Sustainable, Responsible &/or ESG Policy:

Our Sustainable Future investment process is a high-conviction, bottom-up approach whereby sustainability is explicitly integrated throughout.

The investment process starts with a thematic approach in identifying the key structural growth trends that will shape the global economy of the future and then invests in well-run companies whose products and operations capitalise on these transformative changes and, therefore, may benefit financially. The Sustainable Investment team invests in three transformative trends (Better resource efficiency, Improved health and Greater safety and resilience) and 22 themes within these trends as described below:

Better resource efficiency (Cleaner)

Better resource efficiency focuses on companies helping the world make better use of scarce resources, driving improvements in areas as diverse as energy, industrial processes and transport.

Improving the efficiency of energy use

We see many ways of making energy cheaper by reducing wasted energy while also reducing emissions through more efficient use of energy. This cuts across many areas of the economy and includes building insulation, efficient lighting, energy efficient climate control, travel and industrial processes.

Improving the management of water

Water is essential for life. Companies that can manage, or produce products or services that can improve the efficiency of water distribution, waste water treatment are vital and in demand. Sanitation is a first line of defence from disease, much of which comes from contaminated water. We like companies that improve sanitation and give affordable access to clean water.

Increasing electricity generation from renewable sources

Electricity generation from burning fossil fuels is a major emitter of carbon dioxide. Substituting carbon intensive fossil fuel electricity generation (especially coal) with renewable power sources reduces carbon emissions as well as providing a cost effective means to connect people to cleaner power sources. We like wind and solar and some biomass (using waste streams as opposed to feedstock grown on agricultural land).

Improving the resource efficiency of industrial and agricultural processes

We like companies providing products or services that help make industrial processes more resource efficient, as well as safer for workers and users. We see investment opportunities in software and systems that help implement life-cycle design (including disposal of products), help manage supply chains as well as opportunities in automation of factory processes to remove repetitive or dangerous mechanical tasks as well as reducing waste from process errors as they help modernise and improve industry.

Delivering a circular materials economy

Resources are finite and the UN Environment Programme (UNEP) estimate we recycle as little as 25% of global waste. We need to increase the amount of waste recycled and design products with end of life in mind (made easy to break down and reuse / recycle). Companies that can process and recycle waste are generally set to benefit from this trend.

Making transportation more efficient or safer

We look for companies whose products and services improve our transport system or make travel safer. We look for:

• Modal shift away from private car usage to public transport systems such as bus and rail. Urban transport systems are improved by reducing congestion as well as transport emissions (which make the local air quality toxic) as the mode of transport shifts from self-driven cars to public transport systems such as trains, tubes and buses as well as active transport.
• Reducing negative impacts of travel: Companies that produce equipment that reduces pollution from cars, or that improve safety, are set to benefit from structural growth (higher than that of the autos industry) by helping meet tightening global regulations to reduce emissions from travel. To respond to tightening global regulation to reduce emissions from cars, we see rapid electric vehicle adoption as an area with many potentially interesting investments in this area.
• Asset sharing: We like systems that facilitate sharing of transport (bicycles or cars) as this can increase utilisation and reduce materials intensity in transport. For example, rental of efficient vehicles and technology that facilitates journey sharing.

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Improved health (Healthier)

The team is seeking to invest in companies helping to extend life expectancy and enable people to be fit and healthy enough to reap the benefits of an improving world.

Enabling innovation in healthcare

Companies whose products or services help promote innovation within healthcare are helping achieve this goal. They do this by either coming up with new, more effective ways to treat diseases (creating a significant step change in the mechanism used to treat a given disease), or by providing essential equipment or services for biotechnology research (such as specialist measuring equipment, genetic sequencing equipment or high quality consumables for research) or software to help make treatments more effective.

Building better cities

Shelter is a basic human requirement and companies that build quality affordable homes are helping to provide this. We like well designed and built homes that are energy efficient and safe.

Connecting people

We believe access to easy communication tools and the ability to access information, increasing amounts of which are online, is a positive requisite in a more sustainable economy.

Providing affordable healthcare

Currently the costs of healthcare are very high and we need more effective ways of delivering better patient outcomes. Companies that help deliver affordable, positive patient outcomes in managing disease help achieve this goal.

Providing education

Education brings massive benefits including longer life expectancy, increased job opportunities, stimulates economic growth as well as leads to overall higher satisfaction in life. Companies providing education services provide vital knowledge and skills which help educate and improve people’s lives.

Enabling healthier lifestyles

Companies that promote healthier lifestyles, principally through increasing activity, taking exercise and sport help improve health. These include positive leisure activities such as gym operators and companies providing sports clothing and equipment.

