The Sustainable Future strategies have existed for 24 years. They have always aimed to deliver strong returns by backing sustainable companies. We write regularly about those investment returns and how over the longer term we have shown that this strategy is a credible approach to active management.
However, in this series of articles we want to focus on the other vitally important aspect of sustainable investment: how it helps improve our world. Our existing economies remain far from perfect; but they can change to become much more sustainable. Sustainable investing plays an important part in accelerating this change. Here, in the fifth of six articles, we examine how it can hold companies to account and agitate for them to close any potentially material gaps in how they are managed.
Corporate governance: dull but important
Most people find it difficult to get excited about corporate governance. But it’s key to how decisions in companies are made and when governance is wrong, it can go spectacularly wrong and even result in businesses going bust. We believe that, as investors, you have to care about governance as it is a very material driver of returns. Management teams tend to possess a strong desire for an ever-increasing share price which generally requires meeting Wall Street’s ever-increasing expectations. Without sufficient corporate governance structures, at the extreme, this can lead to aggressive accounting and in turn to downright fraud – see Wirecard and Enron for more details.
Holding companies to account – voting and engagement
Companies have to abide by rules being enforced by regulators. They should also be held to account by investors analysing corporate governance practices and driving improvements where this is not good enough. For equity investments, we voted on all eligible companies in 2024 (160 companies) and voted against management or abstained on at least one resolution in 68% of these companies. For example, a breakdown of the classic governance issues relating to independence of the board, remuneration not being closely aligned with shareholders and entrenched auditors is as follows:
The following graphic shows (in green) the number and percentage of eligible meetings where we voted against or abstained on these particular issues.
Source: Liontrust, December 2024. *Due to lengthy terms of office, bundled director elections or lack of independence.
A full review of 2024 engagement and voting is available here Sustainable Investment documents | Liontrust Asset Management PLC
Management quality driving investment returns
Before investing in any company, we assess how sustainable its products and services are as well as how well the company is managing the most material environmental and social impacts as well as how well it is governed.
This is done using our Sustainability Matrix which is our own proprietary assessment of the business. This assessment is done by our investment team. Integrating this analysis into the broader analysis of the business in question, rather than outsourcing this to third parties or another team inside the organisation.
We analysed our data to see if there was a relationship between the matrix management score (which assesses the quality of governance and management of the company) and stock returns. We took our management quality scores in the cohort of 319 stocks analysed between 2013 and 2015 and looked at the subsequent stock returns (versus the company’s geographical stock index).
The results (see figure 1) showed that the best rated companies (scoring 1) outperformed their relevant geographic benchmark, returning 31% on average, while the lower scored companies (rated 4) underperformed their benchmark by 72%. The middle rated companies (scoring 2 and 3) slightly underperformed their benchmark by -2% and -7% respectively. This shows that better managed companies, as measured by our assessment of management quality, outperformed the lower scored companies over this time period (for the period ending 31-Mar-2025).
Figure 1: investment returns grouped by our Sustainability Matrix management rating
Source: Liontrust, FactSet as at 31.03.25
In addition we found that these better quality management teams ran companies with, on average, higher operating margins, higher returns (ROE) and lower leverage (shown in figure 2).
Figure 2: Business fundamentals grouped by our Sustainability Matrix management rating
Source: Liontrust, Factset, 2013-15 cohort, outliers or companies without data have been removed from the sample. ROE = Return on equity; EBITDA = Earnings before interest, taxes, depreciation, and amortisation
We believe our management score on material ESG topics can be a lead indicator for the quality of management more broadly. We believe this analysis helps us identify superior stocks that are more likely to outperform the market over the medium term.
Conclusion
Holding companies to account to improve the way in which they are governed is a key role that investors can play. By:
- making our own assessments about what is important and most material to company’s future success (as opposed to relying wholly on a third party);
- including material issues often outside the realm of traditional corporate governance, such as material environmental or social impacts of the business or their products; and
- acting as agents for positive change both in our engagement where we ask for specific requests for change as well as actively voting;
the Liontrust Sustainable Future funds are ensuring they use the weight of investors’ money to affect positive change which we believe should also enhance investment returns.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Sustainable Investment team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
- Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Investment team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
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.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It 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.
This information and analysis 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, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. 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.
