Peter Michaelis

Lessons from 20 years of sustainable investment

Peter Michaelis

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. 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, June 14, 2021, 11:46 AM