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Harriet Parker
Harriet Parker 08-03-21

Active stewardship: building trust through integrity

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise.

A ‘do no harm’ approach is always our aim as sustainable investors. But sometimes even the best managed companies make mistakes. How fund managers respond to these mistakes can give a good insight into the integrity of their investment processes. 

A core component of our role is to understand what best practice looks like and specifically what it does not look like when it comes to sustainability.  I’m sure most fund managers that run ESG or sustainability focused strategies at least mildly enjoy calling out corporate greenwash when they see it. But there is often a collective wince on our team when we hear a company begin a meeting by describing itself as having ‘sustainability in its DNA’. Such misappropriation of biological terminology can be somewhat forgiven, however, when it is backed up by hard data and accompanied by steady performance and progress on ESG impacts.  Asking the right questions and taking time to understand a business in its entirety helps to identify signals that indicate genuine integrity, and experienced fund managers will come to know over time whether sustainability is truly integrated.

Monitoring and engagement are an essential part of active stewardship, irrespective of whether funds are ESG or sustainability focused, although the bar will obviously be set that much higher for such strategies. While fund managers all have their own interpretations of what makes a portfolio sustainable, none can promise perfection; all companies continually make choices that balance the needs of many stakeholders, and, occasionally, even great businesses with the best of intentions, policies, governance and culture make mistakes.

When a company does find itself the subject of such shortcomings, the first response should be to analyse the facts.  Selling positions in companies as a knee-jerk response to a controversy is not the best course of action because it is through engagement that investors can help to ensure mistakes are resolved and prevented from happening again.

Responsible fund managers will look for a clear initial response from the company that includes details of the issue in question and the process for any internal or third-party investigations. This can take time, which can be used to go beyond the company line and any media hype; hearing views from other stakeholders and gathering wider perspectives can be critical to understanding the issue.

At the end of this process, we need to see a company take responsibility for any failings, along with swift, corrective action, to be confident that harm will not be repeated. The type of controversy, focusing on the severity as well as the likelihood for change, is key; issues concerning culture, for example, can be hard to rectify quickly. Being clear about what we need to see from a company in response to a mistake so we can continue to back them, as well as what would prompt us either to reduce the position or divest completely, assists engagement. 

The decision of whether to divest from a company subject to a controversy should come down to the lines already drawn by a fund manager’s investment process, such as where a company no longer adheres to stated investment criteria or the issue is material so that the initial investment thesis no longer stacks up. 

Clients might use these situations to assess the integrity of a fund manager’s investment process, checking how a company made it into funds and whether specific failings could have been predicted. Such events might also highlight the resilience of processes for escalating engagement, the extent to which fund managers leverage their stewardship position, and whether they are genuinely committed to fostering fundamental change with engagement informing investment decisions. 

Honest communication from fund managers to clients when these issues arise is also important and can help to build long-term trust. Fund managers with greater transparency, and who  explain the outcomes of engagement and the resulting investment decisions, would seem to warrant greater trust.  Investment teams who are open about where they might have got things wrong themselves, and are willing to learn from and improve their engagement, signal best practice: like the companies in which we invest, we are only human after all. No one has perfect foresight, so explaining how companies continue to deserve their place in sustainable funds, and how fund managers process and react to emerging controversies, is an important aspect of ‘being the change’, especially as interest and flows into sustainable strategies continue to grow. 

Understand common financial words and terms See our glossary
Key Risks 
 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
 
Some of the Funds managed by the Sustainable Future team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Investment in Funds managed by the Sustainable Future team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Some Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.

 

Disclaimer
 
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
Harriet Parker
Harriet Parker
Harriet Parker joined Liontrust in April 2017 as part of the acquisition of ATI. Harriet started her investment career in 2004 at Aviva Investors and was also a Research Assistant at the Department of Economics and Centre for Market and Public Organisation.

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