The flood of money into companies aligned with sustainability principles has led to a surge in corporate greenwashing in the past year among other issues, according to Rathbones’ David Harrison.
Greenwashing is a growing problem in investing, with asset managers marketing their products as compliant with sustainable and ESG (environmental, social and governance) criteria for no other reason than to capture the growing inflows into this area of the market.
This same phenomenon is also playing out among individual companies, with more of them failing Harrison’s own sustainability criteria since the coronavirus outbreak. 
Harrison, who manages the Rathbone Global Sustainability fund, said: “I've always quoted less than 50 per cent of companies get through our process. It's definitely below that now. They're often failing on that point about sustainability.”
One reason behind this increase in ‘pretender’ sustainability companies is governments’ prioritisation of funding and support for companies offering solutions to climate change.
President Joe Biden recommitted the US to the Paris Agreement upon election, while China has planned to achieve carbon neutrality by 2060, the first long-term plan from the country regarding climate change. The European Union’s coronavirus recovery fund is being channelled through the pre-established European Green Deal, stipulating that 30 per cent of the money must be spent on climate change solutions. Prime minister Boris Johnson also announced a £12bn 10-point plan to start a ‘green industrial revolution’ in the UK.
“We’ve spoken before about greenwashing and I’ve always said that phrase ‘walking the walk’ in terms of sustainability,” Harrison (pictured) continued.
“We're finding some companies that are repurposing themselves as sustainable. And when you really dig into the detail, you meet them, they can't back it up with the numbers. They're not linking sustainability to their core business. We are seeing that to a degree.”
Another concern of Harrison’s is that many companies that offer a product or service that genuinely aids the switch to a sustainable society have a poor business model, meaning they fail the other side of his investment criteria.
“There are no barriers to entry [in the business] and you kind of think ‘well, will this still be here in 10 years?’ and we’re not so sure,” he said.
Harrison added that this was also happening more frequently, justifying some caution around which stocks make it into the portfolio.
The financial requirements are as central to Harrison’s investment process as the sustainability requirements. On the former he looks for companies that pass his ‘trinity risk framework’: price, business and financial, meaning they are on a compelling valuation, are highly liquid and have little debt.
“We are seeing the sustainability stock universe grow,” Harrison said.
“There are lots of factors behind this – new companies to market, existing companies changing their business model, better transparency and analyst coverage. But, with this growing universe, we are seeing more examples of greenwashing and what we would judge inferior business models.
“We have a strict process around what is sustainable and what is not. We are also seeing examples of companies with little durable competitive advantage.”
A third issue Harrison has seen increase in the past year is a size bias around which companies are attracting the green pound.
“We’ve talked about this before, but it’s gotten worse where the biggest companies with the biggest marketing budgets can often spend $20m or whatever it might be on repurposing the business to make it more ESG friendly or sustainable. Whereas a smaller company, which might be much better in terms of sustainability criteria, is less able to get that message out there,” the manager explained.
He said this makes it more important not to base investment decisions on single ESG scores alone, but to use them as a tool in a wider strategy.
The manager continued: “I think as we go through this phase of the market now compared with three or two and a half years ago, when we used to talk about ESG and sustainability, it’s everywhere. And the capital flowing in has gone up a lot. I think that's natural that you will see some companies that don't meet our bar.
“But at the same time, our potential opportunity set is bigger.
“So we're just sticking to our knitting as it were, we're just doing the same thing again and again,” Harrison said.
Rathbone Global Sustainability has made a total return of 42.71 per cent since it launched in 2018, outperforming both its FTSE World benchmark and IA Global sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.9 per cent.