Diversified Income Fund and Impact

Energy prices were already rising to some of the highest levels in decades prior to Russia’s invasion of Ukraine and the subsequent economic sanctions placed upon Russia by the West. The plunge in global energy consumption following the outbreak of the Covid-19 pandemic drove prices down significantly. However, they have since rebounded strongly as a result of the rapid economic rebound from lockdown measures, a long and cold Northern Hemisphere winter in 2020-21, and a weaker than expected increase in supply. Now, the crisis in Ukraine has exacerbated the issue considerably.

The current dynamic is producing crippling energy prices for consumers, but it will also have ramifications for Europe’s energy independence policy and climate change targets. To tackle rising energy prices in the short term, immediate and affordable energy will be favoured in the form of gas from the United States and, contrary to climate change initiatives, coal. However, in the longer term Europe could witness an acceleration of renewable or alternative energy development in an attempt to satisfy both independence and climate goals. However, the shift required to see a significantly greater proportion of global energy production coming from renewable sources will require a huge amount of investment.

Close Brothers Asset Management’s (CBAM) Diversified Income fund has been backing renewable energy investments since 2013. Rather than just buying shares in the secondary market, the Diversified Income fund has invested significant sums of new money directly into the renewables sector to fund the green economy. The fund has invested £109m in the primary issuance of nine renewable infrastructure funds within its alternatives allocation, including eight Initial Public Offerings (IPOs), 23 placings and one open offer^*. The Diversified Income fund does not have an explicit sustainable investment mandate – it can and has invested in sectors which most funds with a sustainable mandate would explicitly exclude – but the primary allocation to climate change solutions is clearly differentiated from investment strategies that only buy shares on the secondary market. Fundamentally, it ensures that the connection of invested capital to the underlying environmental impact is much clearer. As an example, the fund participated in the IPOs of NextEnergy Solar Fund and Foresight Solar Fund in 2014 and 2013 respectively, and has since invested in multiple placings of both fund – each of which hold a diversified portfolio of solar energy infrastructure assets.

At CBAM we define Impact Investing as an approach that: “aims to achieve positive social and environmental impacts alongside a financial return. These impacts should be measurable, reported, intentional and additional. The intention should consider who / what experiences the outcome and how underserved they / it were / was before. Impact can be created through capital allocation as well as engagement.” Measurability, intentionality and ‘additionality’ are three core tenants to Impact Investing. ‘Additionality’ is defined as “whether a proposed activity will produce some ‘extra good’ in the future relative to a specified baseline, typically the counter-factual in which the investment has not taken place.” The Diversified Income fund does not set specific intentions to create positive impact, but by being a primary supporter of successful renewable infrastructure investments, the fund creates additional positive environmental impacts which might not have otherwise occurred. The Diversified Income fund does not currently measure or report on the impacts driven by these investments, but as data improves this is certainly an area for further discussion and development.

Our approach at CBAM is to integrate environmental, social and governance (ESG) factors into the bottom up, fundamental research process, whether a fund or service is sustainably themed or not. As typically long-term investors, we believe it is vital to integrate ESG risks and opportunities across our investment process, particularly given the longer time period over which they tend to materialise. Furthermore, systematic consideration of material ESG issues provides an additional information set and a more holistic perspective from which the credibility of an investment can be judged. Broad examples of factors in each of the E, S and G categories include, but are not limited to the following:

• Environmental factors: climate change, biodiversity, resource depletion, waste, pollution, deforestation
• Social factors: human rights, modern slavery, child labour, working conditions, employee relations
• Governance factors: bribery and corruption, executive pay, board diversity and structure, political lobbying and donations, tax strategy

It is likely that the war in Ukraine will accelerate the need for greater energy security and independence. The role renewable energy investments will play in meeting future energy is undeniable. Diversified Income will continue to identify and invest in such opportunities which have a meaningful and tangible impact.

^*Initial Public Offering (IPO): The process of offering shares of a private company to the public (usually both institutional and retail investors) in a new stock issuance. An IPO allows a company to raise capital from public investors for the first time – it is sometimes also referred to as a stock launch.

Share Placing: A method of raising additional capital (usually to fund company growth) by selling new shares and other financial securities in the primary market. Securities are usually offered to a narrow group of investors (often existing investors), such as institutional investors and the brokers of private clients.

Open Offer: A secondary market offering similar to a rights issue. In an open offer, an existing shareholder is allowed to purchase stock at a price that is lower than the current market price. This can be an efficient way for a company to raise capital.

Important information

This communication is for professional advisers only and may not be reproduced or redistributed in any format, in whole or in part, without the express written approval of Close Asset Management Limited. This does not constitute a recommendation or advice regarding the shares or other securities of any issuer. Statements reflect the knowledge and information available at the time of its preparation. Capital at risk. Past performance is not a reliable indicator of future returns.