Following the Climate Change Act 2019, Scotland set itself key initiatives to reduce greenhouse gas emissions by 90% by 2040 and achieve net zero by 2045. By hosting the 2021 United Nations Climate Change Conference (COP26) in Glasgow, the initiative looks to be well under way.

As COP26 has descended onto the Glasgow cityscape this month, news outlets are awash with continual ‘breaking news’ reports of announcements from the summit. It’s clear that climate action and sustainability is increasingly under the spotlight - and we have also seen this shift reflected in investor behaviours.

Annual reports provide companies with a platform to promote themselves, not just from a financial perspective, but also from a wider stakeholder viewpoint, including their corporate social responsibility (CSR) and environmental, social, governance (ESG) policies. Investors are placing ever increasing prominence on CSR and ESG, so it is more important than ever to ensure disclosures provide more meaningful narrative and information on how companies address these issues. One sector where there is room for significant development of such reporting is the investment trust sector.

Given a typical investment trust’s business model is to outsource all its functions to service providers, there is a perception that such reporting is of lower importance than the more eye grabbing headlines such as total returns and dividends per share. Investors do of course place a great deal of importance on these metrics, but in recent years investors have moved towards aligning their investments with their own values, of which CSR and ESG are increasing in significance.

In order achieve this alignment, more transparent disclosures are needed around ESG reporting in the investment trust sector.

From reviewing a range of investment trust annual reports and their disclosures over ESG reporting, we have observed a number of good practices, as summarised below:

• A standalone ESG or responsible investing report.
• ESG details from an investment perspective.
• Discussion of ESG policies in place and any updates to these.
• Examples of engagement with stakeholders in relation to ESG.
• Evidence of active and ongoing engagement with investee companies.
• Disclosure of ESG partnerships or collective engagements entered into.
• Identification of targets in place to promote ESG and current progress.
• Attendance at ESG events of training undertaken by directors.

Of course, the above examples would not be expected to fall into a ‘one size fits all’ category. However, the breadth of examples that can promote ESG reporting should be viewed as an opportunity for investment trusts to consider their disclosures and further enhance their reporting transparency for investors.

And it’s not just investors who are looking for such disclosures, as part of COP26, the IFRS Foundation Trustees announced 3 significant developments to provide the global financial markets with high quality disclosures on climate and other sustainability issues through the formation of a new International Sustainability Standards Board (ISSB), the publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group (TRWG) and the complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022.

Although announced before COP26, the FRC also published their ‘FRC Statement of Intent on Environmental, Social and Governance Challenges’ paper in July 2021, pushing for further disclosures. The FRC do note within this paper that the maturity of the systems that produce ESG information is significantly less sophisticated than for financial information, and as such will pose challenges. The FRC have summarised the challenges into six stages;

Production - Better internal information leads to better decisions and better insights for stakeholders.

Audit and assurance - Reported information is robust and reliable.

Distribution - The information leads to better decision-making by stakeholders.

Supervision - Information and activity are appropriately monitored and requirements are enforced.

Regulation - Coordinated and coherent regulation leads to efficiency.

Similarly, in December 2020, the FCA published their technical note 801.1 on disclosures in relation to ESG matters, including climate change. This note looked at ESG from the perspective of Market Abuse Regulation (MAR) and Prospectus Regulation (PR) and their being subject to disclosure requirements. The purpose of these requirements is to ensure that shareholders, investors, and markets more generally are enabled to make informed decisions.

However, it is important to clarify that such reporting is only useful if it is of sufficient quality and specificity to provide investors with information to make enhanced decisions. Investment trust boards now have a real opportunity to set the tone from the top and embrace the continued momentum of CSR and ESG, with a range of meaningful disclosures presented in a way which enhances shareholder communication.

Get in touch

If you would like to hear more about our work in the investment trust sector, please don’t hesitate to get in touch with me at dean.moore@jcca.co.uk or any of the senior members of our Investment Trusts team: Scott Holmes, David McBain or Richard Sutherland.