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 last of six articles, we examine how it can help make our digital infrastructure, financial systems and everyday lives more secure, resilient and ultimately better for everyone.
The growing threat of cyberattacks
What do the British Library, NHS and M&S have in common? They have all had their ongoing business severely disrupted by cyberattacks. These attacks take many forms: ransomware, denial of service, theft of sensitive data, or data corruption. The perpetrators’ motivation spans financial gain, political ends, corporate espionage, or simply the sense of achievement from breaking into supposedly secure locations.
IBM estimates that the average cost of each data breach in 2024 was $4.9 million and is on an increasing trend. M&S has estimated that the current breach has cost £300 million so far in lost sales. Surprisingly these breaches can go undetected for months, with the average time to detect being 200 days, and amazingly 24% of breaches are only identified when the attacker discloses their activity.
Two things are clear though: the sophistication and activity of cyber criminals increases every year; and as more human activities move online, so the potential impact of disruption increases.
Investing in cybersecurity solutions
Sustainable investment has two parts to play. Firstly, by backing those businesses that provide the solutions to companies, governments and individuals to protect, detect and recover from cyberattacks. Secondly, by encouraging all companies to put in place strong governance and procedures to reduce incidents and mitigate damage. Indeed, our assessment of management quality includes how well companies are addressing their cybersecurity exposures.
On the one hand, investing in cybersecurity appears straightforward: it is a sector which sees strong structural growth (6-12% a year) and $200 billion in size. However, the changing threat landscape makes for a dynamic environment. Many past leaders have fallen by the wayside. It used to be that all sensitive data for an organisation was kept on premise – so protection could be provided by firewalls (essentially moats around the castle). Now most organisations are cloud based and have multiple points of access – remote workers across the globe for instance. This is a Zero-Trust architecture. Telling good from bad actors becomes harder. And then there is the speed of attacks – thousands of attempts every day. And as the saying goes, the hacker needs to be lucky once; the organisation needs to be lucky every single day.
Within our theme of Enhancing cybersecurity, we back companies such as:
- Palo Alto Networks – this company has been very successful in evolving from a firewall provider to one that provides a platform of protection measures on premise and in the cloud. This includes the ability to detect and respond to any malware that does gain entry.
- Visa – it may not be front of mind when thinking about cybersecurity, but this is actually core to what Visa does. Trust in digital money depends on very low rates of fraud and Visa is only successful if it can do this. With 4.2 billion Visa cards in use and $15 trillion of payments a year, fraud rates remain very low – around 0.07%.
- Softcat – a software reseller to UK small and medium sized businesses. Most of these businesses cannot afford a dedicated cybersecurity team, so they have to rely on the solutions provided by Softcat. About a third of Softcat’s revenues are linked to these protection services.
Promoting resilience through engagement
The second area where sustainable investment plays a role is in engaging with companies on cybersecurity. The aim is to ensure they have considered their risks and put in place protection and mitigating procedures. Interestingly, the initial approach was for organisations to be less than transparent about attacks or their preparedness. The idea was to hope to have better security than your competitors, and not to brag for fear of becoming a target. We, in collaboration with other investors (PRI3 ), encouraged greater openness so that others could learn both from honest disclosure of incidents and to emulate best practice. Pleasingly, this is exactly the approach the SEC (the US regulator) has adopted. Since 2024 companies have four days to disclose a material incident.
In our assessment of companies we look for clear policies, Board accountability, sufficient skills and resources in the business, and staff training. In this way we invest only in those companies that are well positioned. This does not mean they will never suffer a breach, but it does mean they are likely to be better prepared.
Enhancing digital security is one of our themes within the category of Safety and Resilience. It encapsulates how important it is to invest in the stability of the systems on which we rely – in this case cybersecurity, but it covers our financial system and the role of insurance in spreading risk. This theme aims to deliver strong returns by investing in successful companies in the sector while also encouraging all companies to improve their preparedness.
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.
