Investment trusts helping energy transition to net zero

As part of our COP26 coverage, we run through investment trust options for a greener future. 

Even before the COP26 climate summit in Glasgow, various governments, companies and the world’s largest investors had made pledges to reduce carbon emissions towards a net-zero target.

At the summit, further plans have been outlined; including proposed Treasury rules to force UK firms and financial institutions to show from 2023 how they intend to meet climate change targets.

In particular, climate change has ramped up the pressure on oil and gas firms to transition away from fossil fuels.

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Fund managers with an exclusively ethical remit tend to screen out such companies, but others incorporating environmental, social and governance (EGS) factors as part of their approach argue that putting a blanket ban in place is short-sighted as this does not resolve the problems the world is facing.

Lowland (LSE:LWI), for example, holds both BP (LSE:BP) and Royal Dutch Shell (LSE:RDSB). In its most recent half-yearly results, the trust said: “Our approach does not extend to the exclusion of specific sectors (such as fossil fuels). Some fossil-fuel companies held (such as BP and Royal Dutch Shell) will form a necessary part of the energy transition, and are spending material sums shifting their portfolios towards renewable energy. It continues to be our view that engagement is more conducive to change than exclusion.”

Alliance Trust (LSE:ATST) also holds BP for similar reasons. Mark Atkinson, head of marketing and investor relations at Alliance Trust, explains: “An example of our pragmatic approach is BP. It is highly ranked among peers in terms of environment, social and governance (ESG) risk, investing in renewables and looking to improve its reporting and transition risk management.”

He added that over time it is expected that there will be a shift in BP’s fuel mix towards lower carbon intensity.

Another example of a carbon-heavy business that Alliance Trust is engaging with is HeidelbergCement (XETRA:HEI). Atkinson points out that the company has implemented numerous projects towards the goal of reducing its carbon footprint, including carbon capture and storage methods.

James Hart, investment director at Witan (LSE:WTAN), argues that a blunt exclusion policy is likely to be detrimental to shareholder returns.

In addition to Witan’s investments in climate change and renewable energy strategies, he notes that its portfolio “may contain mining companies (copper for electrification or nickel for battery storage); steel manufacturers (to make wind turbine towers or electric grids); paper and packaging companies (to address overuse of single-use plastics); and aerospace manufacturers (developing fuel efficiency in aviation).”

Hart also made the point that “our belief is that it is more important to focus on what a company’s contribution to the long-term global carbon reduction is, rather than to fixate on its historic carbon footprint – provided, of course, that these companies are best-in-class and that there is a clear path to reduce emissions over time”.

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Renewable energy trust options

A more direct step to investing in a greener future is through the Renewable Energy Infrastructure sector. There are 19 members.

Among the trusts in the sector are Gresham House Energy Storage (LSE:GRID) and the US Solar Fund (LSE:USF). Bear in mind, that premiums across the sector tend to be high due to the trusts proving to be very popular at the moment. GRID is trading on a 15.8% premium, while USF commands a premium of 5.7%.

Gresham House Energy Storage invests in battery energy storage systems in the UK. Ben Guest, the fund manager, notes: “The deployment of renewable energy in the UK is set to continue, led by offshore wind. As zero emissions remain a target outcome for many businesses and governments around the world, resultant renewable energy generation will require more storage capacity to balance the crucial supply and demand issues.”

The US Solar Fund, meanwhile, as the name implies, invests in solar farms across the US. Whitney Voûte, head of investor relations for the trust, argues: “President Joe Biden’s goal is for 30% of all US electricity to be generated from solar by 2030 – compared to a figure that is in the low single digits currently.

“The US solar market offers one of the largest opportunities for UK investors looking to gain exposure to an environmentally focused, alternative income-generating asset. In addition, by investing in US solar, investors can play a key part in powering president Joe Biden’s plans for a seismic shift in energy generation and a transition to zero emissions.”

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Five of the 19 members in the Renewable Energy Infrastructure sector have listed over the past year: Aquila Energy Efficiency Trust (LSE:AEET), Downing Renewables & Infrastructure (LSE:DORE), Ecofin US Renewables Infrastructure (LSE:RNEW), HydrogenOne Capital Growth (LSE:HGEN) and VH Global Sustainable Energy Opportunities (LSE:GSEO) Opportunities.

Another trust in this space planning an IPO is Atrato Onsite Energy. If it launches, it will be the first UK-listed investment trust focused on rooftop solar power installations.

Gurpreet Gujral, managing director of Atrato Onsite Energy, noted that“while government action is crucial for combating climate change, net-zero can only be achieved if the corporate sector also takes action”.  

He added: “The list of corporations making climate pledges is growing, with some of the UK’s largest companies – including supermarket giants Aldi, Asda, Co-op, Lidl, M&S (LSE:MKS), Morrisons, Ocado (LSE:OCDO) and Sainsbury's (LSE:SBRY) – respectively setting their own targets to decarbonise stores, deliveries and products by 2030, 2035 and 2040. These ambitious targets are far and away ahead of the UK government’s 2050 deadline.

“Through the installation of rooftop solar panels able to directly supply green energy, companies can bypass the grid and realise energy efficiencies and cost savings, while helping in the transition to net-zero. These savings come from the removal of policy costs, supplier margins and network charges for connecting through the grid.”