Delivering healthier foods

There is a trend in the food industry where consumers are changing their preferences and demanding healthier foods. We have identified companies that provide reformulation services to change the recipe of foods to make them healthier (less fat, sugars and salts) while maintaining the taste. These companies are a beneficiary of this demand for healthier food as their customers (many of which are the big incumbent food producers) respond to changing consumer preferences and use their reformulation services. This improved diet has positive health impacts. For example, it can help reduce non-communicable diseases such as obesity and cardio-vascular disease.

Encouraging sustainable leisure

Our sustainable themes focus enabling a cleaner, healthier and safer world, but beyond these fundamental issues a natural progression is to spend more time on leisure time and activities – as Aristotle puts it ‘the end of labour is leisure’. Or as Tim Jackson puts it in Prosperity without Growth;

“…in the advanced economies…material needs are broadly met and disposable incomes are increasingly dedicated to different ends: leisure, social interaction, experience… what really matters to us: family, friendship, sense of belonging, community, identity, social status, meaning and purpose in life”

Leisure time and social activities enable many of these human desires, for example picture going to a music concert with a friend, going on a date to the cinema, having dinner with family at a restaurant or playing a video game with an online community of friends. The social experience of these is positive and should be a growing part of the economy as we develop. Nevertheless, there can be negative aspect to some leisure activities – gambling addiction or excessive alcohol consumption – so we focus on those companies where the positive experience far outweighs any negatives. Examples include music events, and films.

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Greater safety and resilience (Safer)

The underlying themes include transport safety, with a focus on the rapid developments in such areas as Automatic Emergency Braking (AEB).

Enhancing digital security

As more and more of our lives and critical services are carried out online, we need to trust these systems and to protect the data from theft. Digital security helps make this growing area of the economy secure.

Insuring a sustainable economy

Insurance can spread the risk faced by an individual or a corporation amongst many other actors. The benefits of good insurance are:

• Provides a safety net (at a small cost) to mitigate: death in family; medical emergencies; material loss from natural disasters
• Supplements state social protection for individuals
• Mitigates financial impact of catastrophes corporations
• Lowers the capital a firm needs to operate
• Increases investment by reducing uncertainty
• Provides a price for risk

But with poor oversight the insurance industry is prone to mis-selling, (PPI, with profits), miscalculation of its own exposure, taking on excessive investment risk, and rewarding shareholders at the expense of their customers. We look for well-managed companies providing good insurance products which effectively mitigate and manage their customer’s risk.

Saving for the future

Retirement funding has stemmed from three sources: government programmes, employer-based programmes, and individual savings. Diminishing tax revenues and budget pressures have led to reductions in public pensions through increased retirement age, less generous inflation indexing and possible increases in taxes. At the same time, companies have been retreating from a Defined Benefit (DB) framework and shifting towards a Defined Contribution (DC) one. Both of these mechanisms shift the responsibility of retirement funding and risk to the individual. For the eight largest economies in the world the World Economic Forum, using Mercer data, predict the retirement savings gap will increase to $400trn by 2050 (5% growth from 2015) if measures are not taken to increase overall savings rates. This theme identifies businesses that make it easier for individuals to access and manage their financial futures.

Enabling SMEs

This theme seeks to find companies enabling the foundation, scaling, and improved efficiency of innovative new businesses. Small to medium sized enterprises (SMEs) are the anchor of a resilient and sustainable economy, accounting for 44% of US GDP and creating two thirds of jobs in the US. According to the OECD, SMEs facilitate innovation, reduce inequality in society, and increase economic resilience within society. There are key barriers to SME success as they struggle to overcome complexity and reach scale. Within this theme, we look for companies enabling his journey from idea formation to value creation, helping increase SME productivity and efficiency, and ideally growing with the SMEs they support.

Financing housing

Housing is a basic human requirement that is central to human wellbeing. A lack of housing also has detrimental effects to the wider economy; for instance rental and mortgage costs in many developed countries have outpaced wage growth, leading to declining disposable income for households and increasing inequality. In this theme we are looking to find companies that are allocating capital towards residential housing or making the market more efficient.

Transparency in Financial Markets

We believe that companies increasing the transparency of financial markets are set to benefit from increasing regulatory compliance measures and the increasing availability of data that can provide valuable insights for financial market participants to manage risk. In effect if there is equal information on both sides of a market then markets are likely to function better, risk is likely to be more accurately assessed, and the financial system will be more resilient.

