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Energy transition powers specialist investment trusts

One of the many gripes people have about sustainable investing is that so-called environmental, social and governance (ESG) funds often focus on large listed companies. Often it is very far from obvious why such companies are even in a sustainable fund.

Fox News, for example, was one of the top ESG picks for 2022 from Sustainalytics, a rating agency used by lots of “sustainable” fund managers. So was building society Nationwide, aircraft maker Airbus and chemicals giant Linde, to name a few that seem counterintuitive.

Some of this has to do with fund managers being allowed to buy “best in class” stocks — companies that are trying harder than their peers on sustainability. But it’s not hard to see why there is a lot of suspicion about ESG funds being a box-ticking exercise.

With investment trusts — investment companies that are listed on the UK stock exchange — a different case can be made.

Because they don’t have to sell things to meet demands for redemptions from investors as open-ended funds do, it’s easier for investment trusts to hold less liquid assets that aren’t normally accessible for retail investors — such as private equity. A lot of the innovation in the energy transition is taking place in the private sphere. And a lot of investment companies have sprung up to get involved.

Most sustainable investment trusts fall into the Renewable Energy Infrastructure sector. They might own solar or wind farms, or invest in battery storage.

Ewan Lovett-Turner, head of investment companies research at broker Numis Securities, notes that shares in many of these companies are, unusually, trading on discounts now. That reflects uncertainty over potential energy price caps as well as the effect of rising interest rates that has caused income-seeking investors to ditch investment trusts for less risky assets. Yet, unusually in the current environment, many of these trusts have actually made money in the past year.

Bluefield Solar Income, which invests in solar farms across the UK, is on a discount of 5.5 per cent and has returned more than 14 per cent to investors in the past 12 months. Greencoat UK Wind is on a 6 per cent discount and has returned 9 per cent to investors. The Renewables Infrastructure Group, which invests in onshore and offshore wind and solar in the UK and Europe, is on a discount of 2.7 per cent versus a 5.2 per cent return.

Investment trusts can also invest in energy efficiency, an often overlooked area. Launched in 2018, the SDCL Energy Efficiency Income trust was the first investment company to focus only on energy efficiency, says its manager, Jonathan Maxwell.

He points to research from the Lawrence Livermore National Laboratory in the US showing that 65 per cent of energy is wasted on its way from producer to end consumer — and that’s before accounting for inefficiencies at the user end, like draughty buildings.

The SDCL trust, which trades at a 7 per cent discount and has lost 7 per cent in the past 12 months, therefore targets investments that reduce wastage in the supply, demand and distribution of energy.

An even newer option, which offers access to Asia, is the ThomasLloyd Energy Impact Trust, which is less than a year old and focuses purely on renewable energy infrastructure in a handful of Asian countries including Indonesia and India. Its co-manager, Michael Sieg, suggests that investors get more environmental bang for their buck in Asia, whose carbon emissions are 87 per cent greater than those of Europe and North America combined.

Needless to say, trusts investing in private markets are riskier, and can be too opaque for the average retail investor to get their head round.

Interactive Investor, the UK investment platform, recently removed Syncona, a FTSE 250-listed investment trust that specialises in biotech companies with new, unproven technology, from its Ace 40 list of recommended funds for sustainable investors — raising concerns over its “niche nature” and its tendency to move too much with investor sentiment.

And while renewable energy infrastructure trusts may look attractive, some sustainable investment trusts outside the renewable sector have been having a terrible time. Jupiter Green trades on a discount of 21.7 per cent, which is perhaps unsurprising considering it has lost 29.3 per cent in the past year: its benchmark is the MSCI World Small Cap Index, which has not been doing well.

Another established environmental trust, Impax Environmental Markets, has lost 21.7 per cent in the past year, but has a much better medium-term record, returning 71.8 per cent in the past five years, compared with Jupiter Green’s 3.9 per cent.

Still, it could be worse. The prize for worst-performing sustainable investment trust over the past year goes to Keystone Positive Change, which has been a negative change for investors’ portfolios, with a 40 per cent loss. Baillie Gifford took over management of the trust from Invesco last year and shifted it from a UK equity income to global equity focus.

Those that want to take a punt on the new manager eventually turning it around can at least take heart in the discount of 14.5 per cent. However, its focus on large, listed companies makes it quite a different beast from the renewable energy infrastructure specialists – and puts it in the category of ESG funds that investors can be suspicious of.

Controversially for a sustainable fund — and unfortunately given what’s happened to the stock this year — one of its largest holdings is Tesla. Renewable energy infrastructure trusts, by contrast, may offer the retail investor who doesn’t want to choose between performance and purity the best of both worlds now.

Alice Ross is the FT’s deputy news editor. Her book, “Investing to Save the Planet”, is published by Penguin Business. Twitter: @aliceemross

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