Investment trusts switching to ESG need shareholder approval

by Kyle Caldwell from interactive investor |

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Shareholders asked to give their blessing to any ‘material changes’ to investment policies.

Investor appetite for ethical funds has never been higher, which has led fund houses to roll out new products with a responsible investing slant.

In the investment trust world, there has also been an uptick in demand, with most IPOs in 2020 putting socially responsible investing at the forefront of their strategies including Home REIT (LSE:HOME), Downing Renewables & Infrastructure (LSE:DORE), Triple Point Energy Efficiency Infrastructure (LSE:TEEC), Ecofin US Renewables Infrastructure (LSE:RNEW), Schroder British Opportunities (LSE:SBO) and Schroder BSC Social Impact Trust (LSE:SBSI).

More launches are expected in 2021, with Liontrust preparing an investment trust for its sustainable team. 

In addition, it is expected there will be a rise in trusts tweaking their investment policies to adopt a greater focus on environmental, social and governance (ESG) factors.

This week, Dunedin Income Growth (LSE:DIG) announced its intention to introduce an enhanced ESG framework, which would result in the exclusion of certain companies – including tobacco manufacturers and those involved in controversial weapons and thermal coal extraction. The trust invests in UK equity income shares, and has a current dividend yield of 4.1%.

The proposals will be put to shareholders on 10 June – a requirement ahead of a change in strategy being implemented. To make your vote count, sign up to receive shareholder materials and voting information directly from companies. The service allows interactive investor customers to vote electronically.

Dunedin Income Growth’s ESG proposal follows Odyssean Investment Trust (LSE:OIT) tweaking its investment policy to restrict investment in certain sectors or businesses that it deems unethical and/or unsustainable.

In January, Odyssean shareholders approved the change in the investment policy. The trust has restricted investments in companies which produce controversial weapons, extract oil and gas, produce alcohol and tobacco, and operate gambling facilities or websites.  

A number of other investment trusts, including Alliance Trust (LSE:ATST) and Witan (LSE:WTAN), have been formally embracing ESG principles.

In 2019, Alliance Trust strengthened its approach to responsible investing by appointing external experts Hermes EOS (Equity Ownership Services) to add a further layer of expertise and oversight on top of its own ESG analysis.  

Last February, Witan became a signatory to the UN-supported Principles for Responsible Investment. This involves the trust integrating ESG factors into investment decision-making, engaging with company management on ESG issues, and monitoring ESG risks in the portfolio. 

With investment trusts, a shareholder vote is required if something leads to ‘material change’ in how the trust invests.

For example, if the trust invests in UK equities and will continue to invest in UK equities under new management, this will probably not be put to a shareholder vote. A recent example is Temple Bar (SE:TMPL), which last September switched from Ninety One (formerly Investec) to RWC Partners. The trust’s investment objective and strategy (of investing in UK value shares) was unchanged, so the change in the fund management group was not put to a vote.

But, Witan Pacific’s move to Baillie Gifford last September, did require a shareholder vote due to a change in strategy. The trust formerly invested in Asia shares, but now invests exclusively in Chinese equities and its name has subsequently changed to Baillie Gifford China Growth (LSE:BGCG).

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