Impax Environmental Markets 19 September 2019

The central investment thesis behind Impax Environmental Markets is that the global economy is in transition from a depletive economic model (growth which ignores negative social and environmental costs), to a sustainable one, in which growth is achieved with improved social and environmental outcomes. Impax believes that companies which help solve these huge, global problems should outperform those which don’t. Happily, this is reflected in IEM’s performance numbers over the past five years.

IEM’s objective is to achieve strong financial returns from it’s investments. It has not been designed as an ESG fund, but in our view it should be considered by any investors seeking to allocate to ESG-thematic funds. Aside from the investment thesis and specialist sector focus, the managers also integrate ESG fully into their investment process. As we discuss in our new ESG section, the managers see ESG analysis as one of the most effective ways of mitigating risks in investments. They observe that the speed of change in markets is accelerating, and so fully understanding the environmental, social and governance risks is one of the key contributors towards finding successful long-term investments.

IEM’s portfolio companies must have at least 50% of their revenues exposed to what the Impax team view as “environmental markets”. Currently around half of the portfolio is invested in energy efficiency and water infrastructure sectors. These are two key pillars of Impax’s investment thesis. Several countries and global companies (with Nestlé being the latest) have declared that they will be net zero emitters of carbon dioxide by 2050. Any attempts to achieve this will require significantly enhanced efficiency of our current energy consumption. Cape Town last year, and Chennai this year are both cities which have experienced unprecedented droughts and prolonged water shortages, illustrating the need to improve the conservation and efficiency of water supplies around the globe. Impax believes that many of its investee companies will be the ones that help alleviate many of these problems.

Underpinned by strong earnings growth from the underlying portfolio, NAV performance has been strong. Over five years, the trust has delivered NAV total returns of 81.1%, against the MSCI ACWI total return of 76.6%. Shareholders have actually done significantly better than this, on account of the discount having narrowed, which means that the share price total return has been 109.2% over the same period.

The trust currently trades on a premium of 1.7% (11 September 2019). IEM has seen a significant improvement in demand for shares, such that the board has felt able to bring in its discount target from 10% to an expectation that it will seek to maintain the share price at or close to NAV (in normal market conditions).

In a traditional sense, IEM’s portfolio represents a global small and mid-cap portfolio, with growth characteristics. Many of the companies are very specialist, and so IEM offers exposures that are unlikely to be found in generalist global funds or trusts. It is recognition of this, and the strong performance delivered over the past five years, that has led to the discount to NAV narrowing significantly. Indeed, the shares have been trading consistently at a small premium, which has enabled the board to issue shares from treasury and start to grow the trust.

The managers have carved out a niche in an area that demands expertise, and in our view the managers fit well into the ESG universe for all the right reasons. ESG analysis is fundamentally bedded into the investment research process, as well as the core investment thesis. The team have been believers for 20 years now, and as such can be viewed as having a depth of experience in sustainable investment which is unparalleled.

The performance over the last few years has shown the benefits of investing ahead of the curve, and taking a long term, low turnover approach. The fundamental drivers which have underpinned this performance show no signs of slowing down. As such, whilst the portfolio has a cyclical tilt and associated risks according to the trajectory of the global economy, Impax’s portfolio should be well-positioned to benefit from disruption and innovation across a range of sectors and industries for generalist and ESG investors alike.