Catch up and a cuppa with Kenny Watson and Aitken Ross

Liontrust Monthly Income Bond doesn’t have the word ‘sustainability’ in its title, but the managers have used an integrated sustainability matrix as part of its investment process for the past seven years.

Designed to assess the extent to which a company’s core business helps or harms society and/or the environment, whilst also assessing whether a company has appropriate structures, policies and procedures in place for managing environmental, social and governance (ESG) risks and impacts, the matrix ranks companies and helps the managers decide if their bonds could be good or bad investments, before they undertake further valuation and fundamental analysis.

Here, co-managers Kenny Watson and Aiken Ross, talk to us about three companies they invest in and how they score.

Centre Parcs: B2

“Centre Parcs, as many people will be aware, is based in forests and has a car-free environment. It’s also a good business that is well-run and despite having a number of changes of ownership, has never been starved of cash.

“A lot of work goes into the biodiversity of its environment and studies are undertaken to make sure the lodges and activities offered are not affecting animal life or the forests themselves. The carbon footprint has been reduced over time, renewable energy is used, recycling encouraged and a healthier life-style is promoted to holiday makers.

“It tends to have a high staff turnover, but is good with employees – evidenced by employee satisfaction surveys.

“From a business point of view, one of the appeals is its repeat bookings – which are around 80%. Occupancy is fairly predictable and, as people book in advance, the company gets the money upfront.

“It scores a B2 in our matrix and we invest in its subordinated bonds.”

Learn more about the different kinds of bond issued by a company here

Lloyds Bank: B2

“Lloyds would not have made it through our matrix ten years ago. However, since the global financial crisis, a number of positive changes have been made. It’s main business today is lending money to retail clients and small and medium enterprises – services that benefit society.

“Insurance is also a positive product for society and we now view the PPI claims [which all banks had to pay] as ‘crimes of the past’.

“Today, governance has improved significantly and the company’s carbon footprint has been reduced through lower paper usage and the issuance of green bonds.”

Morrisons: C3

“Morrisons has a lower ranking ‘C’ due to its product sustainability and the work that still needs to be done by supermarkets generally. But it has made some positive inroads.

“The company owns more of its own supply chain, so it is able to make sure that the companies that supply its products are also trying to be more sustainable: it audits them regularly to track progress and has excluded suppliers in the past that haven’t changed processes when requested.

“Morrisons is also leading the way in the fight against plastics – having introduced paper bags. It has also reduced food waste by selling ‘wonky products’ that are not perfect but are edible, and gives food past its ‘sell-by date’ to other organisations to recycle. Carbon emissions have been reduced and it uses LED lighting in stores. It is also good with employees and donates a lot of money to charities.

“It only ranks as a 3 because other targets have been introduced but not yet achieved.”

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.