Liontrust Sustainable Investment Annual Review 2021 - Flipbook - Page 44
Controversies
Over the 20 years we have been managing the SF funds, a key
lesson we have learned is that ‘sustainable’ should not be taken
to mean perfect. Investing involves making predictions about the
future, which is extremely difficult. We therefore have to expect
occasions – albeit rare – when the future does not turn out as
predicted and our companies become embroiled in a controversy
that challenges our initial assessment of their sustainability. This can
be due to some overlooked aspect that we could perhaps have
picked up earlier or because of a new event or revelation that
causes us to see the business in a different light.
We do not claim to have perfect foresight, nor that the companies
held in our funds are flawless. What we do aim for is to find the best
examples of sustainable companies to own for the long term, and how
we process and react to controversies is an important aspect of this.
First, through our own research and monitoring, we look to be aware
of any previous or current contentious issues. In addition, we use two
third-party controversy monitoring services that cover news reports
linked to all our companies; in practice, we are usually aware of
anything before it is highlighted by these external providers.
Over 2020, MSCI highlighted 186 ‘controversies’, with just three
of these considered severe, including Kingspan. There were five
controversies that led to the team reviewing our sustainability rating
and for the others flagged, we were either aware of the issue or,
after examination, deemed it immaterial to our assessment.
As soon as we are aware of any controversy, the next stage is to
analyse the situation in detail, investigating ourselves to ascertain
the true involvement of the company in question, the seriousness
of allegations made and how the business is responding. This
gives us the context with which we can engage with the company
and we will then look to speak to senior management or nonexecutive directors as well as other interested parties such as nongovernmental organisations (NGOs) or industry experts.
With this information, we are in a position to establish the impact
of the controversy on our investment thesis (remembering that this
includes the sustainability rating). The three possibilities are:
i.
The business no longer satisfies our criteria for a sustainable
investment, so we exit the position.
ii. The risk and quality of the investment is affected so we feel a
smaller portfolio position is appropriate and therefore reduce
our exposure. This would be reflected in a downgrading of our
sustainability matrix rating.
iii. The issue is being addressed by management sufficiently so
that we can continue to hold our portfolio weighting while
engaging with the company to ensure the situation is resolved.
All use of company logos, images or trademarks are for reference purposes only.
44 - Liontrust Sustainable Investment: Annual Review 2020
To conclude, companies (much like the people they comprise) are
not perfect, nor can our predictions about the future be faultless.
We can use a disciplined process, however, to ensure we deal with
the few controversies that do arise from time to time consistently and
correctly. In this way, we can continue to deliver on the mandate of
the SF funds for our clients
Case study: Kingspan
We have invested in Kingspan for more than 15 years and held the
company in high regard for the quality of the products it sells, playing
a key role in carbon reduction and the circular use of materials.
Revelations from the Grenfell Tower Inquiry, however, have raised
serious concerns about the culture and controls within the insulation
business, which need to be taken seriously.
Based on what we learned, we decided to downgrade Kingspan’s
sustainability rating from A1 to A4 in December 2020. Such a
downgrade means we view a company as higher risk and its
weighting in our portfolios should be smaller.
Our team began questioning Kingspan the day after the tragedy
in June 2017 and we have continued engaging about Grenfell in
particular and the fire resistance of the company’s products more
generally. More recently, we requested a meeting with Kingspan’s
management to discuss more recent revelations, which we were
eventually able to have in February 2021.
Our conclusion following these meetings is that Kingspan has
accepted responsibility for the shortcomings in product fire certification
and is not ducking the need to reform the governance and oversight of
product assurance. The Grenfell Inquiry will run its course over the year
and Kingspan has made its own representations to this, referring to
unacceptable employee conduct at its UK insulation boards business
and apologising unreservedly for historical process shortcomings.
Kingspan’s reputation across all products has been tarnished and
will take years to repair. However, it does appear this was an
isolated incident of poor oversight and not systemic and the new
measures put in place should ensure there can be no repeat. What
it does point to is a dysfunctional fire safety control system in the
UK – from building standards, testing, quality of workmanship and
compliance with technical specifications of cladding systems.
This is a highly sensitive issue and we maintain a reduced holding
as per option ii of the three outlined above. We will reserve
judgement, however, until after the Inquiry concludes and we have
been able to discuss the findings and recommendations with the
company’s management.
