Alliance Trust’s ESG push becomes a crucial factor as activist hedge fund circles

The concerted move into environmental, social and governance (ESG) investing by Alliance Trust Plc has emerged as a key factor as the venerable UK investment trust tries to fend off activist hedge fund group Elliott Advisors.

Alliance Trust, under CEO Katherine Garrett-Cox and chair Karin Forseke, the former Carnegie investment banker and exchange executive, went into ESG in 2012 with the acquisition of Aviva Investors’ then £1.5bn sustainable funds business headed by Peter Michaelis for £1m.

Buoyed by the team’s performance, the 127-year-old listed UK trust went even further last year by making SRI head Michaelis its overall head of equities, taking over from Ilario di Bon, who left. This, in effect, made Alliance Trust a more or less pure-play ESG funds house.

Michaelis told RI at the time there would now be a common research process across Alliance Trust’s range, with a strong emphasis on ESG integration. He said: “We’ve taken what we’ve learnt on the Sustainable Future funds and are applying it to a mainstream trust.” He explained how Alliance Trust saw performance and profits as an outcome of ESG.

It is this ESG approach that could now prove pivotal for the survival for Alliance Trust in its current form. The trust is making it a major plank of its defence against Elliott which, citing underperformance, wants to get three candidates onto the board: Anthony Brooke (ex-BZW and Warburg); Peter Chambers (ex-CEO of Legal & General Investment Management and Framlington); and Rory Macnamara (ex-Morgan Grenfell).

Alliance Trust says this is “the thin end of the wedge” and that it would jeopardise its clear and differentiated strategy, now fully centred on ESG. It notes too the “very similar professional backgrounds” of the trio, which would hit its board diversity where three of its current seven directors are female.

“Alliance Trust is differentiated amongst global investment trusts by having embedded an analysis of the environmental, social and governance factors of the companies in which we might invest into the stock selection process,” wrote Forseke in a letter to shareholders on March 26.

The Michaelis team’s “proven process” is employed to enhance equity returns, putting Alliance Trust in a position to capitalize on the growing demand for sustainable investment, she added. The portfolio is already delivering good results under the new team, Alliance Trust says, with third party assets now standing at £2.4bn.Forseke points out that Michaelis and his colleague Simon Clements’ “demonstrable, long and successful track records were fundamental to our rationale for the appointments”. But Elliott says Michaelis’ appointment as equities head was “without prior notice, through internal promotion without advertisement, without inviting external proposals, and without canvassing shareholder views”. Michaelis’ team includes not just Clements but other well-known ESG figures such as Neil Brown and Mike Appleby.

Meanwhile, JP Morgan, the company’s broker, has issued a research note saying it is hard to deny Alliance Trust’s historic “lackluster performance” – but acknowledged that the trust may have found a “raison d’être with its ESG approach” – the early evidence of which was “encouraging”. But, the bank goes on to say it was difficult to see shareholders tolerating underperformance from this strategy over the next few years.

Elliott, which holds 5% directly in Alliance Trust and a further 7% via a ‘contracts for difference’ derivative, was founded by Paul Singer, the billionaire who’s probably best known for his debt default dispute with Argentina. Singer chairs conservative think tank the Manhattan Institute, which sponsors the Proxy Monitor website, which tracks shareholder proposals at listed US firms.

Forseke slams Elliott’s own lack of transparency as displaying “a disregard for established UK corporate governance practices”, saying the “contrast between the two companies could not be starker”. Elliott has set up a website to support its proposals.

Alliance Trust, founded in 1888, has been a signatory to the Principles for Responsible Investment (PRI) since 2011 and is a member of UKSIF and a signatory to the Stewardship Code. An independent SRI Advisory Committee, inherited from Aviva, includes figures such as environmentalist Jonathon Porritt, Alice Chapple from Impact Value, and Tony Greenham of the New Economics Foundation.

It’s not the first time AT has come under pressure from investors; in 2012 it faced pressure from Laxey Partners and Aberdeen Asset Management over lacklustre performance.

The trust’s declared values of “transparency, trust, clarity and a clear focus on long-term, stable value creation” will now go to the vote at the AGM in Dundee, Scotland on April 29, though there is probably little that institutional investors can do, given that around 65% of its shares are held by private individuals.