The Investment Trust Green Opportunity
The Labour coalition has won a staggering majority in the July general election. I thought this was a good time to reflect on what this means for the UK’s climate transition ambitions.
Labour’s manifesto outlines several ambitious climate policies, above all the commitment to achieve a clean power system by 2030, halting the issuance of new oil and gas exploration licenses, aligning with the International Energy Agency’s (IEA) Net Zero Emissions programme and doubling the investment in energy efficiency measures for buildings. The latter includes a comprehensive Warm Homes Plan aimed at reducing energy consumption and addressing fuel poverty.
These ambitious goals will be achievable only through large investment in renewable energy sources, the cheapest and most reliable means of generation available at the moment.
With transition commitments set to accelerate, we get exposure to this theme in our ESG portfolios by directly investing in UK-listed investment trusts. These companies focus on real asset ownership, in particular, development and management of essential infrastructure and green energy generation projects. Examples of assets in the portfolio include the “Super Sewer” Tideway project, the 16-mile-long tunnel running under the tidal section of the river Thames, designed to reduce pollution and modernize London’s outdated sewage system. This project includes initiatives to generate renewable energy from collected sewage waste and is estimated to reduce sewer overflows by 95% a year helping create new habitats for aquatic wildlife and protect river ecology.
Our portfolio companies are also exposed to the theme of green energy generation primarily via wind farms and solar parks but also via hydro and anaerobic digestion. These investment vehicles have grown considerably in the past decade and now power millions of homes each year.
The estimated price of these projects is in the order of billions of pounds and would not be possible without private capital investments. This, in our opinion, highlights the size and the importance of the investment opportunity.
Despite operational performance being either in line or even ahead of expectations, investment trusts prices have experienced negative price momentum over the past couple of years, the zenith coinciding with the day before Liz Truss’s mini-budget was announced. This underperformance can be explained by various factors, above all the changing macroeconomic environment, with rising interest rates and cost inflation threatening the stability of their business models, but also a deteriorating sentiment towards UK-focused investment companies.
One positive aspect of this challenging environment is that it has helped weeding out the weaker players in the sector. We saw energy efficiency focused companies struggle to keep up their revenues and digital infrastructure allocators getting caught up in excessive valuations after buying assets at the top of the business cycle.
The investment trusts that better navigated the evolving landscape are focusing on optimizing their balance sheets after the increase in their cost of debt. To do so they are disposing of assets and using the recycled capital to pay down their short-term debt obligations and consolidating via corporate actions. The terms of the transactions we are currently seeing in the market (either at or ahead of their original cost or purchase value) give us comfort in the intrinsic valuations of these companies.
Looking forward, we consider infrastructure focused investment trusts an attractive proposition. At current valuations they offer a compelling blend of stability and low business cycle correlation, aligning financial objectives with the urgent need for climate action. As the world accelerates its transition to a sustainable future, these investments not only promise attractive returns but also contribute to building the foundation of a greener, more resilient, energy market.
Tiziana Maida
Head of Research
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.