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Investment trusts for responsible investing

Investment trusts can provide access to otherwise inaccessible areas such as renewable energy infrastructure
Investment trusts for responsible investing

Not many investment trusts have an ESG focus

But of the small selection that do some have performed well

Some of these offer exposure to assets you couldn't invest in directly such as renewable energy infrastructure

Appetite for investment products with strong environmental, social and governance (ESG) credentials has boomed this year as the pandemic has put the need for a sustainable world under the spotlight. Enthusiasm has been helped by sustainable funds broadly outperforming their conventional peers this year, partly because they tend to have less exposure to the oil price, and more to technology and healthcare stocks, which have largely performed well. 

Investment trusts are often overlooked as a way to get exposure to sustainable investments, in part because there are many more open-ended funds that specifically market themselves as sustainable. Investment platform interactive investor runs a list of what it considers to be the best ethical investment funds – the ACE 40. But only three of the list are investment trusts – Impax Environmental Markets (IEM), Pacific Assets Trust (PAC) and Syncona (SYNC). interactive investor says that “the investment trust sector has been a bit slow off the mark to cater to a budding demand for ESG solutions”, but that ESG is a work in progress.  

Over the past decade ESG has gone from being a little known concept to something that many investment trusts consider to a greater or lesser extent. Many trusts address how they approach ESG considerations in their annual reports, so these are a good place to get a feel for how robust their approach is. Some trusts have an exclusionary policy, for example, they do not to invest in assets such as tobacco companies, although most just explain how they think about ESG criteria. 

If you have specific preferences, you can refer to the Association of Investment Companies website to search for funds in specialist categories. For example, there are three equity trusts in its Environmental sector and 14 trusts in its Renewable Energy Infrastructure sector. There is no easy way of screening ESG funds so you have to read their literature to understand their approach.

You can also look at ESG scores from data providers such as Refinitiv and Morningstar for their assessment of investment trusts, although they do not cover all of these.

 

Specialist trusts

Impax Environmental Markets is the largest specialist environmental trust, with assets worth £946m at the end of October. Set up in 2002, the trust invests in companies that operate in resource efficiency and environmental markets. It typically invest in small- and mid-cap companies that make more than 50 per cent of their revenue from sales of environmental products or services in the energy efficiency, renewable energy, water, waste, and sustainable food and agriculture markets. Impax Environmental Markets has 42 per cent of its assets in the US and 38 per cent in Europe. 

The trust has performed strongly (see table), putting it well ahead of its sector peers, but this has resulted in it trading at a premium to net asset value (NAV), which was over 6 per cent at the end of October, one of the higher levels it has traded at. Emma Bird, research analyst at Winterflood, adds that the trust has issued £238m-worth of shares over the past two years due to popular demand.

Jupiter Green Investment Trust (JGC) is much smaller, with assets of only £40m at the end of October. Menhaden (MHN) is a concentrated trust that launched in July 2015. It is managed by Ben Goldsmith, co-founder of sustainable specialist asset manager WHEB, and its share price is still lower than it was at time of issue.  

Investment trusts are a way to invest in renewable energy infrastructure in areas such as solar, wind and hydroelectric. Priyesh Parmar, associate at Numis Securities, says: “The funds are popular with investors, as demonstrated by the significant premiums at which they trade, due to their relatively stable and predictable earnings, as well as fitting with the ESG theme, which is becoming increasingly more prominent”.   

All the renewable energy infrastructure trust were trading at premiums to NAV as of 30 October, and the sector has seen considerable growth in recent years. Ms Bird notes that half of the trusts in this sector have launched since the start of 2018.   

Greencoat UK Wind (UKW) has assets under management worth £2.4bn and has delivered consistent returns since it was established in 2009. The trust invests in both onshore and offshore wind farms, and its revenue seems reasonably secure as the government has made large spending commitments to offshore wind. The trust’s yield was over 5 per cent at the end of October. But its gearing – debt – was quite high at 26 per cent so this could lead to enhanced volatility.  

Renewables Infrastructure Group (TRIG) has net assets of £1.6bn and a yield of almost 5 per cent. It has recently been trading at a premium of over 20 per cent, one of its higher historical levels.

