Mike Appleby

Assessing the social side of ESG

Mike Appleby

We continue to see growing demand from clients for us to show how investments in our Sustainable Future funds affect people. The ‘social’ element of ESG (flanked by environmental and governance) is perhaps the broadest area of the three and the hardest to assess due to a lack of agreed metrics to measure. Despite this, we have analysed a number of social aspects of our funds: while this is an evolving area and something we will continue to develop, it shows our portfolios have better social metrics than the markets in which they invest.

There are a number of factors driving the growing interest in sustainable investment, with consumers wanting what they wear, eat and drive to have a positive impact on the world around them. In the food and clothing industries, sustainability is becoming synonymous with quality (and so it goes in investment).

This is fundamentally changing businesses, from high street retailers to industrials and even commodity producers, and social considerations are often at the heart of this transformation. Social covers issues such as labour standards, human rights and public health, gender diversity, ethical supply chains, basic health and safety – all of which can have a material impact on a company’s ultimate profitability.

With this in mind, clients continue to ask for new and different social key performance indicators and we are working with a range of environmental, social and governance (ESG) data providers to improve how we do this. We looked at the proportion of women on the boards for companies held within the Sustainable Future funds, for example, and compared this to conventional benchmarks.

Mike Appleby: assessing the social side of ESG

Source: Liontrust, as at 31.12.17

We found, on average, the SF equity Funds had 27.8% of women board members compared to 27.5% in the respective benchmarks. The Funds have marginally more women represented on boards, although the proportions are very small and so should be regarded as the same.

We do not screen out companies on the basis of board diversity but do engage actively with companies we own to urge them to improve representation. This is one of our key engagement priorities for 2018 as there is evidence to suggest more diverse boards function better and therefore deliver as good, if not better, investment returns.

Given the availability of this data, we have also looked at how the proportion of women on boards differs by economic sector and geographical regions (assessing the global stock market as a whole rather than our funds in particular).

Mike Appleby: assessing the social side of ESG

Source: Liontrust, as at 31.12.17

Companies in telecoms, financials, consumer staples and healthcare, on average, appear to have a higher proportion of women on their boards than consumer discretionary, industrials and information technology businesses. There is not a huge spread between sectors: if you assume a board has a rough average of 10 members, the difference between the best and worse is about one female board member.

There are far bigger differences in the proportion of women on boards between regions than between sectors, ranging from 33% in Europe to a low of 6% in Japan.

Mike Appleby: assessing the social side of ESG

Source: Liontrust, as at 31.12.17

Elsewhere, we analysed data from Sustainalytics, which scores companies on controversy incidents, such as employee-related, supply chain, customer and community incidents: a higher score reflects better managed businesses with fewer controversies.

 

As can be seen from the charts, the aggregated, weighted portfolio scores for the Sustainable Future funds were better than the conventional benchmark weighted averages on all these measures – which means companies in the Funds rate better on these metrics than the market average. On average, these scores were 9% better in the Funds compared to conventional benchmarks.

 

Mike Appleby: assessing the social side of ESG 

 

Mike Appleby: assessing the social side of ESG

 

Mike Appleby: assessing the social side of ESG

 

Mike Appleby: assessing the social side of ESG

Source for all: Sustainalytics Social Score metrics, weighted averages, as at 31.12.17

As we said at the outset, investors are becoming increasingly discerning in the ESG data they demand from us and we continue to look for new ways to demonstrate the distinctive nature of our process and funds. This is an evolving field as there are few complete date sets and, as yet, no agreed methodology and we expect this aspect of our reporting to improve over time as more meaningful data become available.

Our Sustainable Future Funds 2017 Review includes more information on the work we do in challenging companies (engagement), investment themes (finding positive structural growth) as well as other environmental impacts of the funds in terms of climate change. You can access this review via www.liontrust.co.uk/sustainable.

For a comprehensive list of common financial words and terms, see our glossary here.

 

Key Risks 

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 and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

Monday, September 17, 2018, 10:57 AM