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Climate conscious

9 October 2020

Faith Glasgow looks at the Renewable Energy Infrastructure sector.

Unprecedented forest fires in Siberia, California, Australia. Tornados, devastating floods, record-breaking summer temperatures, shrinking ice caps. There is plentiful evidence that the earth’s climate is changing rapidly as a result of human activity, with catastrophic consequences for society and the natural world.

As concern over the future of the planet has become a mainstream movement over the past two or three years, interest in broader ‘sustainability’ and ESG (environmental, social, governance)-focused funds has mushroomed. But the options for investors keen to invest part of their portfolio specifically to mitigate the effects of climate change are relatively limited.

This is where the AIC’s Renewable Energy Infrastructure sector comes into its own. The 13 investment trusts housed in this sector focus their attentions on infrastructure projects designed to reduce carbon emissions, primarily through solar or wind power generation, energy storage or improved energy efficiency.

As Peter Walls, manager of the Unicorn Mastertrust fund of investment trusts, observes: “If you’re really worried about the climate, this is pretty much the only [collective] investment option available to you.”

Although most people think of investment trusts and companies as investing in listed equities, there has been massive growth in those focused on alternative assets, including not only renewable energy infrastructure but also the likes of property, debt, private equity and aircraft leasing. Over the six years to August 2019, AIC figures show that alternative trusts more than doubled in value from £35 billion to £80 billion, and they accounted for 70% of total new share issuance in 2019. In the renewable energy sector, the number of trusts has doubled over the past three years alone.

The big advantage of these trusts for particularly hard-to-sell assets such as renewable energy infrastructure is their closed-ended structure, which means that a fixed number of shares are issued and traded on the stock market. When demand falls, the trust’s share price drops and the discount to net asset value (NAV) widens; but, in contrast to open-ended funds, the manager does not have to keep cash available or sell assets if investors rush to get their money out.

David Gorman, head of research at Castlefield Investment Partners, adds: “Shares are traded on the stock market just like regular stocks, so they are very liquid investments and they enable investors to access a broad range of assets in a cost-effective way. For people interested in investing sustainably, trusts can invest for the long term in a portfolio of wind farms, an anaerobic digestion plant or maybe even social housing, all things which an individual would not be able to invest in directly.”

However, the appeal of renewable energy investment trusts extends well beyond anxious environmentalists. With reliable dividend-paying assets highly prized in these days of rock-bottom interest rates, income investors have homed in on the generous yields on offer. These currently average 5.2% and in many cases are linked to inflation (with any capital growth as a bonus).

As a consequence, all the companies in the sector are currently trading on hefty premiums to NAV, averaging 17.5%. That’s marginally above the 52-week average of +11.3% for the sector.

Walls suggests that current premium levels mean “it may be worth waiting for the secondary share issues that happen from time to time”.

It’s important to note also that these trusts are specialist investments and should only form a small part of any balanced portfolio - particularly as their performance will be influenced by external factors such as the wider price of fuel globally and the UK government’s policy on supporting renewable energy generation through subsidies and other initiatives.

If you’d rather look for a broader-brush investment response to environmental concerns, the leading option of the three trusts in the Environmental sector is Impax Environmental Markets, which invests in companies active in the growing resource efficiency and environmental arena, from sustainable forestry to pollution control. It trades on a modest 2% premium and has seen a share price rise of 21% over the past year.

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