ESG is an acronym, with the ‘E’ standing for the environment, ‘S’ for social issues, and ‘G’ for governance. Many investors want to know how their investments affect the environment and society, and how the companies they invest in are run. Indeed, the AIC’s ESG Attitudes Tracker suggests 48% of people consider ESG factors when deciding how to invest.

Sustainable investing, responsible investing, ethical investing and many other terms are used to describe investing that’s not just about financial returns. These terms can all mean slightly different things, and sometimes the same term can mean different things to different people. The term ESG has become widely used within the investment industry and includes a broad range of issues that investors may be concerned about. In the AIC’s ESG Attitudes Tracker, the most important ESG issue to investors was transparency and disclosure, followed by climate change.

The AIC has invited every member investment trust to disclose its ESG policy. Where a trust has submitted its ESG policy to us, this can be found on its information page under the “ESG” tab. If a trust has not provided an ESG policy, no ESG tab will appear. We hope these disclosures will be useful to investors who want to know more about how ESG considerations are incorporated into our members’ investment strategies.

We have let every member investment trust decide if they want to provide a disclosure, and what to put in that disclosure. Most trusts have described how ESG factors are incorporated into their investment process. Some have given details of how they try to influence the companies they invest in to have a more positive social or environmental impact (called “engagement”). Others have provided facts and figures about the investment trust’s impact on the environment or society (such as carbon emissions). You can also find information about any agreements, codes or principles that investment trusts may have signed up to, such as the UN Principles for Responsible Investment. Finally, some investment trusts have given details of types of companies they avoid investing in for ESG reasons (called “exclusions” or “negative screening”).

Some features of investment companies make them particularly suitable for ESG investing. They have a “closed-ended structure”, which means they do not have to sell assets when investors sell their shares in the investment company. This allows them to take a longer-term view of their investments and invest in assets that are hard to buy and sell such as physical property, infrastructure assets and start-up companies. Some of these investments can have positive social or environmental impacts. The fact that investment companies are governed by independent boards of directors, whose legal duty is to look after shareholders’ interests, helps ensure accountability, while their status as listed companies means they are transparent and need to meet high regulatory standards.

The SDR regime was announced by the Financial Conduct Authority (FCA) to make it easier for investors to choose genuinely sustainable investments and prevent greenwashing – the practice of exaggerating green credentials or covering up unsustainable practices. Most elements of SDR are coming into force this year (2024). The purpose of the rules is to ensure that claims around sustainability or other ESG attributes are clear, fair and not misleading, and force providers to produce evidence to back up any claims.

In a bid to make it simpler for investors to choose funds without having to dig into the small print, the FCA has created four labels that fund managers can adopt to clarify a fund’s credentials: 

• Sustainability Focus. This is for investments that “aim to invest in assets that are environmentally and/or socially sustainable”. 
• Sustainability Improvers. Investments that “aim to invest in assets that have the potential to improve environmental and/or social sustainability over time.” 
• Sustainability Impact. This is for investments that “aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome.” 
• Sustainability Mixed Goals. Investment products that include a mix of assets which “are already sustainable, have the potential to improve their sustainability over time, and/or aim to achieve a positive impact.” 

As of October 2024, it’s early days for the FCA’s new labels and no investment trusts have adopted a label yet. We will update our website as soon as this changes. 

The labelling regime currently applies to UK asset managers, so investment trusts based outside the UK (for example, in Guernsey and Jersey) are not yet covered by it.  Several investment trusts that invest in renewable energy infrastructure are based in Guernsey or Jersey.