Liontrust Sustainable Investment Engagement and Voting Annual Review 2021 - Flipbook - Page 23
Controversies
Over the two decades 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. 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.
Over 2021, MSCI highlighted 196 ‘controversies’, with 15 of
these considered ‘severe’, including Kingspan. There were three
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.
Total number of
196
% of total
Severe
15
8%
Moderate
97
49%
Minor
84
43%
MSCI controversies
in 2021
As soon as we are aware of any controversy, the next stage is
to analyse the situation in detail, investigating to ascertain the
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 and we will then look
to speak to senior management or non-executive 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.
Case study: Compass Group
Case study: Kingspan
A subsidiary of Compass Group
was highlighted on social media
for providing inadequate school
meals after the government decided
children should not return to schools
due to the second wave of Covid-19, so we engaged on product
safety and quality. After finding out more about what happened and
the company’s response, we concluded it was a one-off issue that is
unlikely to be repeated given the significant steps that were taken.
We have invested in Kingspan for
more than 15 years and have held the
company in high regard for the benefits
its products bring, playing a key role
in energy efficiency in buildings and
therefore carbon dioxide emission reduction. Revelations from the
Grenfell Tower Inquiry, however, have raised concerns about the
culture and controls within the insulation business.
We initially decided to downgrade Kingspan’s sustainability rating (in
our proprietary Matrix) from A1 to A4 in December 2020, a significant
reduction in terms of management quality. This means we view a company
as higher risk and Kingspan’s weighting in our funds fell substantially as
a result. Our view at that stage was to reserve final judgement until after
the Grenfell Inquiry concluded and we could discuss the findings and
recommendations with the company’s management and other parties.
As part of our continuing engagement, we requested a meeting with the
new Chairman to understand his view of how the culture has changed,
and needs to change further, towards safety. This was not forthcoming,
however, which is disappointing given our large holding and long-term
support of the business. This lack of engagement has prevented us from
improving our rating from A4.
On balance, factoring in concerns on valuation, culture and management
rating, we exited the company in the fourth quarter of 2021.
All use of company logos, images or trademarks in this document are for reference
purposes only.
Liontrust Sustainable Investment: Engagement and Voting: Annual Review 2021 - 23
