The Sustainable Future strategies have existed for 24 years. They have always aimed to deliver strong returns by backing sustainable companies. We write regularly about those investment returns and how, over the longer term, we have shown that this strategy is a successful and credible approach to active management.
However, in this, the first of six articles, we want to focus on the other vitally important aspect of sustainable investment: how it helps improve our world. Our existing economies remain far from perfect, but they can change to become much more sustainable. Sustainable investing plays an important part in accelerating this change. We start by examining how it can help us to leave our planet in a good state for future generations.
It was 38 years ago that the Brundtland Commission defined sustainability as ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs.’
How have we been doing with that? From a planetary perspective, not so well. The Stockholm Resilience Centre (SRC) assesses nine critical processes which maintain a stable and resilient Earth – that is, one we could be proud of passing on to the next generation. In 2023 it concluded that six of the nine boundaries have been transgressed. Transgressing means there is a risk of generating large-scale abrupt or irreversible environmental changes. It shows that in these six areas we are beyond the safe operating space at a planetary level.
Stockholm Resilience Centre – Planetary Boundaries, 2023 update.
Amongst these is the well-documented challenge of climate change, but it also covers freshwater change and biogeochemical flows of nitrogen and phosphorus.
The SRC and many others show that at a planetary level we are severely compromising the ability of the next generation to meet their own needs. Not sustainable at all.
So far so dismal. However, look at one of the segments – that of ozone depletion. That is back in the safe zone. Yet in 1986 it would have been coloured orange or red. It is a rare success story in what can be done when science, governments and society, and business work together.
Science was behind the discovery of the existence of the ozone layer, how CFCs (chlorofluorocarbons) destroy ozone, and provided evidence of Antarctic ozone thinning. The science became clear: CFCs were causing unexpected harm.
Now CFCs were actually invented to benefit humans (substituting for hazardous refrigerants like ammonia), so eradication overnight would be impossible.
And this is where governments came in.
They came together in response to the science and pressure from environmental groups and instigated a planned and gradual phase out of CFCs under the Montreal Protocol.
But what about business? Business adapted to the new regulations, realising that the demand for better substitute HCFCs (hydrochlorofluorocarbons) would more than compensate for the loss from the ozone harming CFCs. The novel solution became a fantastic opportunity.
The result is that we still have fridges, air-conditioners, hair spray, but we do it in a way that does not put at risk the thin sunscreen of ozone in our atmosphere.
Sustainable investment finds and invests early in those companies that are providing the solutions. Those companies that will take the successful model with which we solved the thinning of the ozone layer and apply it to climate change, biodiversity loss, land-use loss and freshwater change. We see the opportunity where others do not.
By backing these companies, investors encourage greater innovation and speed to market. For the companies we invest in, our long-term investment approach helps them to stick to their strategies and deliver the solutions the planet needs. These strategies, when successful, can have a meaningful impact on these planetary challenges. Three examples of areas where companies in the SF Funds are helping to deliver a planet in a better state for future generations include:
- Circularity of materials: reusing materials (instead of throwing them away and relying on new virgin material) has huge environmental benefits by reducing energy and emissions as well as limiting the impacts of mining and processing more virgin material. Trex is a US-listed company that collects used plastic packaging which it incorporates along with waste wood into its decking materials sold in the US. Its products last much longer and using reclaimed plastics reduces emissions and increases their profitability.
- Climate change: our current energy use is very wasteful. Energy efficiency alone can reduce emissions by over 40% while also saving on future energy bills. Insulating and using smarter heating and cooling in buildings meets both of these goals. Companies such as Topbuild, a US building insulation consultancy and distributor, are delivering on this theme. So too is Trane Technologies, which is a leader in the manufacture and servicing of energy efficient heating, ventilation and cooling (HVAC) products. By replacing older HVAC systems with greater energy efficiency and lower global warming potential (GWP) refrigerants, Trane helps to decarbonise the built environment by reducing the operational emissions of buildings and homes.
- Freshwater & novel entities: Evermore sophisticated monitoring and analysis of materials is required to understand the pollutants in our shared environment and to detect new man-made pollutants such as micro-plastics and PFAS (more commonly known as toxic forever chemicals). Companies like Waters Corporation and Oxford Instruments make the equipment to monitor specific toxic pollutants. More directly, companies like Core & Main (a distributor of equipment needed to manage water) is helping improve how water is managed in the US, where huge investment is required to deal with ageing water infrastructure and increasing water stress.
Key Risks
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments
The Funds managed by the Sustainable Future Team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
- Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Disclaimer
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
