118. Could the US now take a leading role on the global environmental stage?

11 February 2020 (pre-recorded 10 February 2020)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Ryan Lightfoot-Brown (RLB): Hello and welcome to the Investing on the go podcast, brought to you by FundCalibre. I’m Ryan Lightfoot-Brown and today I’m joined by David Harrison, manager of the Rathbone Global Sustainability fund, which is on FundCalibre’s Elite Radar. David, thank you very much for your time.

David Harrison (DH): No thanks Ryan, thanks for having me.

[INTERVIEW]

[0:20]

RLB: One of the big stories over the last six months or so is the US election. We’ve now seen the Senate flip to a tied one ,with the Democrats with the casting vote and a Biden administration come in. So they’ve got quite strong views on environmental policy. What opportunities exist for the fund with that in mind?

DH: Yeah, it’s a great question Ryan. So we think actually this is really significant. You know kind of framing it, I guess we think you’ve seen already with what Biden said about the commitment to rejoin the Paris Accord. You know, we see the US playing a much more leadership role in climate space, which we think is, is very, very important, for us all, really to have the US playing more of a leadership role.

We think that we’re likely to see a lot of stimulus targeting environmental kind of policy, green infrastructure and we think there’s a lot of follow on from that in the US and kind of globally. The way that we think about it, we kind of break out into two areas really, if you think about areas such as renewables, the US only has about 20% penetration rate for renewables. So, we see lots of opportunities in areas such as wind. We’ve owned a number of wind companies such as Vestas listed in Denmark, which has lots of exposure in the US anyway, but also we’ve been adding more wind exposure through Orsted, which is one of the leading operators. We’ve also got a business called Hannon Armstrong Sustainable Finance, we think this is really fascinating because Hannon Armstrong is exposed to not only wind and solar, but also they’re one of the leading players in kind of energy efficiency of buildings. You know, a stat I heard the other day was that they think they could cut 40% of emissions in the US by making buildings more energy efficient. So we think someone like Hannon Armstrong is very well exposed to that area. So, I think that one side of renewables is a really powerful area, and we think there’s a multi-year driver with lots of opportunities.

[2:39]

I think the other part that’s really interesting to us is when you think about the transport fleet. So, people speak about electrification, moving away from carbon kind of heavy engines, and well below 5% penetration in the US. Again, we’re likely to see lots of legislation to accelerate this. And it’s interesting that a lot of the kind of big automakers, you’ve seen Ford and GM really accelerate their commitment to electrification. So ,we’ve had a business called APTIV in the fund since we launched. APTIV is kind of that nerve centre of an electric vehicle. You know, we think it’s still really well-placed and, you know, for the long run and it’s got a management team that was very, forward-thinking in what it’s doing.

But we’re kind of thinking, you know, other areas that you think about the US in terms of its geographic size, there’s going to be different technologies as well as electric. So, we’d be looking more and more at hydrogen. We spent a long time looking at kind of hydrogen fuel cells, and we’ve actually bought into a business called Ballard Power Systems, which is Canadian listed. But really if you think about you know, kind of those big trucks, you know, things that have to go a long distance, that can have a heavier kind of power source, we think hydrogen fuel cells is really interesting. So, yeah, it’s such a fascinating area. We think the legislation, we think we’re at that kind of inflection point of adoption. But the one thing, like I always say, I think to you, is that we stick to our knitting in terms of the companies that we’re looking at. Clearly there’s lots more coming to market but have the focus on buying those businesses that are truly sustainable and are fundamentally sound.

[4:30]

RLB: Really interesting, thank you. And outside of the US, I see you’ve been increasing your weight to Asia in the portfolio, why is that?

DH: Yeah so Asia has always been a really interesting area in terms of the… particularly technology providers and companies that are helping drive sustainability forward. I think historically, even two and a half, three years ago, sometimes the transparency of kind of sustainability metrics in Asia was not as good. We’ve seen a step change in that. But also we’re just seeing more interesting opportunities for us. So recently we bought a Japanese business called Nidec. Now Nidec is the global leader in small motors. You know, it’s all they do. They do it very, very well. And again, thinking about electric vehicles, the small motors required in an electric vehicle compared to traditional vehicle, the requirement’s a lot higher, Nidec has a leading position there. Again, a management team that is very much committed to sustainability and has great transparency. So that’s one we’ve added. In terms of our pipeline, I’d say it’s getting stronger and stronger in Asia. And it’s an area that we’re very excited about for the next several years.

[5:52]

RLB: And I know you sort of, you use UN SDGs [sustainable development goals] in your, in your process, are there any areas in particular this year that you’re looking at or think very pertinent to your investment case?

DH: Yeah, I think, you know, obviously all the SDGs are really important, but if I had to highlight, I would probably highlight three actually for you. So obviously clean energy, which I think is number seven. But also two others: number nine, which is innovation and infrastructure, and also number eleven, sustainable cities.

