Anyone thinking about sustainable investing will quickly come across many options between mutual funds and exchange-traded funds. Often this is due to aggressive marketing that has attracted the attention of regulators concerned about greenwashing.
But there are other options for sustainable investors: investment funds have been expanding their sustainable offering for several years, often in the areas of renewable energy and infrastructure.
Discounts in these trusts have increased significantly over the past year as interest rates have risen and investors have opted for safer government bonds over stable, but not so safe, infrastructure yields. But analysts and professional investors say this indiscriminate sell-off has led to bargains.
“Given current ratings, there is an opportunity for trusts to benefit from a ‘double whammy’ of improving NAV [net asset value] performance and tightening discounts once overall investor sentiment improves,” said Elliott Hardy, analyst at Winterflood.
Annabel Brodie-Smith, head of the Association of Investment Companies, the trade body for investment trusts, says investment trusts have become slower than open-end funds (conventional investment funds or unit trusts) to climb aboard the ESG bandwagon. Independent boards are much more careful about making claims they can’t necessarily substantiate, she says, and indeed no investment trust has ESG in their name. That has helped them avoid some of the greenwashing issues that open-ended funds have faced.
In many cases, investors who purchase ‘sustainable’ investment funds have done so primarily with financial performance in mind. Colette Ord, director at investment bank Deutsche Numis, points out that most renewable energy infrastructure funds predate the launch of specific ESG products and were launched with a financial return target in mind.
“Other sources of income have become more attractive to investors and there has been reallocation, but fundamentally we see the listed infrastructure sector in particular as providing real value to investors looking for assets that are well managed and deliver good returns.”
This is supported by research from the AIC, which found that 44 percent of investors in ‘sustainable or impact investment companies’ were motivated by financial returns and performance, compared to 19 percent by a focus on ESG or sustainability.
Brodie-Smith says that while investment trusts are taking their time to respond to the ESG trend, they are well suited to be truly sustainable investments. They can invest in assets that are less liquid and more difficult to trade, such as wind farms and solar farms, which open-ended funds find more difficult to do due to the need to return money to investors when they want to.
There is no ‘sustainable’ category for investment trusts per se; many can be found in more targeted categories. There are only three in the ‘environment’ category. One of these is the long-term Impax Environmental Markets fund, which remains popular with analysts. It is trading at a 7 percent discount, having lost 14 percent of its value in the past year but growing 40 percent over the past five years.
There are 22 investment trusts in the renewable energy infrastructure sector. All trading at a discount, from the largest, FTSE 250-listed Greencoat UK Wind, which owns wind farms across the country, to the smallest, Aquila Energy Efficiency Trust, which is currently trying to sell its assets with a view to liquidation.
But recently, in August last year, renewable energy infrastructure funds were trading at a premium, unlike most of their peers. The rapid shift to an average cut of 25 percent, compared with 17 percent for the broader mutual fund industry, has come as interest rates have risen and returns on infrastructure investments have looked less impressive – and riskier – by comparison.
Matthew Hose, analyst at Jefferies, thinks renewable energy infrastructure trusts have benefited from renewable flows in recent years, with new share issuance around the time of the pandemic, but this has dried up.
“The greenwashing stuff doesn’t really apply because they do what they say, but they are exposed to the broader problems in the investment company sector, with huge tech sales, mainly from multi-asset investors,” he says. “Selling is quite random.”
Hose suggests that Greencoat UK Wind, with a simple strategy of owning wind farms to generate cash to pay an inflation-linked dividend, would appeal to sustainable investors, along with SDCL Energy Efficiency Income, which is currently at a 40 percent discount is trading with a portfolio that Hose says “the market doesn’t really understand.”
Other investment trusts are not clearly sustainable, given their name or the sector in which they operate. For example, Pacific Assets Trust operates in the Asia Pacific region, but employs a sustainable investment strategy based on the belief that sustainability drives investment returns and is the best way to protect investors’ capital in the long term.
This more considered approach is another reason such funds are not caught up in greenwashing allegations, according to John Moore, investment manager at asset manager RBC Brewin Dolphin. He is also a fan of Greencoat, because it has high-quality assets, and of Impax as an early example of a thoughtful investor.
Of course, investment trusts are not free from scandals. Home Reit, founded as a landlord for the homeless, saw its shares suspended this year and faced a lawsuit from investors after tenants failed to meet rent payments.
Some in the renewable energy infrastructure sector, such as those focused on hydrogen, are particularly volatile: HydrogenOne Capital Growth is trading at a 54 percent discount, having lost 46 percent of its value over the past year.
A common accusation of greenwashing against open-ended funds is that they opportunistically relabel funds while making only minor adjustments to the portfolio. This has not been a problem for the sustainable sector so far.
However, the reallocation of funds may change. The AIC’s Brodie-Smith predicts there will be more sustainable trusts after the UK regulator decides how to properly label the funds, a decision expected by the end of the year. That could mean that investment trusts feel more comfortable calling themselves sustainable without incurring the ire of the regulator – and that more sustainable private investors have investment trusts on their radar.
Alice Ross is a contributor to FT. Her book ‘Investing to Save the Planet’ is published by Penguin Business. X: @aliceemross