Alternative Thinking: Four Vehicles for ESG Investors Beyond Open-Ended Funds
The weight of capital flowing to environment, social and governance (ESG) assets over the past year has been stratospheric. According to Morningstar data, the growing demand for such investments during the year 2020 prompted European fund managers to change the strategy or investment profile of 253 European funds, thus helping to push the regional assets invested. in ESG-focused funds to a record â¬ 1.1 billion. (Â£ 860 billion). In addition to these converted vehicles, Morningstar also reported 505 new ESG fund launches in Europe in 2020.
The frenetic attention surrounding ESG has caused some confusion in terms of terminology, its potential impact on returns and how it informs investment decisions. Sustainability is likely to remain a key priority, but investors need transparency and clear solutions to meet their needs and goals. With that in mind, there are several options that investors and their advisers might consider, the simplest of which relate to four key areas: VCTs, EISs, Investment Trusts, and REITs.
VCT and EIS
For investors looking for positive impact opportunities outside of listed vehicles, Venture Capital Trusts (VCT) and the Enterprise Investment Scheme (EIS) are potentially attractive options, with the added benefit of their leanings. fiscal policies promoted by the government.
This is due to their focus on investing in young, high growth companies, which means that VCT and EIS products offer investors the opportunity to support precisely the types of businesses that will be so important to the Kingdom’s economic recovery. -United. Indeed, since their inception over 25 years ago, EIS has raised around Â£ 24bn, while VCTs, which were introduced in 1995, have raised around Â£ 9bn. The investment target for both vehicles is today in innovative UK start-ups.
Investing in such companies does not always mean a higher level of risk. This is because different VCTs pursue different investment strategies, with the most insightful review of companies that have already achieved some form of market validation. VCT managers can, for example, use a ‘challenge-driven’ approach: identifying companies with growth potential that are already actively solving the problems of established companies, rather than those that have not yet determined their demand on the market. the market.
VCTs offer tax advantages to investors because of the risks taken – for example, investors can invest up to Â£ 200,000 and claim up to 30% tax relief per year on newly issued shares. Dividends are exempt from income tax and investors can benefit from capital gains tax relief when they sell their shares with a profit subject to a minimum holding period.
For EIS, returns are achieved by investing in unlisted growth companies that have the potential to provide a significant return on capital over a holding period of three years or more. Depending on their circumstances, investors can also benefit from various tax breaks including 30% income tax relief, tax-free inheritance and growth tax.
There are now also impact-oriented EIS products, which not only target fast-growing innovative companies, but specifically those that have a positive impact on society in key areas, such as health, children and youth. , the environment and inequalities.
Additionally, many high-growth companies attracting EIS and VCT investment in the coming months should have a better chance of success than they might have in the pre-COVID era. Indeed, the disruption caused by the pandemic has reduced the costs of starting a business, such as rent, while giving business owners better access to the vast pool of talent needed to accelerate growth.
Investment trusts should be an attractive option for those targeting a long-term sustainable investment strategy. Depending on the strategy and the sector, they can provide a diversified, yet strong and sustainable investment portfolio that offers the dual benefit of return on capital and long-term income.
At the end of 2019, the total assets under management of UK investment funds were estimated at around Â£ 200 billion, double what it was a decade earlier. With over 400 trusts currently traded on the UK stock market, focusing on over 30 different sectors, the choice is vast.
While investment trusts are not without risk, those that effectively integrate ESG issues into investment analysis and decision-making processes can enhance their credit risk mitigation and enhance asset performance over time. term. For investment trusts, ESG integration can therefore be essential to deliver broader social and environmental benefits to investors and stakeholders at large.
For example, Digital 9 Infrastructure (DGI9) is an investment trust managed by Triple Point, whose strategy aligns with the United States Sustainable Development Goals, as its name by the way. The â9â refers to the ninth UN goal – âBuild resilient infrastructure, promote inclusive and sustainable industrialization and foster innovationâ – which reflects the trust’s commitment to improving global digital communications from a global perspective. ecologically sustainable way. The company is responding to exponential demands for Internet support by investing in a range of digital infrastructure assets that aim to generate sustainable income and capital growth for investors.
Real estate investment funds
Real Estate Investment Trusts (REITs) invest in a wide range of property types and can provide investors with dividend-based income, transparency, liquidity, inflation protection and portfolio diversification. Historically, they have proven to be an attractive way for investors to gain exposure to the world’s largest asset class, while gaining the liquidity of a marketable security.
Not all REITs have been able to be resilient in the past year or so, but these likely have done so by focusing on ESG or impact-related sectors, including health and social housing. These REITs have continued to collect uninterrupted rents during the pandemic, as they invest in much-needed real estate whose rent is paid by the government.
For example, social housing REITs finance the development of specialized supported housing, whether newly built or renovated, for people with long-term care needs such as learning and physical disabilities. These facilities are designed in collaboration with the local health commissioners to accommodate people leaving institutional care establishments.
As a result, these homes both improve the well-being of residents and free up resources in a context of ever-increasing demand. For investors keen to have a positive impact on society, social housing REITs can therefore represent an opportunity to generate sustainable, long-term, inflation-indexed income, while helping to overcome one of the challenges. the most urgent of society.
After a year of frenzied interest in ESG investing, it’s no wonder that investors and their advisers are feeling overwhelmed by the risks and opportunities of a growing industry. But there are still clear and attractive options for those seeking long-term profitable investment strategies designed to create value for the communities and the people who live and work there. VCTs, EISs, Investment Trusts, and REITs all have the potential to meet the needs of investors with enduring goals and priorities.
Belinda Thomas is Sales Manager at Triple Point