Investment trusts with a greener conscience
For green or ethical investors, the world of investment trusts can be difficult territory. A much lower proportion of funds are clearly labeled âsustainableâ or ESG (environmental, social and governance) than that available among open vehicles.
Of the 40 ethical funds listed in broker Interactive Investor’s recently updated ACE 40 shortlist, only three are closed-end – the same three that appeared last year. Fund EcoMarket, an ethical fund search engine for advisors, only has 33 investment trusts in its total list of about 450 funds that advertise themselves as sustainable.
The EcoMarket Fund’s shortlist is heavily dominated by explicitly environmental renewable energy trusts, with broader options such as Impact Environmental Markets, Premier Miton Global Renewables and Jupiter Green. It also includes a sprinkling of specialist social-purpose real estate funds, as well as health and forestry trusts.
Some trusts go even further in ESG criteria. Andrew McHattie, editor of the independent Investment Trust Newsletter, says a number of more socially oriented trusts “now have the explicit purpose of providing social good or contributing to charity.”
He gives the example of the Civitas social housing trust, which details the social benefits of its portfolio in a separate social impact report, alongside its annual report. âFocused on healthcare, Syncona supports health charities. Home Reit provides accommodation for the homeless and Schroder BSC Social Impact focuses on housing, health and social care, âhe adds.
For UK retail investors looking for ethical and environmental investment trusts, these specialist funds have been an obvious place to start, especially as real estate and infrastructure assets can provide both income. practicality and useful diversification for a stock portfolio.
But what is available among conventional broad-based equity trusts? A few have explicit ESG elements at the heart of their proposition, says McHattie, although it’s not necessarily obvious when they do. âMobius Investment Trust, which deliberately seeks out companies that can benefit from its assistance to improve their ESG credentials, is an example of this type of ‘integrated ESG’.
A handful of them have recently changed their mandate to adopt an ESG approach. In February, Keystone’s board of directors handed over the mandate of the trust to fund manager Baillie Gifford and renamed it Keystone Positive Change. Last year, small business specialist Odyssean Investment Trust implemented more rigorous ESG due diligence rules. BlackRock Sustainable American Income and Dunedin Income Growth have both officially adopted an ESG approach in recent months.
New launches of dedicated sustainable equity trusts, however, performed less well. The recent launch of Liontrust’s ESG-focused equity trust fell through this summer, while Schroder British Opportunities only raised a third of its Â£ 250million target when it launched in December of the l last year in a tough foreclosure market.
Despite these setbacks, analysts say ESG considerations are increasingly embedded in the governance of investment trusts. âESG reports are built into most executive-board interactions these days,â adds McHattie.
Indeed, as Ewan Lovett-Turner, head of research on investment companies at Numis, points out: âMany trusts incorporate ESG characteristics into their approach, and companies like Abrdn have placed great importance on governance for many years. many years.
However, fund managers have different interpretations of what constitutes an ESG approach. âThe majority of investment managers focus on ‘G’ or governance issues, which include overall compensation,â says Simon Elliott, head of investment company research at Winterflood. When more attention is paid to environmental or social factors, he says, the key discussion revolves around the position of managers on engagement or exclusion.
Those who believe in engagement – investing in companies involved in controversial industries such as mining or oil and gas – often argue that the key players must be part of the solution. With this in mind, fund managers, as important shareholders, can push companies in the right direction. Exclusion – avoiding stocks to ensure a clean, green portfolio – doesn’t necessarily lead to a better long-term outcome for the planet, they say.
Some take a mixed approach. Dunedin Income Growth has adopted a new ESG strategy, only allowing investments in oil companies if they meet strict criteria, and excluding tobacco companies altogether. Finsbury Growth & Income shies away from both sectors.
The question is important to many traditional investment trusts, as oil and gas companies are not only a significant part of the UK market, but also key providers of generous and generally reliable dividend payouts. These companies still appear in the portfolios of many equity income investment trusts.
How do stringent ESG requirements affect the returns of an investment trust? A recent review of industry research from UNPRI, a UN-backed investor network focused on responsible investing, found support for the idea that top-ranked ESG companies produce equity-adjusted returns. at higher risk. Lovett-Turner says fund managers have accepted this view: âESG in underlying companies is seen as an integral part of a long-term, sustainable investment strategy.
It is also increasingly easier for investors to learn about the position of trusts on ESG. Many managers have submitted their ESG policies for publication on the website of the Association of Investment Companies, the trust industry body, although the policies are not required to be presented in a standardized and easily comparable format.
Until recently, evidence suggested that investment trusts were behind schedule in adopting ESG. However, concludes Elliott, âwe believe there is a growing demand for mandates that can demonstrate real ESG credentialsâ.
If he’s right, more trusts are likely to refine their investment approach to attract the growing number of investors motivated by more than just financial returns.