Better monitoring of supply chains and quality control

We look for companies who are good at managing the complexities and potential risks in their supply chains as we believe this is not only the right thing to do but gives them a competitive advantage. We are also interested in finding companies whose products and services can help their customers manage their supply chains and ensure their products are of a consistent high quality.

Leading ESG management

How the business is managed operationally, in particular how they managed the Environmental Social and Governance challenges, can give them a competitive advantage over their peers if they can manage these challenges and opportunities more proactively. We believe this is a good proxy for the quality of management and the likelihood they will deliver on their strategy.

Process:

Sustainable Future Investment Process

Sustainable companies have better growth prospects and are more resilient than the market gives them credit for. We use this underappreciated advantage to deliver outperformance in our portfolios. In supporting these sustainable companies, we can also accelerate environmental and social improvements.

The investment process follows two stages:

Stage 1: identifying superior stocks for the equity portfolios.

Stage 2: constructing resilient portfolios

The first stage, stock selection has four key filters: thematic analysis; sustainability analysis; business fundamentals; and valuation.

1.Thematic analysis:

 We work to better understand the big sustainable trends that are happening and analyse these themes to check which companies will be potential winners or losers from major multi-decade changes in different parts of our economy. Why is this relevant to investors? This helps us identify potential areas of the economy and companies that will experience structural growth and helps inform our investment decision and give us conviction in the businesses we own. We feel most investors underestimate the speed, scale and persistency of such trends within our economy.

We therefore 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 22 themes within these.

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2. Sustainability analysis:

Our proprietary Sustainability Matrix assesses the whole company in two dimensions – the set of products or services offered; and the management of ESG exposures relevant to that industry sub-sector.

• Product sustainability (rated from A to E): Using our own proprietary model we quantify the sustainability of the products or services the company provides from the different business units within the company to come up with a business weighted overall sustainability score for the company. This enables us to go beyond industry classification generalisations and assess companies in more detail on an individual basis. This enables us to assesses the extent to which a company’s core business helps or harms society and/or the environment. An ‘A’ rating indicates a company whose products or services contribute to sustainable development (e.g. renewable energy); an ‘E’ rating indicates a company whose core business is in a conflict with sustainable development (such as tobacco).
• Management quality (rated from 1 to 5): Using our own proprietary model we quantify how well the company is managing the material ESG aspects within the company to come up with a quantitative overall ESG management score for the company. This includes performance data on material ESG factors that can come from the ESG data provider or can be augmented by our own analysis. This enables us to go beyond industry classification generalisations and assess companies in more detail on an individual basis. This enables us to assesses whether a company has appropriate structures, policies and practices in place for managing its environmental, social and governance risks and impacts. Management quality in relation to the risks and opportunities represented by potentially material social, environmental and governance issues are graded from 1 (excellent) to 5 (very poor).

How we use third party ESG data: The analysis and recommendation itself is always formed by the relevant team member. We initially look at the conclusions from our third party ESG data provider (MSCI ESG) to understand how well the company manages the aspects the provider have determined are most important as well as understanding any controversies surrounding the business. We use the ESG data they provide to understand how the business ranks relative to their peers. This is the start of our sustainability assessment.

How we quantitively score the sustainability matrix: we further augment the research from the third party ESG data provider by using our own proprietary model which identifies what we have identified as the most material ESG aspects that need to be managed and we measure how well the company is managing these to form our own view on how well the material ESG aspects are being managed by the company. There is significant overlap with the third party data provider but also important differences which can generate a different conclusion, using our discretion, based on our experience and proprietary research.

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3. Strong business fundamentals:

We target companies that exhibit growth above both their industry average and the economy as a whole. We also explicitly target companies which can illustrate recurring revenue streams and can consistently convert earnings to free cash flow.

We believe that those companies with a proven ability to generate and maintain high returns on equity (RoE) from a stable capital base will outperform the broader market. We look for companies with high asset turns and defendable margins. Typically these companies have a maintainable competitive advantage through scale, technology or business model. We avoid companies with excessive leverage.

A variety of metrics including return on equity, resilience, quality of earnings, free cash flow, and historic and predicted growth, are used to analyse a company’s business fundamentals. This allows the team to identify and forecast the growth prospects and underlying strength of a company’s finances.

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4. Valuation:

This filter ensures that all the companies we invest in are undervalued. We model 5 years of future revenue, margin and expected earnings and free cash flow. Our forecasts deviate predominantly in the integration of different thematic growth rates and in our forecasting further out. We use these financial forecasts to derive a future share price target that the company can achieve. The analyst has to explicitly identify the appropriate type and magnitude of valuation multiple to use for this purpose.

