Investment trust insider on ESG

Investment Trust Insider on Capital Gearing Trust

Investment trust insider on ESG – James Carthew: ESG? Riverstone, you’re having a laugh

Riverstone Energy (RSE) has just announced a deal whereby it, and other funds managed or advised by its investment manager, will refinance Enviva, a leading player in the manufacture of wood pellets. The pellets are burnt in power stations (like the UK’s Drax). The announcement from Riverstone made much of Riverstone Energy’s focus on environmental, social and governance initiatives, with this deal as a shining example. Three pages of the investment company’s annual report are devoted to this topic.

I have to say that I think Riverstone Energy is flogging a dead horse here. Not only are the environmental benefits of wood pellets questionable, the rest of the portfolio’s environmental credentials are shaky at best – the vast majority of the portfolio is exposed to US shale oil or Gulf of Mexico oil and gas fields – but also the final paragraph of this year’s chairman’s statement in its report and accounts warns of a huge exit fee due to the managers and cornerstone investors should investors dare to vote against its continuation later this year.

The fund’s articles of incorporation contained a provision that if, in the event that on the seventh anniversary of its launch, the share price (adjusted for things like dividends and cash returns) had not exceeded £15 (compared to a launch price of £10); and returns on capital (subject to some adjustments) had not exceeded 8% a year (on average), shareholders would be offered a discontinuation vote. Since the vote is a special resolution, 75% of shareholders voting have to oppose it for the resolution to be defeated and the fund continue.

You might have thought that, having failed to meet its performance objectives, the manager would retire gracefully and hand back shareholders’ money without a fuss, but no. It would get 83% of an exit fee calculated as 20 times the previous quarter’s management fee. Cornerstone investors from launch get the other 17%. To me this looks like a major governance failing.

Riverstone is not alone in over-egging its ESG credentials. For example, JPMorgan Russian Securities (JRS) devotes considerable portions of its report and accounts to ESG issues. I am not doubting the board and the manager’s sincerity in thinking about what the trust can due to tackle these issues, but…   read more here