ESG: 10 trusts trailblazing positive investing

by Jennifer Hill
Key points:

The environment, society and good governance (ESG) have become key topics for investors in response to the global coronavirus pandemic.

Although investment companies and investment trusts tend not to shout about it, ESG has been a core part of some of their strategies for decades.

However, getting clear information on investment policies and what benefits are actually achieved is difficult. We asked experts to cut through the ‘greenwash’ and identify 10 ‘closed-end’ funds they thought were doing a good job on ESG.

Given their long history of being in the vanguard of economic and social progress, investment trusts often pave the way for trends long before the rest of the investment world catches on. Prioritising environmental, social and governance (ESG) factors in the investment process is the latest example.

While ESG became the buzzword of investment circles in 2020, back in 1945 3i (III) was founded to invest responsibility to support companies in post-war Britain. The private equity and infrastructure trust – the second largest in the investment trust universe after global equities goliath Scottish Mortgage (SMT) – has maintained those principles ever since.

‘Its sustainability strategy is not separate to its business strategy overall but is embedded in its investment process and it believes that companies with high ESG standards are better run and generate more sustainable earnings growth,’ said Christopher Brown and Adam Kelly, analysts at JPMorgan Cazenove, which has an ‘overweight’ rating on the trust.

When evaluating companies, 3i considers environmental issues such as waste management, energy and carbon management; social issues such as human rights and supply chain management; and governance issues such as health and safety, anti-corruption and cyber security.

Companies involved in unethical areas like animal testing, child labour, gambling, ozone substances and weapons are automatically excluded, while those with low ESG risk and limited impact on the environment are ripe for inclusion.

Transparency and disclosure are important. It makes disclosures under the Task Force on Climate-related Financial Disclosures and environmental reporting charity CDP. It has been a signatory to the United Nations (UN) principles for responsible investment since 2011 and was top-rated A in its 2020 assessment.

It is this level of transparency that investors increasingly seek. As questions around ESG preferences move into the mainstream for wealth managers and advisers, investors want to know how well an investment proposition is aligned to their principles.

ESG objectives

Some investment trusts have clear ESG objectives. These have been the focus of recent launches and initial public share offerings (IPOs). Of the eight investment companies that floated on the London Stock Exchange (LSE) between October and February, seven had an emphasis on ESG (see chart), the eighth being a music royalties trust.

There has been a recent flurry of investment company launches with an ESG focus
Home Reit (HOME)
Triple Point Energy Efficiency Infrastructure (TEEC)
Schroder British Opportunities (SBO)
Downing Renewables & Infrastructure (DORE)
Ecofin US Renewables (RNEW)
Schroder BSC Social Impact Trust (SBSI)
VH Global Sustainable Energy Opportunities (GSEO)

VH Global Sustainable Energy Opportunities (GSEO)
became the latest addition to the burgeoning renewable energy sector, which encompasses 18 solar, wind, energy efficiency and storage funds, and the first investment company to float in 2021 when its shares started trading on 2 February.

In the general infrastructure sector, there are six trusts that predominantly invest in social projects, including schools and hospitals, but their universe has evolved to include assets that serve an environmental purpose. These include wastewater assets and ‘OFTOs’ – offshore transmission projects that aid the UK’s transition to a zero-carbon economy.

There are three environmental-focused trusts, the largest being Impax Environmental Markets (IEM).

The property sector offers growing choice for investors who want to help solve the shortage of social housing stock through Civitas Social Housing (CSH), Triple Point Social Housing (SOHO) and Home Reit (HOME), which made its debut in October.

Impact investing is another growth area. Schroder BSC Social Impact (SBSI), whose day-to-day management is carried out by Big Society Capital, launched in December. Trusts have reinvented themselves for a more ethically conscious world, too. The most notable recent example is the reincarnation of Keystone (KIT), an underperforming UK equity trust run by Invesco, as Keystone Positive Change (KPC), a global equity strategy run by Baillie Gifford with a mandate of investing in companies ‘contributing towards a more sustainable and inclusive world’. Others have enhanced and better disclosed existing practices. Odyssean (OIT), a specialist UK smaller companies trust, has integrated ESG into its investment policy, reflecting the formalisation of an approach that already incorporated many of these factors as part of its quality screening.

ESG ratings surprise

More trust managers are considering and articulating how their approach maps to the UN sustainable development goals (SDGs). From the second quarter, the Association of Investment Companies will allow its members to disclose this and other relevant ESG credentials on their profile pages.

Investment managers, among them Baillie Gifford, Impax and Amber Infrastructure, the investment adviser to infrastructure trust International Public Partnerships (INPP), have published detailed impact reports.

For closed-end funds with exposure to renewable energy it is easy to disclose the reduction in CO2 emissions, but for equity trusts the ability to report hard numbers on areas such as climate impact is constrained by the amount of information they receive from underlying companies.

‘Many trusts have taken the time to carve out and separately articulate their approach to ESG. The challenge for fund selectors is assessing the quality and efficacy of them,’ said Anthony Leatham, head of investment companies research at Peel Hunt.

In 2019, the LSE introduced a Green Economy Mark that has been awarded to 24 investment companies, predominantly infrastructure and renewables trusts. ESG ratings can help too, but the methodologies behind them vary enormously.

Morningstar bases its sustainability ratings on ESG scores of underlying equity holdings, as provided by Sustainalytics. This affects its coverage of small-cap trusts and means virtually no alternative asset trusts hold a rating.

Refinitiv bases its analysis on disclosures at the fund level and provides ratings across a wider range of equity and alternative asset trusts.

The results, at times, are surprising. IEM has a four globes/above average Morningstar sustainability rating but a poor Refinitiv rating of D+. Greencoat UK Wind (UKW) and Foresight Solar (FSFL) are among several renewables trusts that are also lowly rated, both being assigned D+.