So if you kind of put all those three together, I’d say about 50% of the fund is exposed to those SDGs in one way or another. You know, clearly what we’ve come through in the last 12 months, and we’re still going through at the moment, is going to lead to a lot of structural changes. But really the opportunity to come out of this in a better position, you know, we’ve spoken quickly about green infrastructure spending, but we think it means wholesale changes in terms of how we work and how we live, how we consume, how different industries work, and we see multiple opportunities in terms of the innovation theme, as well as the clean energy. Perhaps the sustainable cities theme is something that is longer term, but again, in terms of ideas we’re seeing a very strong pipeline at the moment.

[7:21]

RLB: And can you perhaps talk about what a sustainable city is and what that means for the fund for your investors?

DH: Yeah. So it’s a very good question. When you think about sustainable cities, it’s something, it’s a lot of things at once. So if, kind of, you know, I suppose at most basic it’s thinking about the buildings, the new buildings that we’re making in terms of energy efficiency, in terms of mobility in that building, how do you cut down on emissions? How do you make things from a social point of view and a wellbeing point of view, better to work and live in? But then if you think about connectivity, how do you move around that city? So, in terms of the transport fleet, you know, is it more linked in terms of cycling, walking, less requirement on vehicles? Data is another area within smart cities. You know, we talk about 5G. 5G will be a real kind of accelerator of the ability to link everything together. So when you think about the concept of the internet of things, that is going to be a key part of a smart city.

So there’s lots, and sometimes it can be overwhelming, the whole smart city concept, but, you know, if I kind of break it down, I suppose, in terms of a couple of ideas. I’ve mentioned APTIV already, but clearly electric vehicles, vehicles that are more autonomous – so self-driving vehicles will probably be a feature of smart cities. Again, APTIV is exposed to that vehicle autonomy theme, electric vehicles. We own a business called Kone, which is Finish listed. Kone is one of the leaders  in elevators and escalators, but they’re very strongly focused on energy efficiency, next generation technology in terms of elevators and how you move people around that city. So from that point of view, I think there’s some kind of obvious areas within the smart city initiative. And then if you kind of flip over to technology, for example, you know, some of the big technology players, Microsoft, Adobe, again, they are key players in enabling a smart city.

And lastly you know, if you think about kind of power generation, you know, where those things are powered and how they’re powered, whether it be the energy source being wind and solar, but also the grid. So, if you think about grid technology, you know, things like smart grids, that’s really important. So we own another business, which is listed in the Netherlands called Alfen. Alfen the leaders in Holland in this around kind of battery storage for your gird, the leaders in rolling out electric vehicle charging points. So it’s really once I guess you break down that concept into what it means for the investments. There’s lots that you can get into. And we kind of we put it in those buckets. And again, an area that we think is really exciting.

[10:23]

RLB: Yeah. I mean, like you said, you’ve obviously talked about the fund is a lot more than just renewable energy and electric vehicles, which many people might think, and I can see, you’re obviously quite invested in the sort of technology and the technology supply chain. It’s actually a really big story at the moment. There’s a lack of semiconductors. There’s a global shortage at the moment. Lots of production’s slowing down. Is that something you’re playing in the fund or being to take advantage of?

DH: No. I mean, we don’t have really, yeah. It’s not something directly. We do have a name ASML, the Dutch listed company, which makes the machines which makes semiconductors. And, you know, recently if we look at their last set of numbers, they are still beneficiaries no matter if it’s kind of too much or too little in the system, because they supply, whether it be Samsung or whether it be one of the US makers, they’re supplying all of them, and they’ve got 90% market share in that next generation technology.

You know, I think this chip shortage reflects a couple of things. Firstly, I think it’s, you know, clearly what we went through last year, many of the factories were closed down and they’re starting back up. I think it’s been well flagged as you know, you’ve already mentioned Ryan, these factories take a while to start up. So, you know, I’ve read, it might be three or four months before we get back to the market not being in deficit. So I would say, I think this chip shortage is not a multi-year event, but also it reflects really you know, some of the things we’ve spoken about, you know, an electric vehicle has probably three times the content in terms of chips versus a traditional vehicle.

So we actually see for something like an ASML, the opportunities longer-term for their machinery, particularly that next generation technology in terms of chip lithography is so exciting, and no one else can really do it and do it well. So, the chip shortage is something we’re looking at. We’ve got at the back of our minds, but it has no direct impact on the fund.

But you know, I’d add I suppose, on technology and technology supply chain, we still see so many interesting opportunities. It’s linked in some things we’ve spoken about already, but you know, one of the things that we’ve really noticed is that how early we are on, in this kind of digital shift. I think sometimes we think about how we consume every day. We’re used to doing kind of tap and pay. We’re not really using cash anymore. But if you look at the average industry, it might be agriculture, construction… digitalisation rates are well below 10%. So ,you know, there’s a number of companies we own that are long-term beneficiaries of this, but also the, I think the positive impact of technology is being recognised more and more, if you find that right business that, you know, like you say, it kind of plays into the supply chain that, you know, we think there’s really high, durable barriers around them as well, it’s a really fascinating area.

RLB: Well David, I mean what a fascinating note to finish on. Thank you very much for your time today.

DH: Thanks Ryan.

RLB: And if you’d like to find out more about the Rathbone Global Sustainability fund, please visit our website fundcalibre.com and for more from our Investing on the go podcast please don’t forget to subscribe.