On 1 November 2021, representatives of the 197 signatories to the United Nations Framework Convention on Climate Change will meet in Glasgow for the UN Climate Change Conference or COP26, as it is more commonly known. This is significant as it is the first time all the signatories have met since COP21, where countries around the world entered into the Paris Agreement, a legally binding commitment to reduce emissions. COP26 provides an opportunity for the signatories to reach agreement on a clear strategy for meeting the ambitious targets set in the Paris Agreement.
One of the five key themes for discussion at COP26 is how to mobilise the finance required to secure the targets set out in the Paris Agreement. The International Renewable Energy Agency has estimated that in order to meet the targets set for 2050, around US$ 110 trillion of total investment will be required globally.
While governments, in particular in developed nations, have pledged significant sums, the amount of investment required will mean that there will have to be significant engagement from financial institutions and individuals.
One solution to the difficulties of mobilising finance in the UK is the investment trust. Investment trusts are not a new concept with a heritage that dates back to 1868. Despite the name, an investment trust is a company listed on the main market of the London Stock Exchange, not a trust.
Over the last five years the fastest growing sector of the AIC (the trade association for closed-ended investment companies in the UK) has been the Renewable Energy Infrastructure sector. Since the launch of Greencoat UK Wind plc in March 2013 the sector has raised aggregate funds in excess of £10 billion. Initially focussed on wind and solar assets situated in the UK through companies such as Foresight Solar Fund plc, JLEN Environmental Group plc and NextEnergy Solar plc, the sector has more recently diversified into new technologies such as battery storage, with the launch of Gresham House Energy Storage plc in November 2018, and clean hydrogen, with the launch of HydrogenOne Capital Growth plc in October 2021.
Advantages of an investment trust
There are a number of advantages of the investment trust structure that makes it particularly suited to investment in the renewable energy sector, but also more widely for use in relation to ESG investments.
1. Closed-ended structure
Closed-ended investment structures have a fixed number of shares in issue at any one time. An investment trust may increase this number by issuing new shares, but once issued, shares are bought and sold between investors in the market.
In contrast open-ended structures, such as unit trusts, expand and contract depending on demand from investors. This means that an open-ended fund must be managed in such a way that it is quickly able to return cash to investors at any time, either through its cash reserves or by selling its assets.
The permanent capital available to the investment managers of investment trusts mean that they are able to be more long-term in their investment decisions and invest in assets that are relatively illiquid without the fear of investors looking to redeem their investment.
Unlike many other investment structures, investment trusts can borrow money to make additional investments. This allows investment trusts to implement long term plans and take advantage of attractive investment opportunities without having to issue additional shares to investors or sell existing investments. The flexibility that this offers has been particularly beneficial in recent years given the low interest rates and reduced costs of borrowing.
The flexibility offered by the investment trust structure allows them to be used to invest in almost anything. While an investment trust must define its investment approach in its investment policy, this flexibility has allowed investment trusts to adapt and develop as new renewable energy technologies have matured and become more profitable.
The wide disparity between the targets set by governments to reduce emissions and the lack of action that has been taken to achieve these targets, means that there continues to be a wide range of investment opportunities for existing and new investment trusts in the renewable energy sector.
While the UK renewable energy market is well developed and recent years have seen an end to many of the subsidies offered by the UK Government, the renewable energy markets in other jurisdictions are less developed and are in need of high levels of investment. There are a growing number of investment trusts such as Acquila Energy Efficiency Trust plc, JLEN Environmental Group plc, Octopus Renewables Infrastructure Trust plc and The Renewables Infrastructure Group Limited, now investing in renewable energy assets across Europe. Others, such as Foresight Solar Fund Limited, have invested in assets as far afield as Australia.
There is nothing to prevent the investment trust structure being used to invest in renewable energy projects and other projects which aim to reduce emissions around the world, including in less developed nations where this investment is most needed.