Liontrust Sustainable Investment Annual Review 2022 - Flipbook - Page 37
Controversies
Over the two decades we have been managing the SF funds,
a key lesson we have learned is that ‘sustainable’ should not be
taken to mean perfect. Investing involves making predictions about
the future, which is extremely difficult. We therefore have to expect
occasions – albeit rare – when the future does not turn out as
predicted and our companies become embroiled in a controversy
that challenges our initial assessment of their sustainability. We do
not claim to have perfect foresight, nor that the companies held
in our funds are flawless. What we do aim for is to find the best
examples of sustainable companies to own for the long term, and
how we process and react to controversies is an important aspect
of this.
As soon as we are aware of any controversy, the next stage is
to analyse the situation in detail, investigating to ascertain the
involvement of the company in question, the seriousness of
allegations made and how the business is responding. This gives
us the context with which we can engage and we will then look
to speak to senior management or non-executive directors as well
as other interested parties such as nongovernmental organisations
(NGOs) or industry experts. With this information, we are in a
position to establish the impact of the controversy on our investment
thesis (remembering that this includes the sustainability rating). The
three possibilities are:
Over 2022, MSCI highlighted 101 ‘controversies’, with two
of these considered ‘very severe’ and nine of these considered
‘severe’. Of the two ‘very severe’ controversies, we were already
aware of one of the issues as it had already been flagged .
None of the ‘severe’ controversies led to the team reviewing our
sustainability rating as we were either aware of the issue or, after
examination, deemed it immaterial to our assessment.
1. That the business no longer satisfies our criteria for a sustainable
investment, so we exit the position.
2. The risk and quality of the investment is affected so we feel a
smaller portfolio position is appropriate and therefore reduce
our exposure. This would be reflected in a downgrading of our
sustainability matrix rating.
3. The issue is being addressed by management sufficiently so
that we can continue to hold our portfolio weighting while
engaging with the company to ensure the situation is resolved.
Case study: Home REIT
Case study: PUMA
Home REIT PLC | Board & Committees,
Other Corporate Governance issue, Audit
& Oversight, Other Social issue
Home REIT’s shares were initially temporarily
suspended from trading in London after
the company failed to publish its annual
financial report for the year that ended August 31, 2022. In
December 2022, the company reported that its auditor was
undertaking “enhanced audit procedures” after Viceroy Research
questioned its financial status.
We have been engaging with the Board and other significant
shareholders to determine the best way forward and will continue
to do so following the suspension of shares in Q1-2023. Through
this engagement, we are looking to achieve a resolution that meets
two objectives. First, we are seeking to protect shareholder value.
Second, we want to ensure that good quality housing continues to
be provided to vulnerable people. We still believe that this could
be a very effective way of allocating capital to alleviate a major
social issue in a way that leads to better outcomes for vulnerable
people and reduces costs for government and local authorities. It is
not appropriate for us to comment on any of the propositions at this
stage, but we do believe there are ways in which a much better
outcome can be achieved in time.
Issue/Reason for engagement:
The
company has faced an allegation that
its products contain traces of cotton from
Xinjiang, a region associated with human
rights abuses.
We had already engaged with the company through the Better
Cotton Initiative, and contacted the company’s investor relations
team as soon as we became aware of the allegations of
Xingjian cotton being traced in some of the group’s garments.
The company immediately launched a full investigation into the
issue and began independent lab testing. Initial engagement with
the company demonstrated that the allegation was taken into
significant consideration. Within Liontrust this issue was escalated
to the Advisory Committee members. We once again met with the
company, this time escalating the level of engagement, discussing
the issue with the CEO. The independent lab results yielded mixed
results, which could not disprove that the fibre came from the Xinjiang
region. While this is disappointing, we were pleased to see Puma
addressing this issue head on, as other companies involved in the
same controversy have not begun the same independent testing.
We also raised this issue with our Advisory Committee members
and it was agreed that we should continue to monitor the company’s
ability to understand their exposure through testing.
All use of company logos, images or trademarks are for reference purposes only.
Liontrust Sustainable Investment: Annual Review 2022 - 37