This is the first of our quarterly columns for ESG Clarity, designed to give you an insight into the world of ESG in the investment company (investment trust) industry. As a way of kicking things off, I thought a brief overview of ESG opportunities in the sector might be useful, before narrowing the focus to the topic on everyone’s minds.
Investment companies offer a range of opportunities for the sustainability-savvy investor. The Renewable Energy Infrastructure sector offers exposure to wind farms, solar farms, anaerobic digestion and battery storage, all helping to drive the transition to a lower-carbon future. And it’s been a popular one too with assets growing from £2.1bn five years ago1 to £8.7bn today2. There’s also the Environmental sector which invests in environmental solutions and green technology, with total assets of £789m2. Celebrating their 25th anniversary this year, tax-efficient venture capital trusts (VCTs) which focus on young, ambitious companies also have appeal to investors who want their money to make a real difference.
Despite the recent sell-off, the Renewable Energy Infrastructure and Environmental sectors have returned 30% and 33% respectively over the past three years, compared to 8% for the average investment company3. In this era of hyper-low interest rates, the Renewable Energy Infrastructure sector’s 5%4 yield will be an enticing prospect for income seekers too. However, investors pursuing a more sustainable strategy with investment companies aren’t confined to these sectors. Numerous conversations with fund managers have shown that ESG considerations are being pursued across a wide range of investment companies.
One of the benefits of the closed-ended investment company structure is its suitability for investing in illiquid assets like renewable infrastructure or unlisted companies delivering a greener future. As shares are traded on a stock exchange, managers don’t have to worry about inflows and outflows, resulting in a truly long-term pool of capital – a sustainable way of investing.
Climate change has never been higher on the world’s agenda and much of the focus in terms of investing has been on the environment, or the ‘E’ of ESG. The pandemic has changed the emphasis somewhat. With lockdowns causing drastic drops in economic activity and the associated emissions, the social ‘S’ and governance ‘G’ aspects of ESG have come into sharper focus. Some businesses are engaging in socially responsible activity, with household names like Burberry helping combat the Personal Protective Equipment shortage by making hospital gowns and masks. While others have focused on communicating, motivating and supporting their workforce and customers. We have also seen some companies attract negative publicity, such as Mike Ashley’s Frasers group, which was attacked after attempting to keep its Sports Direct branches open.
When it comes to the ‘G’ part of the equation, the pandemic presents different challenges. Investors’ ability to attend and vote at investment company annual general meetings (AGMs) is an incredibly important component of any public company’s governance. Investment companies, with their independent boards of directors, have worked hard to ensure shareholders can continue to have their say during covid-19. The Renewables Infrastructure Group (TRIG), the second largest member of our Renewable Energy Infrastructure sector at £1.85bn of assets, is hosting its AGM via telephone, with investors being asked to submit questions and vote by proxy in advance. F&C Investment Trust, 152 years old this year, also issued a statement encouraging shareholders to vote electronically or by post in advance of its meeting in May. And Henderson High Income Trust is taking it one step further by planning to live stream its AGM in June.
The investment company industry offers a range of options when it comes to ESG investing and covid-19 has highlighted that investment companies can offer truly long-term capital to companies, while allowing shareholders to make their voices heard.
Readers canfind out more about investment companies by visiting the AIC website, and we look forward to updating you regularly with our ESG news and views.
1 Total assets five years ago are as at 01/05/2015.
2 Total assets are as 30/04/2020
3 Performance is share price total return as of 30/04/2020. Source: AIC/Morningstar
4 Yield is as of 30/04/2020. Source: AIC/Morningstar