Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 44
Sustainability Matrix
Every corporate debt issuer identified for inclusion in the portfolio
is given a Sustainability Matrix rating, which analyses the
following aspects:
• Product sustainability (rated from A to E): 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 conflict with sustainable development (e.g.
tobacco).
• Management quality (rated from 1 to 5): Assesses whether a
company has appropriate structures, policies and practices in
place for managing its ESG risks and impacts. Management
quality in relation to the risks and opportunities represented by
potentially material ESG issues are graded from 1 (excellent)
to 5 (very poor). Companies must score C3 or higher to be
considered further for inclusion in the funds.
STAGE 2: CONSTRUCT RESILIENT PORTFOLIOS
AND CONTROL RISK
Portfolio construction
From the available “buy” recommendations identified in Stage
1, the team selects the best combination of 60 to 100 bonds for
inclusion in a focused portfolio that is constructed to safeguard
against sustained downside risk. Investment managers are
expected to deliver positive investment performance relative to
a relevant performance measure over the medium term while
adhering to defined risk parameters and fund-specific investment
restrictions.
Portfolio construction is reviewed continually to ensure that it
reflects the high-level strategy of the team and is consistent with
the policy objective. The portfolio is also assessed to ensure that it
has appropriate levels of diversification and to identify correlation
within the portfolio, with consideration given to factors such as
asset allocation, duration and yield curve, sector positioning
and stock selection. Portfolio positioning is reviewed by an
independent performance and risk team via both daily analysis
and a more formal review cycle.
Active management
The portfolio is actively managed using a high-conviction approach
with a focus on access to market liquidity. The team believes that
having a more concentrated, lower turnover approach improves
investment performance.
44 - Responsible Capitalism Report 2022
Risk controls
The team ensures that it minimises unwanted risk, but will use
risk where there is a high level of conviction in a particular bond
or theme. The team considers the risk / return potential of each
position and aims to deliver a return that is commensurate with the
level of risk undertaken.
In addition, consideration is given to the risk profile of the portfolio
as a whole and each holding’s contribution to the overall risk.
Derivatives, dealing and counterparty permissions
Where permitted, derivatives are used for the purposes of
hedging and/or implementing strategic and tactical overlays
in accordance with efficient portfolio management guidelines.
The use of derivatives is subject to Liontrust’s derivatives policy.
All derivative positions are reconciled and collateralised on a
daily basis to ensure all relevant systems are accurately reflecting
positions and market valuations.
Screening
All holdings must adhere to the funds’ screening criteria. These can be
found at https://www.liontrust.co.uk/search?query=screening%20
criteria&page=1&take=10& for the Sustainable Future funds, for
the Liontrust UK Ethical Fund, and for the team’s Equity, Bond and
Managed Funds.
SUSTAINABLE INVESTMENT TEAM’S APPROACH TO
ENGAGEMENT (EQUITY AND FIXED INCOME)
Engagement is integral to how the Sustainable Investment team
ensures it invests in high-quality companies. Engaging with
companies on key ESG issues gives the team a greater insight
and helps them to identify leading companies and bond issuers.
In addition, engagement is used to encourage the improvement
of business practices.
The team has actively engaged in this way for over 21 years on
a range of issues including: driving membership of and disclosure
under the UN Global Compact; promoting decent work within
supply chains; seeking the end of modern slavery; and a range
of collaborative engagements around palm oil, tax and nutrition.
This approach challenges and encourages companies and bond
issuers to proactively manage the wider aspects of their business,
which, in turn, protects their longer-term prospects.
Engagements
The Sustainable Investment team undertook engagements on
themes and on specific company issues during 2022. The
purpose of this engagement was to understand how the team’s
holdings are managing the issues areas raised by the team and
to ensure the value of the asset is maintained and/or increased
over the longer-term.