This reflects the high weighting that Refinitiv places on governance factors relative to environmental ones when evaluating investment trusts.

‘A number of investment companies appear to be marked down for not having policies about executive pay despite not having any executives,’ said Ewan Lovett-Turner, head of investment companies research at Numis Securities.

‘The ratings criteria may give companies an idea on where to start with disclosures, but there remains a lot of work to be done in refining these ratings before they can be used without significant sense-checking.’

ESG Ratings and Coverage
Morningstar Sustainability Rating
Refinitiv ESG Rating
Investment trusts covered
Equity investment companies
Equity and alternative investment companies
% of trusts rated (by number)
% of trusts rated (by market value)
Average market value £m
Rating  inputs
Sustainanalytics of underlying holdings
Investment company disclosures
Rating  inputs
5 globes (high), 1 globe (low)
A+ (excellent) to D- (poor)
Relative to a peer group?
Yes (based on final score)
Yes (based on each data point)
Peer group
Morningstar Global Category
TR Business Industry

Source: Company & Numis Securities research

So, which investment trusts do analysts and wealth managers rate for their ESG credentials?

Daniel Bland, EQ Investors


EQ Investors was a seed investor in SBSI, which raised £75m before it launched on 22 December. Since many social impact funds are in private markets, the trust gives public market investors direct access to leading social investment managers for the first time.

‘It’s ground-breaking in terms of access to high impact investments, opening up the possibility to invest with the experienced Bridges and Resonance teams,’ said Daniel Bland, head of sustainable investment management at EQ.

The trust targets an annual total return of 2% over the consumer prices index (currently 0.7%), including a dividend yield of 1-2%.


Charles Stanley research analyst Adam Carruthers regards the revamped KPC as ‘bearing all the hallmarks of Baillie Gifford – high conviction, a distinct growth bias and low turnover’ and deems it a ‘strong higher-risk offering for investors with a less purist attitude to ethical investing’.

The trust backs companies that can deliver positive change in one of four areas: social inclusion and education; environment and resource needs; healthcare and quality of life; and base of the pyramid (addressing the needs of the world’s poorest populations). Its holdings include diabetes management firm Dexcom and electric car manufacturer Tesla.

Robert Wilson, Quilter Cheviot


The flotation of GSEO caught the interest of Quilter Cheviot. ‘Valuations remain rich across the [renewable energy] space with the average trust trading at a premium, so we try to find attractive entry points like IPOs,’ said fund research analyst Robert Wilson.

‘We are also seeing larger underlying assets in the sector being fiercely bid for, which makes the mid-space Victory Hill operates in slightly more attractive.’

He expects revenue risk to be low given the majority is contracted and visible in the form of power purchase agreements. The trust qualified for the Green Economy Mark at admission.


This is another Green Economy Mark holder, but while GSEO is a diversified portfolio of energy infrastructure assets, including energy storage and efficiency, NESF focuses on solar energy generation.

‘Clearly, the end-product is positive,’ said Bland at EQ. ‘For us, what makes the team stand out is its focus on how solar sites can be used to improve local biodiversity. It has partnered with a team of specialists to improve sites and set best practice in the industry. The trust looks unlikely to raise more capital, in contrast to peers, and trades at a relatively attractive discount with a healthy prospective yield.’


Lovett-Turner at Numis regards INPP as having ‘best in class’ ESG disclosure and strong prospects of continuing its long-term track record of share price and dividend growth.

The trust trades on a prospective full-year 2021 yield of 4.4%. Last year’s dividend was 1.3 times covered by net operating cash flows. ‘With interest rates at 0.1%, and question marks over some of the most historically robust UK dividend-paying companies, the relative attraction of infrastructure will only get stronger,’ he said.

It is rated B+ by Refinitiv thanks to investments like Thames Tideway, which will reduce polluting discharges by about 37m cubic metres per year.

Nick Craze, Ravenscroft

6. HOME Reit (HOME)

HOME real estate investment trust raised £240.5m in October to tackle homelessness in the UK, working closely with charity Crisis to provide social housing and an annual donation.

‘In a post-pandemic world that will bring broad concerns for rising inflation, the trust offers a level of inflation protection through index-linked leases that are pseudo government-backed,’ said Nick Craze of Ravenscroft’s advisory team.

‘For those investors who believe that “green” investments lead to sacrificing performance, this Alvarium-led trust proves that you can have a vehicle that solves a social inequality and provides attractive inflation-protected returns.’

Kamal Warraich, Cannacord Genuity


Despite its £18bn size, Canaccord Genuity Wealth Management likes global growth giant Scottish Mortgage as an ‘under the radar’ ESG offering.

‘It doesn’t adopt a negative ESG screen in its process but is clearly aligned to long-term sustainable themes. The team engages with all its portfolio companies with the aim of improving relevant policies and management systems,’ said investment analyst Kamal Warraich.

‘Its team has long believed in the renewable energy revolution and end of the carbon era. To quote [co-manager] James Anderson in the most recent annual report: “We aim to support the people and companies that are building the future of our economy.”’


Carruthers at Charles Stanley likes Pacific Assets, run by sustainable investing specialist Stewart Investors.

‘PAC is not a strictly negatively screened trust but should have wide appeal to ethical investors,’ he said. ‘Sustainability issues are a fundamental part of the firm’s DNA.’

According to MSCI ESG research, PAC has 73% less exposure to carbon intensive companies than its peers and no exposure to high impact fossil fuels.

Among the trust’s largest holdings are Hong Kong plant-based food and drink company Vitasoy, Japanese sanitation product producer Unicharm and Indian consumer goods firm Marico, which focuses on health and wellness.