Only companies that can pass all four of these “quality” filters are eligible for investment

Stage 2: Building resilient portfolios

From the superior stocks identified, we build portfolios combining the best 40 to 60 names to diversify risk and reduce volatility of returns. This results in exposure across a wide variety of industry sectors (via a spread of our sustainable themes) and benefits from potentially distinct and uncorrelated growth drivers. Outperformance will come from the stocks we choose, while disciplined portfolio construction aims to minimise the volatility of returns.

Sustainable Investment team

Sustainability is at the heart of the Sustainable Future investment process. Every member of the Sustainable Future investment team (17 investment professionals) is responsible for understanding all aspects of financial and ESG risks and opportunities – including factors linked to climate change, relating to the investment decision.

• the major trends and themes in their sector
• identifying investment opportunities and the ESG performance of those opportunities
• integrating that information into forecast earnings and valuation
• submitting investment recommendations for our funds
• engaging with companies and conducting all proxy voting for investee companies

Because of this integrated approach, investment team members engage with companies across a broad range of issues relating to steps in our investment process, such as screening criteria, sustainable investment themes and company-specific environmental, social and governance issues.

The Sustainable Future investment team conduct their own proprietary research however there are multiple and diverse sources of additional research:

• Advisory Committee: guides on themes and new challenges and opportunities facing companies.
• Academic Institutions: for example; Cambridge Institute for Sustainability Leadership to develop longer term thinking and to refine the set of themes or Government agencies and audit reports.
• ESG Research Providers: currently we use MSCI ESG Manager and Ethical Screening to provide initial analysis of sustainability factors. For independent validation, we commission MSCI to perform analysis on our portfolios to assess the quality of ESG and carbon intensity relative to relevant benchmarks. These reports consistently demonstrate that all of our funds have significantly higher quality ESG and lower carbon intensity (circa 60% less) than benchmark.
• Meetings with company management and site visits: we aim to meet with investee company management at least twice a year to discuss longer term strategy, this involves travelling to the region the company is headquartered in and conducts additional research and analysis from NGO reports and websites.
• Expert networks: We use Guidepoint to arrange calls with independent experts in a particular sector (e.g. cyber-security purchasers to develop a view on Palo Alto)
• Independent research providers: We pay for research from selected research providers who are unconnected with corporate finance or broking.
• Sell-side research: Selected research is purchased to develop a broader understanding of industry sectors and to provide financial models of companies under analysis.

It must be emphasised though that these research inputs provide a foundation to the assessment by each analyst. The analysis and recommendation itself is always formed by the relevant team member.

Resources, Affiliations & Corporate Strategies:

Resources, Roles and Responsibilities

 Sustainable Investment team

Sustainability is at the heart of the Sustainable Future investment process. Every member of the Sustainable Future investment team (17 investment professionals) is responsible for understanding all aspects of financial and ESG risks and opportunities – including factors linked to climate change, relating to the investment decision.

• the major trends and themes in their sector
• identifying investment opportunities and the ESG performance of those opportunities
• integrating that information into forecast earnings and valuation
• submitting investment recommendations for our funds
• engaging with companies and conducting all proxy voting for investee companies

Because of this integrated approach, investment team members engage with companies across a broad range of issues relating to steps in our investment process, such as screening criteria, sustainable investment themes and company-specific environmental, social and governance issues.

The Sustainable Future investment team conduct their own proprietary research however there are multiple and diverse sources of additional research:

• Advisory Committee: We also have a four-strong external Advisory Committee to provide another layer of expertise in key areas of social and environmental impact: Tony Greenham, Tim Jackson, Valborg Lie, Ivana Gazibara and Mark Stevenson. The committee guides on themes and new challenges and opportunities facing companies.
• Academic Institutions: for example; Cambridge Institute for Sustainability Leadership to develop longer term thinking and to refine the set of themes or Government agencies and audit reports.
• ESG Research Providers: currently we use MSCI ESG Manager and Ethical Screening to provide initial analysis of sustainability factors. For independent validation, we commission MSCI to perform analysis on our portfolios to assess the quality of ESG and carbon intensity relative to relevant benchmarks. These reports consistently demonstrate that all of our funds have significantly higher quality ESG and lower carbon intensity (circa 60% less) than benchmark.
• Meetings with company management and site visits: we aim to meet with investee company management at least twice a year to discuss longer term strategy, this involves travelling to the region the company is headquartered in and conducts additional research and analysis from NGO reports and websites.
• Expert networks: We use Guidepoint to arrange calls with independent experts in a particular sector (e.g. cyber-security purchasers to develop a view on Palo Alto)
• Independent research providers: We pay for research from selected research providers who are unconnected with corporate finance or broking.
• Sell-side research: Selected research is purchased to develop a broader understanding of industry sectors and to provide financial models of companies under analysis.

