The US corporates are going through a fast-paced change in their relationship with sustainability and overtaking Europe in the number of investment opportunities, according to Rathbones’ David Harrison (pictured), having sprung up from grassroots movements in the absence of government aid. 
However, this has opened up the trend of using sustainability ideas to bolster the brand of a company or fund, meaning that 50 per cent of companies do not fully believe in the promises they’re using to draw investors in; a trend epidemic which can only be halted by greater regulation, said Harrison.
After a recent trip to the US, Harrison – manager of the Rathbone Global Sustainability fund – said he had been “blown away by how much more attuned US companies are to sustainability compared with only a few years ago”.
This attitude change towards sustainability in investment and business has come about because of a two-part realisation, the manager said.
Firstly, companies are more aware of the financial benefits of embracing sustainability. And, secondly, they are aware of the damage it can do to the brand of a business.
“The first thing is the revenue opportunity,” said Harrison. “If you’re a company, if you think sustainably, there is a clear, long term revenue opportunity in your business.
“We speak to utility companies in the US, that were 100 per cent coal, and now are over 50 per cent renewables – either solar or wind – and they’re looking to go up to 90 per cent because they’re saving huge amounts on their bills. And they’re just saying that not only do they get the benefit from the switch away from carbon emissions, but then they get the margin benefit as well, in their business.”
The economic benefits of implementing these policies have been established in Europe for some time, explained Harrison, where adoption is more ingrained having been largely driven by the large Scandinavian pension funds and how investors think.
This mindset shift has taken longer to happen stateside because they are more driven by economic returns. However, the recent change in approach has been most surprising to Harrison because it is not being led by government regulations but rather consumer-driven.
According to Harrison, the lack of presidential support on climate and sustainability issues has actually been a significant catalyst in pushing companies to make these changes themselves.
“It might sound like an odd point,” he said. “But if you look at the background of people like Donald Trump and maybe because they have had that safety net [of regulations] taken away, companies have had to do it themselves.
“And something that I think we all know is that to solve a lot of these issues it has to be us making the changes. That’s companies and individuals.”
This merging of sustainability into the overarching business narrative has been one of the biggest elements of this change, Harrison said.
“If companies don’t think sustainably, then you’re going to essentially see that your business will disappear. And companies are realising that they’re not being told [to be more sustainable] by the government,” the Rathbone Global Sustainability fund manager said.
“On the other side, if you don’t start to think about sustainability it can do a lot of damage to your franchise. The obvious examples are BP and Volkswagen. They’re a good example looking at what they did in the US, with the diesel emissions. Not only did they kind of not do the right thing, but then they flouted the rules again and again.”
Being consumer- and investor-driven there is a risk that both companies and asset houses will fall into “greenwashing” so as to not lose out on the business of cashing in on sustainability.
Indeed, this meant that half of the companies that Harrison met failed to get through his fund’s screening process because they falsified their commitment to these ideas. Not just in the US but globally.
But, he added, it’s possible to spot the real from the fakes in under 10 seconds.
He said: “Only one in every two companies gets through our process because we’re looking for a clear link to sustainability and the other isn’t actually using it to be sustainable.
“What you often find is they might claim that they’ll take the UN goals, for example, or they’ll have a wonderful website where they’ll list everything on their website as sustainable.
“But when you meet the senior management, the CEOs and you ask them ‘You said the clean water and sanitation agenda is linked to your core business strategy? Can you kind of explain that a bit for me?’ and honestly they’ll have a terrified look because the CEO has never seen it before.
“So within about 10 seconds, you’ll know.”
It’s not just in companies that ‘greenwashing’ is happening with growing frequency. It’s also found in the asset management houses. These criteria are being applied in response to shareholder pressure, but firms are using it for the same branding benefits.
“Two years ago, no one really spoke about sustainability, it was maybe just one or two slides on a presentation. But now it’s front and centre and it’s not to say that I’m overly sceptical, but if everyone is suddenly sustainable like me, I have questions.”
Harrison applies the UN Sustainable Development Goals (SDGs) – a multi-year global framework for sustainability ambitions –to his own fund and are what he measures his stocks by.
As such he splits his holdings up into key sustainability fields: innovation and infrastructure, resource and efficiency and health and wellbeing.
But with the ongoing abuse of these ideals for saving the face of a brand Harrison sees that the next step is regulation and policy of labelling your company or fund with these objectives.
“So that’s, you know, to go back to your question about a definition of sustainability, for me, it’s pretty simple as a good business that clearly can demonstrate a link to these long-term solutions.
“We have these [UN] goals. But it’s just a guideline. If you want to label yourself as somebody who is, you know, part of the clean water and sanitation movement, this is a goal you have to meet this is how much water you need to produce. This is the process you have to go through.
“Otherwise, the risk is companies come up with their own measures, they make these things up, and there’s no policing of it. So, yeah, I think in the long run of five-to-10-years, or less than that there will be regulation and standards.”
Harrison is the lead manager on the Rathbone Global Sustainably fund. Whilst the fund was seeded last year Harrison has worked in the sustainable investment sphere for over a decade.
Looking at the fund itself Harrison said that one of his best performing holdings has been GN Store Nord, a Danish company who manufacture hearing aids and headsets. Benefitting from the incredibly large ageing population in the West, GN is a global leader in their technology and pricy according to Harrison.
“Normally if they’re really small niches they’re the global leader,” he explained.
However, one stock whose performance has been a disappointment to the fund manager was Aptiv, an auto parts company specifically active in developing the nerve centre for driverless cars.
Although the rise of the Tesla brand has done a lot to increase the popularity of autopiloted cars Harrison said that there’s still a lack of consumer trust in that area; which has contributed to the stocks’ weak performance but not enough that he has dropped it from his portfolio, as he believes sentiment towards driverless vehicles will come around.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Since launch in July last year, the fund has made a total return of 8.72 per cent compared with a return of 9.6 per cent for the FTSE World benchmark and a 6.79 per cent gain for the average IA Global peer. The fund has an ongoing charges figure (OCF) of 0.90 per cent.