Interactive Investor

Renewable energy set to improve ethical investing perceptions

13th January 2014 09:57

Tanzeel Akhtar from interactive investor

Investors who are vigilant about recycling and think twice before taking a domestic flight are still unlikely to have spent much time worrying about how ethical their investments are.

There is an ingrained preconception that being ethical doesn't pay when it comes to investing. Even one of the top performers in the space, Ecclesiastical's Robin Hepworth, has only returned 57.41% over five years with his Amity International fund, compared with 87% from the IMA Global sector.

People interested in ethical investing come in a range of guises from those who would rather not invest in companies dealing in the arms trade to those who want to avoid supporting oppressive regimes.

By far the most talked about and catered to investors, however, are the group of people wanting to avoid investing in companies that damage the environment. For them, investments in the renewable energy sector could be the most attractive.

Those considering it will find a multitude of options, from mainstream unit trusts and investment trusts to the slightly more esoteric venture capital trusts (VCTs) and enterprise investment schemes (EISs).

As governments worldwide look to find ways of reducing carbon emissions to fulfil treaty obligations, businesses that build wind turbines, solar panels/farms and harness hydropower to help make this happen will come further under the spotlight as potential investments.

Patrick Connolly, a certified financial planner at Chase de Vere says there is increasing levels of investment in renewable energy projects globally with much of this being driven by the emerging economies, particularly in the Far East, including China.

Connolly says the UK is some way behind much of the world in terms of developing this infrastructure and yet we have still witnessed a greater number of green investment vehicles aimed at retail investors.

He warns, however: "Many renewable energy projects, while seemingly a good story, have not yet demonstrated that they make reliable investment opportunities and so potential investors must approach with a large degree of caution."

The most reliable form of renewable energy, according to Connolly is solar, which is where many retail-focused investment opportunities lie.

He explains: "There isn't a huge difference in the number of sunlight hours year on year, and solar investments benefit from low maintenance costs, consistent earnings, long term project lives and attractive government tariffs. When we look at renewable energy investments for our clients we therefore prefer those which focus on solar energy."

Investing in renewable energy funds and investment trusts

Funds that can be used to access these themes include the Guinness Alternative Energy, Old Mutual Ethical fund, Premier Ethical fund, Ecclesiastical Amity European fund, Standard Life Investments UK Ethical fund and the Alliance Trust Sustainable Future UK Growth fund.

Darius McDermott, managing director of Chelsea Financial Services ranks the Guinness Alternative Energy fund highly. Over six months it has returned 19.5% compared with an average of 3.9% in the commodity and energy sector as at 8 January.

Edward Guinness, manager of the alternative energy Guiness EIS 5, identifies three broad themes he takes into account when investing in renewable energy. The first of these is investing in solar installation projects, particularly if it's a UK project because he thinks they are quite low risk.

Guinness explains: "There's good credit behind them as the UK government guarantees payments and you have a yielding asset. This way of investing is a good inflation hedge. You could also invest in infrastructure-listed companies or EIS funds."

Next, he suggests targeting the growth in the sector. Guinness says: "It's still quite small but growing. You can do this via a fund."

His final recommendation is investing in "revolutionary technologies". He explains this is hardest for retail investors, but it's often what they are thinking of when they look at this sector: clean tech - the technology companies that are going to revolutionise the way we get energy.

Investing in renewable energy VCTs and EISs

VCTs and EISs represent a way of accessing some of these themes and also attract various tax breaks. They are particularly popular with investors seeking income because they give 30% income tax relief.

Mitch Young, director of tax services at Adler Shine explains: "For the tax year ended 5 April 2014 the maximum investment available for relief is £200,000. This relief can be offset against any income tax liability becoming due whether the investor is a basic, higher or additional rate tax payer; the maximum relief which can be given is an amount which reduces the investor's liability to nil."

An investor can get this relief for the tax year in which these "eligible shares" were issued, provided that they subscribed for the shares on their own behalf, the shares were issued to them, and they hold them for at least five years; otherwise relief can be withdrawn.

Young adds: "Any dividends paid from the VCT are exempt from income tax. If the shares are held for five years there is no capital gains tax on any future gains made from their disposal."

Olivia Bowen, financial adviser at Manchester-based advisory firm Gaeia, which specialises in advising investors who want to invest ethically, says the potential tax free and long-term income stream can be attractive.

Additionally, "The investment will help towards fuel security for the UK," she says, although she warns getting capital back can be tricky unless there is a planned exit point and this looks secure."

Connolly invests in renewable energy investments for clients through VCTs and, particularly, EISs. He recommends Oxford Capital Infrastructure EIS and Downing Renewables EIS.

McDermott says these are viable options but warns they will generally be a more risky investment and adds then when considering this type of energy investors should be aware government policies can change.

He looks for renewable energy projects that use proven technology and already have sites and planning permission because they have a significantly lower risk profile and the ability to provide a consistent and potentially attractive income. For this he recommends wind specialist VCT Ventus.

Matt Ridley partner at Temporis Capital, which is the investment manager of Ventus VCT, says wind is contributing more than ever to the UK energy mix, and the weather in the past month has delivered a record month in terms of energy generation.

Over one year, Ventus VCT has returned 26.0% compared with an average of 11.6% in the VCT Specialist sector as at 6 January.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.