Liontrust Sustainable Future Funds - Annual Review 2019 - Page 17



Fashion
Fashion, by definition, is among the fastestmoving industries and one that has presented
many challenges for sustainable investors
over the years. Our work since 2001 on
the industry also highlights how our thinking
on themes can change and, in this instance,
shines a light on our substantial engagement
efforts as an active owner of companies.
Clothing supply chains have lengthened
under relentless pressure on costs over
recent decades as emerging economies
offered lower wages, weaker labour laws
and tax breaks to win valuable contracts
from major brands.
2001
2002
Climate change
The natural disasters and climate strikes over
the past year have served to highlight the
growing urgency of the climate crisis. It feels
like a step change that will translate into real
action worldwide but how did we get here?
2006: Labour standards
Since the earliest days of the SF funds,
labour standards in supply chains has been
one of our most important engagement areas
and we have seen several major projects
designed to improve this, from Oxfam
launching Better Returns in a Better World in
2006 to Fashion Revolution, formed in the
wake of 2013’s Rana Plaza disaster.
2009: Supply chains
We assessed the fashion industry’s supply
chains and the working conditions within
them in 2009. We concluded that conditions
were unacceptable in a significant number
of supply chains, that change was coming,
and there were opportunities available
to companies which could drive
improvements. We focused on
the need for decent work
and wages throughout
the chain and positively
identified Inditex, the
owner of the Zara
brand, as we believed
its proximity sourcing
model allowed for a
more sustainable form
of manufacturing.
2003
2004
2005
2006
2001: Exposure
In November 2001, the third major report on
climate change (from the Intergovernmental
panel) stated clearly that “global warming
was very likely with highly damaging future
impacts”. We had launched our funds earlier
that year with a clear focus on avoiding
carbon-intensive industries, which meant no
exposure to companies involved in coal, oil
or (internal combustion engine) autos.
This approach meant our clients avoided
exposure to industries involved in some major
events over this time – from BP’s Macondo
blowout to the German car industry’s
Dieselgate – and our funds avoided the
financial losses from these events.
16 - Liontrust Sustainable Investment: Annual Review 2019
2016: Risk vs opportunities
After many years of analysis, we
concluded retailers have been unable to
show sufficient improvements in the supply
chain and the image of ‘Fast Fashion’
has become irrevocably damaged as a
result. The theme exposed more risks than
opportunities for the large retailers and we
sold out of names including H&M and,
ultimately, Inditex in 2018.
2013: Accords established
This issue of unsafe working conditions came
into sharp focus with the 2013 collapse of
the Rana Plaza complex in Bangladesh,
a disaster that resulted in the loss of more
than 1,100 lives. Many of those killed
were employed in the garment industry and
change was urgently required.
We saw the Accord on Fire and Building
Safety in Bangladesh and Alliance
for Bangladesh Worker Safety quickly
established, notable wins for an industry
that had previously been slow to respond
to these issues. The Liontrust Sustainable
Investment team was part of a coalition of
shareholders representing around US$1
trillion in AuM that engaged with companies
following the disaster, with Adidas signing
the Fire & Safety Accord in 2013 being
particularly important.
2018: Safety
This is not to say we no longer find
opportunities within this theme but we now
focus on companies that assess supply
chains on behalf of retailers.
The Testing, Inspection and Certification (TIC)
industry is vital for sustainable development,
ensuring the safety of our products both
for the users and the people making them.
With more complex supply chains, product
innovation, stringent regulations and everincreasing consumer demands around
sustainability, this sector enjoys a long-term
structural growth rate that should continue to
rise ahead of global GDP.
We also visited Bangladesh on a fact-finding
tour in 2014, and legislation such as the
Modern Slavery Act continues to improve
working conditions around the word.
2007
2008
2009
2010
2006: Efficiency and economic sense
The Stern Review came out in 2006, telling
us the cost of reducing emissions would be
far less than the cost of the damage these
emissions would cause. This backed up our
original thinking that investing in companies
helping to cut emissions makes economic
sense. By then, we had already started
investing in companies like Kingspan,
whose products improve the energy
efficiency of buildings.
2011
2012 2013
2014
2012: Footprint
We began monitoring the carbon
footprint of our funds, allowing us to better
understand where portfolio emissions were
coming from.
2016: Gas and coal
We further strengthened our approach.
The investment team and our Advisory
Committee agreed that natural gas should
no longer be considered a primary
transition fuel so, in addition to
coal and oil screens, we
decided to exclude
companies
exploring for
or producing
natural gas
from our
funds.
We identified Intertek as a positively
exposed company benefiting from structural
growth in increasing safety standards,
outsourcing, regulations and sustainability,
adding it to funds in 2018. It also has the
sustainability profile, business fundamentals
and valuation that we need to invest
with confidence.
2019: Circular economy
We continue to look for clothing businesses
focused on closing the loop and moving
towards a circular economy, buying
innovative Italian textile manufacturer Aquafil.
Plastic pollution has quickly become a
mainstream issue and urgent action is
needed from consumers, companies and
governments. One solution to this problem is
to recover and re-use the plastic waste that
litters our oceans. ‘Regenerated’ plastics are
made from recycled plastic waste, avoiding
the creation of new virgin material from oilbased petrochemicals and helping to ‘close
the loop’ in the plastic lifecycle.
Aquafil’s main product is nylon, which has a
number of valuable characteristics including
toughness and durability, as well as being
2015
2016
2017
lightweight, quick-drying, shrink and fire
resistant. As a crude oil derivative, however,
nylon clearly has a number of sustainability
challenges. Recognising this around 20
years ago, Aquafil decided to tackle this
issue by trying to improve the sustainability
of nylon production.
After years of trial and error and investment,
CEO Giulio Bonazzi’s vision was realised as
Aquafil successfully developed a commercially
viable process to recycle used nylon. Aquafil
branded this innovative recycled product
Econyl, with the tagline: No waste. No
new resources. Just endless possibilities.
We believe this will enable Aquafil to
capture more of the end product margin,
and its central role in Vogue’s recent
sustainable issue shows how it is winning
over the fashion world.
We continue to believe unsafe and
degrading working practices make no
business, common or investment sense
and will continue to play our role in
bringing them to an end. We do this to
generate investment returns for our clients
but it is also clearly the right thing to do.
2018 2019
This timeline is designed to show how
the Liontrust Sustainable Investment
team has been at the forefront of
recognising when times are changing.
Being early to adapt means we
avoid risks and capture investment
opportunities along the way.
Currently, our funds continue to be
positioned progressively because we
believe the shift to decarbonise will
be bigger and happen more quickly
than the market anticipates. The Paris
Agreement in 2016 was a major
step forward but we expect further
tightening of global regulations as well
as shifts in consumer behaviour – and
our efforts as part of the One and a
Half Degree Transition Challenge are
testament to this.
Liontrust Sustainable Investment: Annual Review 2019 - 17

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