Why is it so hard to identify investment trusts embracing ESG?

Private investors cannot easily find out which mainstream investment trust managers are taking ESG factors into account.

This month’s star letter flags up a dilemma likely to gain increasing prominence, given the significant rise in interest in sustainable investment over the past 18 months or so.

It points out that while Money Observer magazine makes it reasonably easy to identify ‘green’ open-ended funds – they’re marked with a little green blob in our alphabetical listings – we have no equivalent marker to help investors in closed-ended funds pick out the managers that build environmental, social and governance (ESG) considerations into their stock-picking process.

The best a sustainably minded investment trust supporter can do is to focus on the niche sectors with a clear environmental bent: most notably the environmental and renewable energy sectors, which house trusts with dedicated and relatively specialist mandates. Those who want a mainstream global or UK equity-based trust with an ESG perspective are left remarkably high and dry.

Sustainability cycles

In fact, they’re arguably worse off than they were a few years ago: in 2017, the £2.8 billion Alliance Trust stepped back from its previous stance as an investment trust well known for its sustainable investment approach under manager Peter Michaelis, and outsourced management to Willis Towers Watson (WTW) instead.

Since then, of course, the sustainability bandwagon has really started to roll. In what might cynically be interpreted as an attempt to jump back on to it, last May WTW appointed Hermes Equity Ownership Services, an institutional adviser on sustainability, to boost its credentials, but Alliance Trust has not regained wider recognition as an ESG-focused choice.

The point is not that there are no mainstream investment trust managers taking ESG factors into account – there may be, but we as private investors cannot easily find out which they are.

We’re not the only ones either, it seems. Morningstar recently upped its game with an overhaul of its fund Sustainability Rating methodology, so I spent some time poking about on the Morningstar website to see if the ratings extend to its investment trust listings.

I eventually found a question in the FAQs about the coverage of the new ratings system, the answer to which claims:

“The Morningstar Sustainability Rating covers open-end funds, exchange-traded funds, closed-end funds…”

But while investors searching for open-ended funds (and also, incidentally, for ETFs) have a ‘sustainability filter’ to help them find worthy candidates, there’s no equivalent filter to help those looking for investment trusts. Is that just because Morningstar hasn’t yet got that far? Or does it reflect a lack of ESG-focused options in the closed-ended world? We can only speculate.

There’s a similar challenge playing out closer to home. The recently launched ethical long list and ACE 30 shortlist from our parent company, interactive investor, both include investment trusts, but (with the exception of Pacific Assets (LSE:PAC), which is managed by the sustainability-oriented Stewart Investors) all are specialists focusing on green energy and other environmental solutions, social housing or healthcare. The constituents, in other words, of those easily identifiable, relatively specialist green-focused sectors.

What is the investment trust industry doing to remedy this frustrating situation? The Association of Investment Companies says the EU authorities are working on rules that will require disclosure by fund managers as to how they incorporate ESG in their investment approaches. It is waiting for publication of the technical requirements of these disclosure rules, likely to be the second quarter next year. The EU is also working on a taxonomy for investors so they can define and identify ESG factors in a fund. No quick fixes on the horizon, then.

It’s clearly a complex business to agree a definition of sustainability. But it remains a mystery as to why it’s so much easier for outsiders to identify ESG-focused open-ended fund managers than closed-ended ones.

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