- A breakdown of activity in Rathbone Global Sustainability fund
- An assessment of the issues facing ESG funds and their investors
Environmental, social and governance (ESG) investing has morphed into a hot trend that could potentially drive superior returns. But it can also encourage nefarious practices, with the prospect of companies and funds “greenwashing” their brands to secure new investors. Even established ESG funds have backed questionable names: for example, ethical funds run by Standard Life Aberdeen (SLA) and Premier Miton (PMI) were holding online retailer Boohoo (BOO) when allegations were made about its working practices earlier this year.
So if you want to take ESG issues into account when you invest you should be discerning about the funds you invest in. Rathbone Global Sustainability (GB00BDZVKD12) only launched in the summer of 2018, but the company which manages it, Rathbones, has a much longer record of running funds such as Rathbone Ethical Bond (GB00B7FQJT36). It is also part of the same group as Rathbone Greenbank, which specialises in ethical and sustainable investing, and has pedigree in this field.
David Harrison, who runs Rathbone Global Sustainability with Elizabeth Davis, argues it was a “natural progression” for the company to launch an ESG equity fund. They look to hold 40 to 50 stocks, favouring companies with high-quality earnings and strong ESG practices. But while the rise of ESG has meant more potential holdings for the fund, finding those that 'walk the talk' takes work.
“The opportunity set is growing as more companies think sustainably,” says Mr Harrison. “Two years ago a company might not think of ESG, but now they always have a sustainability person. That’s good but there is the risk of greenwashing – ESG can be a marketing ploy. Less than 50 per cent of the companies we meet get through our process.”
Mr Harrison and his team rely on ethical screening by the Rathbone Greenbank team, and back companies that are committed to helping achieve the United Nations Sustainable Development Goals. The difficulties of 2020 have required extra attention on ESG criteria.
“In times like this it’s important to stay really close to your companies,” explains Mr Harrison “There’s the operational standpoint – how they adapt to the crisis – but also how they are treating their employees. We wanted management to say this is our commitment to our employees, our supply chain. We spoke to every business with two hats on – the operational side and the sustainability side.”
As with many other active funds, Rathbone Global Sustainability's managers have bought and sold a number of holdings this year. The coronavirus pandemic prompted them to sell Henry Schein (US:HSIC), a US-focused provider of dental supplies that looked vulnerable to the closure of dental practices in lockdown. They also dropped Xylem (US:XYL), a waste water specialist whose order book was becoming “increasingly lumpy”.
The money generated by these sales helped the team to initiate various positions including Thermo Fisher Scientific (US:TMO), a diagnostics specialist with good sustainability credentials. Mr Harrison believes that although the company is getting a boost from the mass testing currently under way it also has a longer-term investment case.
Hannon Armstrong Sustainable Infrastructure Capital (US:HASI), which provides companies with financing for energy efficiency projects, also entered the portfolio. Mr Harrison notes that it is seeing “sustained demand” from companies looking to make old buildings more energy efficient.
Mr Harrison and his team also bought German-listed TeamViewer (GER:TMVX) whose services include enabling companies' IT departments to remotely access staff computers.
The funds' tech company holdings are focused on the theme of digitalisation, although it does not have exposure to Facebook (US:FB), Amazon (US:AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) - the so called FAANGs. Instead Mr Harrison and his team have bought Shopify (US:SHOP), which has benefited from strong growth in e-commerce, and added to positions in Visa (US:V), Microsoft (US:MSFT) and Mastercard (US:MA).
“The growth is still underappreciated," says Mr Harrison. "Companies are changing how they do things and these are the winners out of this.
But he is cautious about bargain hunting in this sector because of the risks involved.
“We’re wary of cheap tech stocks because why are they cheap?” he explains. "You have to be very careful around the growth rates. Cash flow metrics around tech stocks can lead you down the wrong path. TeamViewer is at discount to US [prices] but still looks expensive on price/earnings. It only [did its initial public offering] in 2019 and is [not on] people’s radars."
Rathbone Global Sustainability differs from many other global funds because it has more European exposure and less in the US than FTSE World index. This is because Mr Harrison and his team pick companies according to their individual merits rather than where they are listed. But Mr Harrison adds that while Europe appears most advanced on sustainability credentials, the US now stands out because companies there are taking on an ESG mindset especially quickly.
Rathbone Global Sustainability is one of a number of global equity funds that invests via an ESG approach. Since around the time of its launch it has lagged the exceptional returns of Baillie Gifford Positive Change (GB00BYVGKV59), which has benefited from holding companies such as electric car maker Tesla (US:TSLA). But Rathbone Global Sustainability does better against some other global ESG funds, as the chart shows.
David Harrison CV
David Harrison is lead manager of Rathbone Global Sustainability fund, and co-manager of the Rathbone Heritage (GB00B6SCP824) and Rathbone Income (GB00BHCQNL68) funds. He also helps with the direct equity selection for the Rathbone Multi-Asset Portfolios. Mr Harrison joined Rathbones in June 2014 as a global equity analyst from private bank Julius Baer.
He has also held positions at Hermes and Goldman Sachs, and has more than 14 years’ experience in equity analysis and fund management.
Mr Harrison has a degree in economics and politics from the University of Southampton, is a CFA charterholder and holds the Investment Management Certificate.
