Liontrust Sustainable Investment Annual Review 2022 - Flipbook - Page 6
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Thematic analysis – strong and dependable growth prospects
Better resource efficiency
Improved health
Greater safety and resilience
• Improving the efficiency of energy use
• Providing affordable healthcare
• Increasing financial resilience
• Improving the management of water
• Connecting people
• Saving for the future
• Increasing electricity generation from
renewable sources
• Delivering healthier foods
• Insuring a sustainable economy
• Building better cities
• Leading ESG management
• Providing education
• Enhancing digital security
• Enabling innovation in healthcare
• Better monitoring of supply chains and
quality control
• Improving the resource efficiency of
industrial and agricultural processes
• Delivering a circular materials economy
• Making transportation more efficient or
safer
• Enabling healthier lifestyles
• Encouraging sustainable leisure
While themes are at the heart of our idea generation, there are three further criteria all companies have to satisfy.
Sustainability analysis: A company might have significant
exposure to a theme, but we also have to check how
sustainable the rest of its activities are. For each business,
we determine key ESG (environmental, social and governance)
factors that are important indicators of future success and assess
how well these are managed via our proprietary Sustainability
Matrix (which can be seen on page 24). Every company held by
the SF funds is given a Matrix rating, which analyses the following:
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• Product sustainability (rated 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
Analysis of business fundamentals and valuation
analysis: Companies in which we invest have
robust business fundamentals with a proven
ability to deliver high returns on equity (RoE) through sustaining
margins and asset turnover. Typically, these companies have a
maintainable competitive advantage through scale, technology or
its business model.
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services contribute to sustainable development (via our investment
themes); an E rating indicates a company whose core business
is in a conflict with sustainable development (such as tobacco or
polluting activities like coal-fired electricity generation).
• Management quality (rated 1 to 5): Assesses whether a company
has the 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 for inclusion
in our SF funds.
We then predict the likely sales, earnings and other financial returns
we expect to see from these companies over the next three to five
years, integrating our view of their quality into these. Applying
the relevant valuation multiple allows us to derive a price target
achievable in the next three years. When this shows significant
upside (typically, we look for greater than 10% a year), the
investment is recommended as a buy and available to be included
in our funds
Growth
Resilient returns
Quality of earnings
Theme driven
High quality companies
Resilient, dependable
Growing addressable market
Share gainers
Structural tailwinds
High barriers to entry
Aligned management team
Sustainable competitive advantages
Recurring revenues
Cash flow conversion
• Forecast financial outcomes over the next five years
Determining future revenues, margins and earnings
• Determine the future level of the valuation multiple
Will the multiple fade, be sustained or expand?
• Identify the valuation metric relevant to the stock
Price/Earnings, EV/EBITDA, Price to Book
• Derive the valuation that the shares can reach over the
coming years
We look for greater than 10% pa return
6 - Liontrust Sustainable Investment: Annual Review 2022