Green investment trusts face vote on future as shares slide

Green energy investment trusts face investor votes on whether they should continue trading as a prolonged slump in share prices hampers access to capital and presents challenges for the green transition.

High interest rates have lured investors into other assets while onerous fee disclosure rules have made trusts appear comparatively expensive, weighing on the sector and pushing them to trade at a steep discount to net asset value. 

Several green energy investment trusts, including the UK’s largest, Greencoat UK Wind, have either crossed or are on the brink of crossing their own thresholds for a vote on their future. Votes are due take place at annual shareholder meetings. 

The trusts have also been unable to raise equity to invest in green assets, as they generally avoid issuing shares while trading at a discount because this would dilute existing shareholders.

“I don’t think anyone has raised any equity since late 2022,” said Matthew Hose, equity analyst at Jefferies. “They’ve had to adapt to this new environment. Some funds will probably get back to a premium but some funds won’t and there’ll be pressure to wind those up.”

The investment trust sector overall has suffered from the effects of high inflation over the past two years, which has pushed investors to lower-risk, high-yielding government bonds and cash products.

The average trust was trading at a discount to net asset value of 16.9 per cent in October last year, just shy of the 17.7 per cent recorded at the end of 2008, according to the Association of Investment Companies.

Fund and wealth managers, as well as peers, have been calling for a change in the way investment trust fees are reported, which they say has further depressed share prices. 

The UK’s Financial Conduct Authority has interpreted on-shored EU regulations differently to the rest of Europe, meaning that investment trusts in the UK have to report their fees in a similar manner to open-ended funds. Critics say this results in double charging, as the share price that investors pay for trusts already includes the ongoing costs.

Hedge funds have begun to circle, with Elliot taking a 5 per cent stake in the Scottish Mortgage Investment Trust a week after it announced a £1bn share buyback in an attempt to prop up its share price. 

The impact on green investment trusts is particularly significant given the need for new funds to build wind farms, solar panels and more to meet the country’s legally binding net zero targets.

Investment trusts typically play an important role in the sector, often buying up assets from large developers such as Ørsted or others who can then use the cash to develop new farms.

The lack of access to equity markets “definitely means we have to be more selective around the opportunities we pursue”, said Edward Mountney, fund manager at JLEN, which is listed in London with a market capitalisation of about £630mn.

“In order for the renewable infrastructure sector to grow, it will need to raise equity over time, and it’s almost impossible to see that happening while we continue to see a discount to NAV,” added Paul O’Donnell, investment manager at Greencoat Renewables, a sister fund to Greencoat UK Wind.

JLEN is likely to cross the threshold for a discontinuation vote at the end of its financial year this month. Greencoat UK Wind, which supplied about 1.5 per cent of UK electricity last year from its portfolio of wind farms, will face investors at its annual general meeting in April after trading at an average discount to net asset value of 10.5 per cent during 2023. Foresight Solar Fund will follow in June after also trading at a discount of more than 10 per cent during the year. 

Rising global interest rates have damaged green stocks broadly, making them relatively less attractive to investors as bond yields have risen. The S&P Global Clean Energy index, which includes clean energy giants such as Ørsted, the wind farm developer, is down almost 60 per cent below its peak in January 2021 at the height of a frenzy over the sector. 

Richard Crawford, head of energy income funds at Infrared Capital Partners, which advises the London-listed The Renewables Infrastructure Group, said: “I think it’s fair to say that [renewable] investment companies would have raised money had their share prices not been where they were. As an asset class, growth is slower as a result”.

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