Investment trusts with a greener conscience

For green or ethical investors, the investment trust universe can be challenging territory. A far smaller proportion of funds are clearly badged “sustainable” or ESG (environmental, social and governance) than are available among open-ended vehicles.

Of the 40 ethical funds listed in broker Interactive Investor’s recently updated ACE 40 shortlist, only three are closed-ended — the same three that appeared last year. Fund EcoMarket, an ethical fund search engine for advisers, includes only 33 investment trusts within its total listing of about 450 funds that market themselves as sustainable.

The Fund EcoMarket shortlist is heavily dominated by explicitly environmental renewable energy trusts, with some broader options such as Impact Environmental Markets, Premier Miton Global Renewables and Jupiter Green. It also includes a sprinkling of specialist property funds with a social focus, plus healthcare and forestry trusts.

Some trusts are taking ESG criteria a stage further. Andrew McHattie, publisher of the independent Investment Trust Newsletter, says a number of the more socially focused trusts now “have an explicit aim to provide social good or to contribute to charities”.

He gives the example of Civitas Social Housing trust, which details the social benefits of its portfolio in a separate Social Impact Report alongside its annual report. “Healthcare-focused Syncona supports healthcare charities. Home Reit provides accommodation for the homeless and Schroder BSC Social Impact is focused on housing, health and social care,” he adds.

For UK retail investors seeking investment trusts with an ethical and environmental flavour, these specialist funds have been an obvious place to start looking — particularly as property and infrastructure assets can provide both a handy income and useful diversification for an equity portfolio.

But what is available among broader-based conventional equity trusts? A few have explicit ESG elements at the core of their proposition, says McHattie, though it’s not necessarily obvious when they do. “One example of such ‘embedded ESG’ is Mobius Investment Trust, which deliberately seeks out companies that can benefit from its help to improve their ESG credentials.”

A handful have recently changed their mandates to embrace an ESG approach. In February, Keystone’s board gave the trust’s mandate to fund manager Baillie Gifford and rechristened it Keystone Positive Change. Last year, the small-company specialist Odyssean Investment Trust put in place more rigorous ESG due diligence rules. BlackRock Sustainable American Income and Dunedin Income Growth have both formally adopted an ESG focus in recent months.

New launches of dedicated sustainable equity trusts have fared less well, however. Liontrust’s recent ESG-focused equity trust launch flopped this summer, while Schroder British Opportunities had raised just one-third of its target £250m when it launched in December last year amid a challenging lockdown market.

Despite these setbacks, analysts say ESG considerations are becoming embedded in the governance of investment trusts. “ESG reporting is built into most manager-board interactions these days,” McHattie adds.

Indeed, as Ewan Lovett-Turner, head of investment companies research at Numis, points out: “Many trusts have ESG characteristics integrated into their approach, and firms such as Abrdn have placed heavy emphasis on governance for many years.” 

However, fund managers have different interpretations of what constitutes an ESG approach. “The majority of investment managers are focused on the ‘G’ or governance issues, which includes remuneration packages,” says Simon Elliott, head of investment companies research at Winterflood. Where more consideration is given to environmental or social factors, he says, the key discussion is around managers’ stance 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 leading players have to be part of the solution. In this view, fund managers, as important shareholders, can push companies in the right direction. Exclusion — avoiding the shares to ensure a clean, green portfolio — does not 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 investment in oil companies if they meet strict criteria, and excluding tobacco companies altogether. Finsbury Growth & Income steers clear of both industries.

The question matters for many mainstream investment trusts, because oil and gas companies are not only a major part of the UK market but also key providers of generous and usually reliable dividend payouts. These companies are still to be found in the portfolios of many equity income investment trusts.

How do rigorous ESG requirements affect an investment trust’s returns? A recent review of industry research by UNPRI, a UN-supported network of investors focused on responsible investment, found support for the idea that companies with higher ESG rankings produce superior risk-adjusted equity returns. Lovett-Turner says fund managers have accepted this view: “ESG in underlying businesses is being seen as integral to a long-term sustainable investment strategy.”

It is also becoming easier for investors to find out about trusts’ stance on ESG. Many managers have submitted their ESG policies for publication on the website of the Association of Investment Companies, the trust industry body, though policies are not required to be presented in a standardised, easily comparable format.

Until recently, the evidence suggested investment trusts were behind the curve in embracing ESG. However, concludes Elliott, “we suspect there is growing demand for mandates that can demonstrate genuine ESG credentials”.

If he’s right, more trusts are likely to hone their investment approach to appeal to the growing number of investors motivated by more than just financial returns.