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Peter Michaelis
Peter Michaelis 14-06-21

Lessons from 20 years of sustainable investment

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.

Over the 20 years we have been managing the Liontrust Sustainable Future (SF) strategies, the key lesson proved, rather than learned, is that integrating sustainability into stock selection can enhance returns.

At launch in 2001, our goal was to deliver strong performance by investing in sustainable companies and also engaging with these businesses to encourage best practice on environmental and social issues. At the time, these were radical notions: most investors were certain incorporating impact into investment was a distraction at best and, at worst, guaranteed to deliver lower returns than mainstream funds. The prevailing mindset remained in line with Milton Friedman’s dictum that the business of business is business, meaning shareholders should care only about profit maximisation and not worry about how it is achieved.

Today, the picture is very different with almost all listed companies reporting on corporate social responsibility or ESG. A landmark came in 2019 when the usually conservative US Business Roundtable issued a statement on the purpose of corporations. The Roundtable periodically sends out Principles of Corporate Governance and each version since 1997 had endorsed shareholder primacy – that businesses exist principally to serve shareholders. In 2019, they moved away from this and included a commitment to all stakeholders including customers, employees, suppliers and the wider community.

Over the years, the key to our performance has been investing in companies that have been successful because they help to make our world cleaner, healthier and safer. We have provided capital to companies that are decarbonising electricity generation, for example, developing innovative vaccines, building our communication infrastructure, and making roads safer. These highlight the importance of identifying structural growth and we continue to believe investors underestimate the speed, scale and persistency of such trends.

We look at the world through the prism of three mega trends, Better resource efficiency (cleaner), Improved health (healthier) and Greater safety and resilience (safer), and 21 themes within these, and our approach involves looking ahead, often years into the future, and making decisions based on how we believe things will develop. What this means in practice is that our thinking within themes changes over time and this is clear from the autos sector for example. Few would argue that the car defined the 20th Century but we are approaching a tipping point for humanity’s relationship with the automobile.

We began managing the SF portfolios with a refusal to invest in companies exposed to petrol or diesel engines, believing the economics of a sector that emits poison into the air were no longer viable. We saw regulation shift in this direction in 2009, with the EU introducing a 130g/km C02 target for new passenger cars, dropping to 95g/km by 2021.

Beyond emissions, the industry has faced the problem that cars are fundamentally dangerous: while deaths caused by road accidents in the UK have been falling since the 1960s, thousands still die every year. Better tyres are one way to improve safety but the initial focus remained on people within the car – and data show half of those dying are pedestrians or cyclists. Again, we saw this as a problem that needed solving and identified stocks innovating in smart sensors and automated driving.

Looking to the future, we are again seeking ways to get ahead of regulatory and societal curves, with driverless cars no longer the stuff of science fiction. Emissions have been an issue for decades but something more fundamental is now at work: the problem is not should we buy diesel, petrol, hybrid or full electric but rather whether to own a car at all. We see the transport sector shifting focus from traditional internal combustion engine and powertrain cars to auto safety, multi-modal transport and trains.

As long-term sustainable investors, we have faced questions over the years about whether ESG would survive the next downturn and Covid-19 has brought renewed scrutiny on this. Our answer remains firmly in the affirmative but rather than debating sustainability itself, we address the question via our investment process and funds.

The investment process begins with 21 themes, focused on the shift towards a more sustainable economy. To invest in a company, we also require strong business fundamentals and excellence in ESG, and our holdings tend to have processes in place to manage customer relationships, employees and supply chains.

We had no better insight into the pandemic than anyone else, but our chosen companies have been thinking about resilience in the face of structural change for years. They have been grappling with how to offer decent work in stressed supply chains, reduce business travel and create the incentive structures and diversity to form boards that make the best decisions at critical times.

As we look past Covid-19, the tools and techniques companies have developed to outperform in the face of a climate emergency, an obesity epidemic or failing boards will be the making of sustainable investment. 

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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. 
Peter Michaelis
Peter Michaelis
Peter Michaelis joined Liontrust in April 2017 as part of the acquisition of ATI, where he was Head of Investment. Peter has been managing Sustainable Investment funds since 2001 when he was promoted to lead Portfolio Manager at Aviva Investors.

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