Investment trusts are the latest sector of the financial services industry to come under fire for failing to cater adequately for responsible investors.
Research covering 375 investment trusts from JTC Group finds “a significant lack of consistency in the adoption of ESG standards” while their reporting is often “short and lacking in detail”.
JTC’s report is just the latest in a long line of observations that financial service providers struggle to deliver sustainable reporting in a standardised or harmonised format.
David Vieira, JTC Group Head of Sustainability Services, says this runs contrary to the direction of travel from regulators and standards boards that have “expressed the desire for the sustainability disclosures and financial disclosures to be combined within one detailed inclusive disclosure, making it easier for investors and stakeholders to see everything in one place”.
However, he adds: “The reality is that sustainability disclosures must adapt to the huge variety of underlying investment types in a way that financial disclosures don’t.”
Vieira continues: “Market participants such as investment trusts and their clients are searching for ESG disclosures that follow the Goldilocks principle. They can’t be too generic or too specific but need to be ‘just right’ to provide the information needed for investor to make decisions.”
UNPRI had the highest adoption rate at 78 per cent of the total AIC universe, but JTC points out that this is most likely attributable to the trusts’ parent company or management group being a UNPRI signatory.
The second most popular ESG reporting standard is the Taskforce on Climate-related Financial Disclosures (TCFD) used by nearly one-quarter (23 per cent) of investment trusts surveyed. Given that most investment trusts are exempt from the mandatory TCFD reporting since they typically have fewer than 500 employees, JTC says using this standard is “largely an active choice, potentially to appeal to current and future investors”.
To overcome the disparate ESG reporting from investment trusts, Vieira says a consolidation of global standards, as opposed to increased arbitrage, “would be welcome progress and ultimately a positive direction of travel for the industry as a whole and investor confidence in ESG disclosures”.
Meanwhile annual reports and dedicated ESG reports, which Vieira describes as “the key mechanism for communicating the ESG strategy of a trust to investors”, are not always adequate.
JTC finds that nearly nine out of 10 (87 per cent) of the investment trust companies sampled do not have a dedicated ESG report.
Vieira says that this does not necessarily correlate with a lack of adoption of ESG frameworks and standards, noting that 88 per cent of investment trusts use the annual report to communicate their responsible investment position.
However, the detail given over to ESG in annual reports is variable, with one investment trust dedicating a mere half page on the subject.
Vieira says: “It is crucial to highlight that a balance must be found between providing adequate context and falling foul of greenwashing allegations. The most effective ESG reports are those that align with the key aspects of the chosen ESG standards, providing ample detail while remaining concise and relevant.”
He concludes: “Simply put, an ESG report’s quality is ultimately determined not by its length, but by its content and adherence to adopted standards. By doing so, investment trusts can meet the expectations of increasingly ESG-conscious investors.”