It must be emphasised though that these research inputs provide a foundation to the assessment by each analyst. The analysis and recommendation itself is always formed by the relevant team member.

Governance Structure and Responsibilities:

The fund is overseen by the ACD (Liontrust Fund Partners LLP) to ensure it meets with the sustainability and financial objectives.

The Risk Team (which is independent of the Investment team) monitors the funds to ensure they meet with the sustainability and financial objectives.

The independent Advisory Committee advise the Investment team on emerging sustainability trends as well as challenge the investment team’s sustainability analysis conclusions and whether companies are suitable for the funds.

The Investment team are responsible for the sustainability analysis and investment decisions as well as the direct engagement and voting for companies the funds are invested in.

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Liontrust Initiatives /Affiliations:

•  Financial Reporting Council (FRC) Stewardship Code

Liontrust Investment Partners LLP is a signatory to the FRC’s 2022 Stewardship Code.

• The United Nations Principles for Responsible Investment (UNPRI)

Liontrust became a signatory to the PRI on 24 April 2018. Liontrust’s PRI Assessment report for 2021 is available on our website together with our transparency report Corporate sustainability | Liontrust Asset Management PLC

• Taskforce on Climate-Related Financial Disclosure (TCFD)

Liontrust became supporters of the TCFD in September 2018. Liontrust reported against the TCFD recommendations in its annual report and financial statements (p.60-73) as per the FCA listing rules Annual Report | Liontrust Asset Management PLC

• Net Zero Asset Managers Initiative (NZAMI)

Liontrust joined NZAMI on 25 May 2022. We have 12 months (until end May 2023) to submit our plan and our initial % of AuMA to be covered by the commitment. We plan to meet this deadline and provide details on several points including our 5-year targets for our funds, our engagement outline for our highest emitters, as well as our plan for the Plc to become carbon neutral (the Group is currently carbon neutral due to offsetting.)

• Institutional Investor Group on Climate Change (IIGCC)

Liontrust became a member of the IIGCC in April 2022. The mission of the IIGCC is to support and enable the investment community in driving significant and real progress by 2030 towards a net zero and resilient future. This will be achieved through capital allocation decisions, stewardship and successful engagement with companies, policy makers and fellow investors.

• CDP (formally Carbon Disclosure Project)

Liontrust has supported CDP since July 2017. CDP is a not-for-profit charity that runs the global disclosure system for investors and companies to manage their environmental impacts from climate, forests and water. Liontrust reported to the CDP on its climate disclosures in 2022 scoring a ‘D’ rating. Liontrust submitted its 2022 report to the CDP in July, we expect to receive our rating in November. Liontrust also supported two CDP campaigns, which included encouraging non-disclosure companies to disclose and encourage high carbon emitting companies to report science based targets.

• The Montréal Carbon Pledge

Liontrust became signatory to the Montréal Pledge in 2021. By signing the Montréal Carbon Pledge, investors commit to measure and disclose the carbon footprint of their investment portfolios on an annual basis.

• Workforce Disclosure Initiative (WDI)

Liontrust Investment Partners LLP became supporters to the WDI in May 2019.  The WDI aims to improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide.

• UK Sustainable Investment and Finance Association (UKSIF)

Liontrust became a member of UKSIF in July 2017. UKSIF exists to bring together the UK’s sustainable finance and investment community and support our members to expand, enhance and promote this key sector.

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Endorsed Statements:

• 2022 Global Investor Statement to Governments on the Climate Crisis - Endorsed statement
• PRI Statement of Investor Commitment to Support a “Just Transition” on Climate Change - Endorsed statement
• PRI Statement to support the SEC’s reporting changes – Endorsed Statement
• Global Investor Statement to Governments on Climate Change - Endorsed statement
• PRI Investor statement on deforestation and forest fires in the Amazon- Endorsed statement
• Access to Medicine - Global Investor Statement in support of an effective, fair and equitable global response to Covid-19
• CDP Science Based Target Campaign – endorsed campaign
• CDP Non-Disclosure campaign – endorsed campaign

Sustainable Investment team historic involvement:

• PRI Listed Equity Advisory Committee
• PRI Sustainable Palm Oil Investor working Group
• PRI Global Investor Taskforce on Tax & the PRI Tax Advisory Committee
• PRI Cyber Security
• PRI SDG and Active Ownership Committee
• PRI Investor Working Group on the Just Transition
• Access to Nutrition Index