The future of investment trust ESG disclosures

SDR changes everything, writes the AIC's Nick Britton

The demand for sustainability disclosures from funds has far outpaced regulation in recent years.

For investment trusts, this has created a dilemma. While wanting to satisfy investors’ desire for disclosure, trusts’ boards and managers have been bombarded by a barrage of different sustainability standards, frameworks and expectations – and a lack of clear guidance from the regulator.

The result is that each board has had to make its own decisions about what should be disclosed and how. A recent report from JTC Group finds that trusts have adopted a range of standards and frameworks. Among the most cited standards are UNPRI and the UN SDGs, while regulatory frameworks used include TCFD and SFDR. However, with the sole exception of UNPRI, which is usually adopted via the trust’s manager being a signatory, no single standard or framework has been adopted by more than a quarter of trusts.

This diversity of approaches is not surprising. It reflects the diversity of investment trusts themselves, a universe of 365 listed companies that invest in everything from equities to renewable energy infrastructure, from collateralised loan obligations to ships and forests.

SDR changes everything

JTC’s research is timely, as it captures the variety of sustainability disclosures in a pre-SDR world. However, this landscape is set for a seismic shift as the different parts of SDR are implemented.

Investment trusts are within the scope of SDR, but non-UK investment companies are not yet in scope. This is because the Treasury decided to leave non-UK funds outside the regime for the time being while considering its approach to overseas funds. We have strongly argued that non-UK investment companies should be included. They include the likes of Renewables Infrastructure Group, based in Guernsey but listed on the London Stock Exchange, whose portfolio includes onshore and offshore wind, solar installations and flexible energy storage technologies.

We have also lobbied for a robust and rigorous regime to address concerns about greenwashing. The latest wave of our annual ESG Attitudes Tracker research showed that some investors are turning away from sustainable investments because of a lack of trust in asset managers’ ESG claims. SDR takes great strides towards addressing this problem, most obviously through the anti-greenwashing rule, but through the labelling and disclosure measures as well.

The most visible impact of SDR on investment trusts is likely to be the labelling regime. Trusts, like other investment products, will have the choice about whether or not to apply for a label.

Clearly, labels will not be right for everyone. To begin with, there must be a sustainability objective. A key concept in SDR is “intentionality”, meaning that an investment trust must be actively pursuing positive outcomes to claim a label, rather than simply achieving them as a byproduct of its strategy.

Having a label also brings with it the requirement to produce various disclosures, including a stand-alone consumer disclosure that must be clear, concise and no more than two pages. This must include detail on the sustainability objective, investment policy and relevant metrics.

Crucially, this disclosure must be produced not only by labelled products but also by products without a label that use sustainability-related terms in their name or marketing. This is one of the more controversial elements of SDR. The FCA acknowledges that only a “small minority” of stakeholders agreed with its proposed approach to naming and marketing. However, the regulator has stuck to its guns on this one. Clearly, this expands the number of investment trusts that might need to produce SDR disclosures.

Setting the standard

Returning to trusts that opt to claim a label, at least 70% of their portfolio must be invested in accordance with their sustainability objective. This must be based on a “robust, evidence-based standard” and importantly this must be an absolute (not a relative) standard.

Standards could be based on a taxonomy such as the EU taxonomy for sustainable activities or the forthcoming UK Green Taxonomy. They could also be based on emissions data, or more general criteria, as long as these criteria meet the requirement of being “robust” and “evidence-based”.

Trusts that claim a label would also need KPIs to measure progress towards their sustainability objective; sufficient resources and governance to deliver that objective; and a stewardship strategy, including an escalation plan.

Though we are still examining the fine detail of the regulation, we are very supportive of its aims and general approach. There is no doubt that perceptions of greenwashing were having a corrosive effect on ESG. The new regime will help investors to identify those funds with genuine sustainability objectives among the galaxy of investment options.

Many investment trusts have strong sustainability credentials, most obviously those in the Renewable Energy Infrastructure sector but also a number of trusts that focus on positive social impact. SDR will help these funds to promote their credentials within a credible, trusted framework and differentiate themselves from products that may be paying lip service to sustainability. Most importantly, it will help investors who are motivated by ESG considerations find their way to investments that align with their values and beliefs.