An extensive study of the investment trust industry, conducted by JTC Group in the second and third quarters of 2023, has revealed a significant lack of consistency in the adoption of ESG standards.
Instead, the research, which spanned 375 investment trust companies across 52 sectors as defined by the Association of Investment Companies (AIC), showed varying levels of adoption of eight standards, in part reflecting the size of the Trust company, in part the relevance of a specific standard, and also, probably, cost of adoption.
The companies included in the research are primarily registered in the British Isles, though nine other regions are represented to varying degrees.
The mean number of ESG standards adopted across all companies is 1.5 with the most common framework being the United Nations Principles for Responsible Investment (UNPRI), with 78% of companies (or parent companies) being a signatory. The Task Force on Climate Related Financial Disclosures (TCFD) and the United Nations Sustainable Development Goals (UNSDGs) were the second (23%) and third (15%) highest adopted frameworks respectively.
The dataset suggests that larger companies tend to adopt a greater number of ESG standards, with FTSE 250 companies adopting an average of 2.1 standards, compared to an average of 1.2 standards for other companies. The adoption rates with the greatest variance between large and small companies can be seen for TCFD (40% vs 13%), SFDR (25% vs 8%) and UNSDGs (24% vs 10%).
The low level of adoption for UNSDGs is interesting, as this is arguably one of the simpler frameworks to adopt – it is free, has no specific reporting requirements and is not mandated by regulation. There are 17 SDGs; not all of which will typically be applicable, therefore a company has the freedom to choose a sub-set. Interestingly, some investment trust companies included in the dataset decided to adopt all 17 SDGs, raising the question of what meaningful adoption of this framework looks like.
Commenting on variant ESG standards adopted by different investment trust companies, David Vieira (pictured), JTC Group Head of Sustainability Services, said: “These findings are significant for the Channel Islands, which are major and growing investment fund hubs and have ambitious sustainable finance strategies.
“The report highlights what we have observed for some time, which is that 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 investors to make decisions. While regulators and standards bodies have generally expressed a desire for sustainability disclosures and financial disclosures to be combined within one inclusive disclosure, the reality is that sustainability disclosures must adapt to the huge variety of underlying investment types in a way that financial disclosures don’t. There is no magic bullet, but a general trend towards the consolidation of standards globally, 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.”
The publication of the JTC Group study comes some six weeks after the Financial Conduct Authority’s PS23/16 Sustainability Disclosure Requirements which states that the FCA “wants to see a level playing field for all firms operating across the market to maximise the benefits of the regime for consumers.”
Richard Stone, Chief Executive Officer of the Association of Investment Companies (AIC), added: “As this report demonstrates, investment trusts have adopted a range of different standards and frameworks for their ESG reporting. The board of every investment trust must make a judgment on which standards or frameworks, if any, are relevant to its strategy. We are a diverse sector investing in everything from mainstream equities to wind farms, from healthcare properties to space technology. Given this diversity it is inevitable that, as the report highlights, the extent to which individual investment trusts highlight ESG issues, adopt specific standards, or promote their ESG credentials will vary significantly.”
