Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 94
IDENTIFY AND PRIORITISE
The team integrates ESG considerations by undertaking materiality
assessments of fund holdings. This enables the team to identify and
prioritise the material risks and opportunities that an investment may
face over the investable time horizon of GFT’s funds, namely the next
one to three years. The issues prioritised by the team are specific to
each business, rather than determined by top-down checklists which
may be too general or not overly specific to the individual holding.
To analyse and record this information, the team captures and
tracks holistic information on each company, across its operations
and locations. Once the team has identified the spectrum of issues
that a company faces, it determines the materiality of each by
evaluating the likelihood that a risk or opportunity will take place
(over the investable time horizon of the fund) as well as the impact
that the exposures might have on the underlying business, should
they take place. The team maps these exposures, y-axis on a matrix
to indicate likelihood and the x-axis to indicate impact. The issues
that have a higher degree of likelihood and which could have a
higher degree of impact on the business are deemed to be the
most material; these are a group’s most important exposures. These
appear in the upper right-hand quadrant of the materiality matrix,
as shown in the example displayed in Figure 1.
ENGAGE
The team engages holdings on their key risks and opportunities
as identified and prioritised during fundamental research and
materiality assessments. These materiality assessments form part of
the team’s engagement with its holdings. The goal of the team’s
engagements is to understand how and the extent to which a
company is managing its key issues. Where the team finds that
a group is not demonstrating efficient management of a risk or
opportunity, it engages the company, requesting that the group
takes specific steps to manage these more effectively, for the benefit
of both the company and its shareholders.
RESILIENCY
Based on the team’s assessment of how a group is managing its
key issues, the team assigns a 1-5 rating (5 is the highest) as its
proprietary resiliency score, which the team tracks over time. In
cases where a company is managing some issues more effectively
than others within the same group, the resiliency score may reflect
an averaging of its approach across its issues. In practice, the
score is often weighted towards the management of higher impact
areas. Each member of the investment team provides a rationale for
why they have attributed a specific resiliency score. This rationale is
amended each time the team updates the score. Resiliency scores
may rise or fall when a group improves, or, equally, slips in the
management of its key issues. Resiliency scores can also change
with the prioritisation of new areas or exposures which may or may
not be managed effectively. The resiliency score may feed directly
into the conviction score for a holding.
1. Opportunity to gain share in the UK, upside to NPS, which
should benefit from online marketing initiatives and CRM. The
team has tangible evidence of this important leg of the thesis
playing out with market share rising from 7.6% to 10.2% over
the Covid period
Figure 1. Assessing and monitoring a Group’s material issues
2. Economic downturn risk to volumes, especially in higher ticket
items.
Likelihood >
Dunelm
Key issues:
4. Store space and new formats. Management started to talk
again about small space growth.
Opportunities
1
4
6
3
5
2, 3
Impact >
Likelihood >
3. Brand damage – responsible sourcing of raw materials. Supply
chain oversight.
Risks
4
5
Impact >
5. Need to attract and retain the best staff. The CFO left and the
new CFO will need to demonstrate if the same tight control of
financial guidance is kept.
6. Reduction of waste and packaging, managing end-of-life for
products, using durable materials
94 - Responsible Capitalism Report 2023
Source: Liontrust
Jan-22
Jan-22