Climate change issues rightly remain a global concern and continue to sit near the top of government agendas. More recent news includes UK prime minister Boris Johnson agreeing to legislation targeting the reduction of UK emissions by 78% before 2035 and the launch of The Glasgow Financial Alliance for Net Zero (GFANZ).
The latter exciting development will see Mark Carney, former Bank of England governor and current UN Special Envoy on Climate Action, bring together over 160 financial firms responsible for around $70trn of assets, all in an effort to accelerate the transition to net zero by 2050. Carney also happens to be one of the prime minister’s advisers for the COP26 summit in Glasgow, another big event in the climate change calendar.
These political developments have been accompanied by ever-growing appetite for ESG and impact strategies among investors. In the investment company world, the most recent example is Liontrust’s announcement of its intention to float an investment company, with an ESG-oriented mandate.
Particularly relevant to the globally coordinated efforts to fight climate change are the 17 investment companies in the AIC’s £10.6bn Renewable Energy Infrastructure sector – and here too, investor appetite has been plain to see.
Fundraising in the sector last year was over £1.8bn, more than double the Property – UK Commercial sector which came second, according to data from Morningstar and AIC. In terms of IPOs, out of the eight investment companies to come to market last year, three were in the Renewable Energy Infrastructure sector, the most out of any sector. These figures are even more impressive if you take into account that all this corporate activity took place during the global pandemic. And in 2021 there has already been a launch in the Renewable Energy Infrastructure sector, VH Global Sustainable Energy Opportunities, which raised £243m in February.
This popularity has been driven in part by low interest rates, which have driven investors to seek out attractive, stable and sometimes subsidised income streams from sources such as solar, wind and even anaerobic digestion.
But have investors been rewarded for favouring the sector? Yes, so far so good. When the stock market’s dividend tap slowed to a trickle last year as companies struggled with Covid-19, the Renewable Energy Infrastructure’s constituents more than held their own. In fact, every investment company in the sector managed to maintain or even increase its dividends: impressive against a backdrop of UK dividends falling 41% and dropping globally by 12%. Currently, the average yield of the sector is 5.4%.
More widely, investment companies were able to protect dividends during the pandemic because of their structural income advantages. Unlike open-ended funds, they don’t have to distribute all of the income they receive every year and can save up to 15% they receive in a revenue reserve to use when the going gets tough. In a recent estimate, Link Group reported that investment companies had £1.6bn in reserves, of which £700m had been put to use to support dividends by the end of March this year. The structure also allows investment companies to pay dividends from capital profits.
With the UK Treasury Select Committee joining calls for the government to disclose its net zero strategy as soon as possible, pressure is mounting. Investors will have a key role to play in helping create a more sustainable future, helping the government to achieve this important goal, whilst hopefully achieving their own financial ones.
Investment companies in the Renewable Energy Infrastructure sector have shown they can offer investors attractive and sustainable income, whilst supporting renewable, carbon neutral energy production. There is no doubt that investment companies and the sector will play a part in achieving net zero and we can probably expect more fundraising and launches in future.
