ESG Investment Opportunities in the Alternatives and Tax Efficient Market

Our Head of Investments Steve Dobson casts his eye over the ESG trends in the UK tax efficient market, including options already available for investors.

ESG has been a familiar acronym in the institutional investment world for many years and more recently it has entered the vocabulary of the retail investor.  As a result, it is entering the discussions an investor has with their financial adviser.  Many retail investors think about ESG from the Environmental angle as news stories highlighting the impact of climate change on our everyday lives are becoming a regular occurrence.  The news and data points from COP 26, hosted in Glasgow, will push the climate crisis very much to the front of mind.   Therefore, it’s much easier for retail investors to associate with the environmental angle rather than the Social or Governance, though the Covid pandemic has raised many social questions.  This highlights how broad the term ESG is, and advisers now are mandated to discuss ESG preferences and risk tolerance with their clients.  All of this helps fuel the appetite for ESG investment products from retail investors.  The good news is that the supply is there from fund managers and we, as a platform, are seeing a steady increase in offering particularly in the tax efficient space.

Since inception VCT and EIS funds have raised £9.3bn and almost £24bn respectively.  VCT funds raised will very likely exceed £10bn after the current tax year as appetite for the products remains high.  Whilst there are few dedicated ESG funds in each wrapper type, dig a little deeper and you’d actually be pleasantly surprised at what is available.  Responsible, ESG or ethical investing doesn’t mean that investors have to choose between positive financial returns or making a positive impact, both are achievable and in fact companies demonstrating strong ESG credentials can access cheaper forms of funding than those that don’t.

The difficulty for advisers and investors historically has been finding relevant funds as there is no one size fits all framework available in the private markets, to help rate the funds on their ESG credentials.  Third parties like MSCI and Sustainalytics provide good coverage of listed markets but currently no one provider has a grip on the private markets, and more importantly, the tax efficient market.  There is a big opportunity for a research house to own the space and drive a framework that can be adopted across the different tax wrappers, and we are aware of a couple that are making good progress in this space.

So, in absence of a framework currently, what can advisers do?  Let’s look at EIS and VCT funds separately to see how each has approached the ESG opportunity.

EIS

We currently have a handful of “does what it says on the side of the can” funds that make it easier to know what you’re investing into.  Established managers like Triple Point have an Impact EIS fund which maximises financial returns through social impact and Vala launched their Sustainable Growth fund late last year aiming to invest in companies making a positive contribution to the world’s sustainability challenges, whilst creating significant value to investors.  A newcomer to the market, OnePlanetCapital, arrived with a strong message in their Sustainability EIS Fund, targeting investments that tackle CO2 emissions as well as companies with an environmental impact.  Boundary Capital had their Impact Life fund which became the first and to date only approved impact fund in the EIS space.  They utilise their own proprietary methodology to filter out investments that will impact human lives globally, measured against environmental and social criteria derived from the UN’s 17 Sustainable Development Goals.  Some of the social factors are covered by the life sciences funds such as those managed by Deepbridge, Downing and o2h, while Mercia are heavily invested in this space.  Outside of these Ascension tackle the S in ESG with their Fair by Design EIS fund which looks at lowering the poverty premium, and Bethnall Green have their Tech for Good fund.

But that’s not the end of the story in the EIS space, start looking under the hood at other fund managers and you’ll soon see there’s a lot of great things being done in the ESG space.  One way for fund managers to show real commitment to ESG is to sign up to the United Nations Principles for Responsible Investment (UNPRI) which require them to incorporate the principles into their investment practices and also to report on their activities.  Becoming a signatory is a good indicator for advisers and investors that the manager takes their ESG policy seriously.  In the EIS space the following have made the commitment, Blackfinch, Downing, Draper Esprit, Foresight, Guinness, Octopus, Triple Point and Vala.  Investment manager Sapphire Partners are also signatories, and they preside over funds from Fuel Ventures, Love Ventures, British Design Fund, British Robotics and Velocity to name a few.  Jenson Funding Partners align themselves with the UNPRI and have an ESG taskforce guiding them on best approach with their investee companies.

Many of the fund managers themselves have specific ESG investment policies which they adhere to for all of the funds they manage, whilst potentially not having a specific ESG labelled fund.  Blackfinch are a good example, with very strong ESG wording on their website and a downloadable ESG policy.  Calculus Capital also list their ESG policies on the website and MMC note in their prospectus that they invest in sustainable technology and the circular economy.   Par Equity are part of the steering group for ESG_VC, an initiative bringing together some of the world’s leading VC firms to give entrepreneurs the tools to progress on their ESG journey.  MMC, Draper Esprit, Mercia and Downing have all signed up to use the ESG_VC measurement framework.

VCT

There are fewer ESG specific VCT products currently available to investors but as with EIS it can be easy to see which fund managers are taking extra steps to show their ESG credentials.  Gresham House has its renewable energy VCTs and Albion Capital, Amati, Gresham House, Downing, Draper Esprit, Foresight Group, Mobeus, Oakley Capital (Pembroke), Octopus, Triple Point and Unicorn are all signatories to the UN PRI.  Beringea (Proven VCTs) is part of the steering group of ESG_VC which, mentioned previously, has developed a venture-ready ESG measurement framework asking early stage companies to answer various measures against ESG objectives.  Puma Investments prominently display their ESG principles on their website.

IHT

Inheritance tax products can either be investments into asset backed companies or AIM portfolios.  We see some of the same AIM fund managers that we’ve already highlighted in the previous section such as Amati, Downing, Octopus & Unicorn, whom are UNPRI Signatories, out in the market with IHT offerings.  Of the asset backed portfolios, many are structured for lending into solar and renewable energies

In conclusion what all of this shows is that there are a lot of ESG investment opportunities in the tax efficient space, it just may take a little more delving past the fund name itself.  The ecosystem is continually changing as more and more fund managers wear their ESG credentials on their sleeves. It will likely become the norm that every tax efficient fund ticks an ESG box in a few years’ time, and then it will potentially become harder for an adviser to differentiate.  In that time though we expect to see the continued development of an ESG framework and more ESG reporting requirements for the fund managers.  There’s a fear of greenwashing as more and more fund managers promote their ESG credentials, and this will require advisers to apply a higher degree of due diligence when investing their client’s money.  Momentum is with the retail demand for ESG investment opportunities in the tax efficient space and we expect that it will become more granular seeking out the E, the S or the G.  But the good news is that fund managers are responding to this and as a platform we hope we can help advisers and their clients, and the funds navigate the ESG journey through clear education and information.