Some broad infrastructure funds also invest sustainably. Mr Parmar says that Amber Infrastructure, investment adviser to International Public Partnerships (INPP), is a leader in this space as demonstrated by its 42-page 2020 global sustainability report. Daniel Watson, head of sustainability at Amber Infrastructure, says that if society is to meet some of its biggest challenges, such as climate change, significant investment in infrastructure will be required to fill the infrastructure gap, meet net zero emissions and drive sustainable development.

A number of infrastructure investment trusts report in line with the United Nations Principles for Responsible Investing and Sustainable Development Goals, which can help you get a feel for their sustainability credentials.  

Life sciences investor Syncona creates and finances companies in cutting-edge areas of healthcare. It targets a sustainable portfolio of 15 to 20 companies, with two to three being added every year. Its managers hope that in 10 years three to five of the companies they hold will reach the point of product approval. This trust was trading at a very large premium to NAV of 39.7 per cent at the end of October.  

Some real estate investment trusts (Reits) focus on social causes. Target Healthcare Reit (THRL) invests in care homes with an emphasis on the development of purpose-built facilities with en-suite wet rooms. It has a yield of 6.2 per cent and was trading at slight discount of 1 per cent at the end of October. The UK’s ageing population and lack of adequate care home facilities should keep demand high for this sector.  

Triple Point Social Housing Reit (SOHO) invests in housing adapted for vulnerable adults with long-term care needs. Last year its investments accommodated over 1,000 people, helping them to live an independent life in their communities. This trust's income is reasonably reliable because it comes from long-term government contracts, although vacancies can be a problem.

Triple Point Social Housing Reit was trading at a small premium and had a yield of 4.9 per cent at the end of October.   

 

Broad equity trusts with an ESG focus

Some equity trusts include ESG considerations in their investment process. Montanaro UK Smaller Companies Investment Trust (MTU) and Montanaro European Smaller Companies Trust (MTE) have well established ESG processes. Montanaro Asset Management encourages smaller companies to support and embrace sustainability via active ownership and engagement. The company is also one of the few UK asset managers to have B Corp status. Companies with this certification are legally required to consider the impact of their decisions on their workers, customers, suppliers, community and the environment.   

Montanaro Asset Management won't invest in areas including fossil fuel exploration and production, tobacco, alcohol, weapons and gambling. It also excludes high interest rate lending companies, and measures the carbon, water and waste intensity of the companies its funds invest in.   

Montanaro UK Smaller Companies Investment Trust is a high conviction portfolio of 46 holdings with a relatively high weighting to technology of 23 per cent, as of 30 September. Montanaro European Smaller Companies Trust has 53 holdings and 31 per cent of its assets are in technology. Both trusts have consistently outperformed their benchmarks, Numis Smaller Companies Index and MSCI European Smaller Companies Index, respectively.    

James Carthew, head of investment company research at QuotedData, says that Pacific Assets Trust (PAC) also has a well established ESG process. It has been managed by Stewart Investors since 2010, which puts sustainable investing at the heart of its investment process. They believe that they have a responsibility to manage funds for the mutual benefit of all stakeholders and the wider community. 

Emerging markets is not an area associated with strong ESG credentials or shareholder activism. But the managers of Mobius Investment Trust (MMIT) work actively with companies they invest in to improve their ESG credentials and financial returns. The trust was launched in October 2018 by high-profile fund manager Mark Mobius who has over 40 years' experience of investing in emerging markets, mostly at Franklin Templeton

 

Share price performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)
Impax Environmental2153156
Jupiter Green IT131865
Menhaden-330-11
Greencoat UK Wind-33157
Renewables Infrastructure Group94780
International Public Partnerships112060
Syncona93597
Target Healthcare REIT11129
Triple Point Social Housing REIT2621n/a
Montanaro UK Smaller Companies Investment Trust 141941
Montanaro European Smaller Companies Trust3970173
Pacific Assets Trust-11654
Mobius Investment Trust18n/an/a
MSCI Emerging Markets index8875
MSCI AC Asia Pacific ex Japan index121584
Numis Smaller Companies ex investment companies index-10-1413
FTSE All-Share index-19-149
FTSE World index42180
Source: Winterflood as at 2 November 2020