
material ESG issues are graded from 1 (excellent) to 5 (very poor).
Companies must score B4 or higher to be considered further for
inclusion in ESGT’s portfolio.
3. Business fundamentals and valuation: Companies in which
the managers invest will have robust business fundamentals with
a proven ability to deliver high returns on equity (RoE) through
sustaining margins and asset turnover. Typically, these companies
have a maintainable competitive advantage through scale,
technology or business model.
The managers therefore look at the world through the prism of three
mega trends — Better resource efficiency, Improved health and Greater
safety and resilience — and 21 underlying themes within these trends.
The managers evaluate the likely sales, earnings and other financial
returns they expect to see from these companies over the next three to
five years, integrating their view of their quality into these. Applying
the relevant valuation multiple to these allows the managers to derive
a price target achievable in the next three years. When this shows
significant upside, the investment is recommended as a buy and
available to be included in the portfolio.
Identifying emerging and long-term themes is often referred to as
positive screening because of the managers’ focus on what they
want to own rather than just what to avoid, and is one of three
main approaches to managing ESG and sustainable investment
funds. The second approach is engagement, also known as active
ownership. In this case, the managers engage with the companies
they hold so they can influence management into changing their
strategy or operational management.
4. Stock selection and portfolio construction: ESGT’s portfolio
will invest in well-run companies whose products and operations
capitalise on the transformative changes the Liontrust Sustainable
Investment team has highlighted, may benefit financially from them
and score well on ESG, business fundamentals and valuation.
The third approach is avoiding certain industries because of the
negative effects of their products, such as tobacco companies
and producers of weapons. The managers combine all three
approaches in the investment process.
2. ESG management quality: If a company has significant exposure
to a theme, the managers verify how sustainable the rest of its
activities are. For each company, the managers determine the key
ESG factors that are important indicators of future success and
assess how well these are managed, via the proprietary Liontrust
Sustainability Matrix.
Every company held in the portfolio will be given a Sustainability
Matrix rating, which analyses the following aspects:
Product sustainability (rated from A to E): This assesses the extent to
which a company’s core business helps or harms society and/or the
environment. An A rating indicates a company whose products or
services contribute to sustainable development (renewable energy)
while an E rating indicates a company whose core business is in a
conflict with sustainable development (such as tobacco).
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The managers believe identifying these powerful themes and
investing in exposed companies can make for attractive and
sustainable investments.