This week marks three years since the launch of the Rathbone Greenbank Global Sustainability Fund and much has changed in the world of sustainability investing over the period.
The phenomenal rise of environmental, social and governance (ESG) into wider investor consciousness is perhaps the most significant for investors and the fund.
“The narrative has changed completely,” says fund manager David Harrison. “Ten years ago when I started looking at this area, it was seen as a detractor from performance. And now that has been flipped on its head, and would-be investors have realised that these credentials can be additive to performance.”
Among the changes Harrison has noticed is a greater push from governments and investors of all sizes towards a sustainable agenda, stemming from a growing acceptance that the world cannot continue on its current path and that investing the right way can help to make the world a better place.
This has led many companies to focus on how they can improve or expand into new areas.
“We’ve seen the number of potential sustainable investment opportunities has gone up and we’ve now got around 3,000 companies in our universe,” he says.
But while it has been a positive realisation among many companies, the sizeable inflow of money has also created a greater propensity for companies to highlight their innumerable sustainable qualities – even if they don’t really exist.
“As the number of opportunities has gone up, so has the risk of greenwashing,” Harrison says.
“So we’re wary – we only want the companies that ‘walk the walk’ in terms of sustainability.”
The way Harrison and his team picks their investments starts with what's called a negative screen, which filters out no-go areas that include oil and gas, nuclear and animal testing, and leaves this ‘universe’ of 3,000 companies.
Then Harrison and the analysts on the Rathbones investment team “do the work”, as he says, to decide which companies fit the bill. “Then we send the ideas to Greenbank. They do the crucial sustainability work and have the final say on whether a stock is investable or not.”
By Greenbank, he means Rathbone Greenbank Investments, an arm of the group that has been specialising in ethical, sustainable and impact investing for more than 20 years.
“Well under 50% of companies get through the process. We find sometimes the biggest companies have the biggest sustainability budgets and will have done a great job of repackaging what they do to make it more sustainable. But when you dig into the detail, it's not there.”
This requires a lot more work in sifting the sustainable wheat from the greenwashed chaff.
“We'll always sit down and really quiz senior management in detail. That's probably still the single best tool for finding out if a company is sustainable or not.
“We use the United Nations Sustainable Development Goals, which have been widely adopted by many companies – and it looks lovely in the annual report. But I've been at meetings where we go 'okay, let's now dig into this, can you explain how this is linked back to your core business?' and there was a look of terror.
“As more money flows into the space, that is something that will remain and something that we have to remain alert to. And I think it definitely does play to our strengths as investors and the expertise of Greenbank.”
Another strength has been the investment choices that Harrison and the team have made, which is demonstrated perfectly as the fund’s three-year anniversary comes on the back of a remarkable outperformance of its benchmark.
Since launch the fund has delivered a return of 56.9%, versus 44.6% for the FTSE World Index and 41.1% for the fund sector. On a one-year basis the fund returned 23.7% and on a discrete annual performance for the quarter ending in March of 44.3%.
Harrison makes it clear that the 20% outperformance seen in 2020 won’t happen every year.
“You’re always going to have volatility and we are going to give back some of that performance, but it does not mean that suddenly our investments have become bad companies.”
The portfolio contains around 44 companies at present, out of the thousands of potential opportunities, which Harrison says “means we can take our time and be really picky on the businesses that get through.”
Being picky includes working out key sustainability themes and the quality companies that fit them, which for Harrison means having strong market positions and making strong recurring cash flows.
Themes the team has identified include water safety and infrastructure, where companies include Badger Meter and Evoqua Water Technologies, which work with municipalities and are linked into smart city initiatives. There’s also electrification, where the fund holds Aptiv, which makes the software architecture for electric vehicles, and the recently bought NIDEC Corporation, maker of small motor technology that is working on the future of electric vehicles. Finally, there’s the digitisation of business and industry, where the fund has increased its holdings in ANSYS, a maker of simulation software, and Cadence Design Systems, which is a miniaturisation specialist for semiconductors and other technology.
Shares in all these names have performed strongly to various degrees last year, and with many sustainability-linked companies seeing a premium added to their share price, but Harrison says the fund’s ability to go anywhere and look at any size of company provides it with a key differentiation.
“The market tends to look three years out, while in our modelling we tend to look three years to 25 years and we also try to look off the beaten track as well, so there are names in the portfolio that you won’t see in other funds. We find that there's a lot of inefficiencies in the market and a lot of business that don’t fall into the radar or other people.”
With several potential additions always ‘on the bench’ waiting to take advantage of inevitable market volatility, Harrison says, “we’re very happy with how the portfolio is currently positioned and we still see a lot a lot of opportunity out there as well”.