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Liontrust: ESG Delivers Superior Investment Returns

Liontrust head of Sustainable Investing Peter Michaelis says investors do not have to choose between ethics and profits

Emma Wall 10 October, 2017 | 11:48AM

 

 

Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Peter Michaelis, Head of Sustainable Investing for Liontrust.

Hello, Peter.

Peter Michaelis: Good morning.

Wall: So, I thought we could start with a back to basics question, which is, what does sustainable investing mean to you?

Michaelis: Yeah. So, sustainable investing is quite straightforward. It aims to deliver superior investment returns by investing in more sustainable companies.

Wall: And sustainable companies are much more far-reaching in concept than perhaps what many people think of as this type of investment which is dark, green, ethical. Sustainable is much more open and encompassing rather than exclusionary, isn't it?

Michaelis: Definitely, definitely. So, ethical and sustainable investing really has three elements to it. There is the, sort of, avoidance, so avoidance of controversial industries which is within there. But it's evolved and there's a second element within sustainable investing is around positively investing in certain areas such as environmental technology, healthcare, renewable energy, high-growth long-term trends within the economy. And the third element around sustainable investing is engagement with companies. So, modern day sustainable funds encompass all three of those elements.

Wall: And why do those three elements lead to sustainable returns for investors, because I think sometimes there is this idea that you have to choose between your morals and profits?

Michaelis: Yes. Definitely. People have that in their head that in some way you are giving up returns. In fact, the very opposite seems to be true and many sustainable investment funds are in the top quartile and outperforming their peer group averages. Now, the reason why it works as an investment strategy is twofold.

The first is, it invests behind these structural long-term trends within the economy, such as resource efficiency, energy efficiency. These are very dependable positive powerful trends. Companies exposed to those will do well. They will see longer-term growth prospects and that is underappreciated by most investors.

The second element is looking at companies more broadly in terms of their environmental, social and governance performance. And that helps you avoid things like Dieselgate and the impact on Volkswagen and BP Macondo in terms of health and safety accidents.

Tesco mis-tating reports and accounts or the PPI mis-selling. All of those things could have been identified ahead of time by looking more broadly at how companies perform on environmental, social and governance metrics. So, that really leads you to a set of companies with stronger growth prospects and better-quality management.

Wall: Is it fair to say then as a sustainable investor that you are perhaps more activist than somebody who doesn't employ those guiding metrics to their stock picking?

Michaelis: We are definitely active. The active share of our funds is 90% in most of our sort of equity funds. So, we are definitely not benchmark-huggers. And so, we are trying to find those companies that are going to be the real successes of tomorrow, whether that's in the food industry where there's massive change going on in terms of us changing our diet, whether it's in sort of changes in energy efficiency that are going on which is driving huge demand for energy efficiency products.

Whether it's variable speed motors or thermal insulation or in healthcare where we look at innovation within healthcare and diagnostic companies. These are all companies which are industry leaders but are going to see very strong long-term growth while delivering a really positive product to their customers.

Wall: And would you ever help sway a company that perhaps was not quite there in terms of their sustainable – the ESG element?

Michaelis: Yeah. So, clearly, environmental, social and governance metrics are not as well developed as financial metrics. So, we often engage with companies to say, we'd like more disclosure on your energy efficiency, on your carbon dioxide emissions or how you're managing your supply chains, because this information helps us to compare companies better to improve the investment outcome.

Wall: Peter, thank you very much.

Michaelis: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk