Three years ago, the idea that a fund focused on environmental markets and resource efficiency would be regarded as “contrarian” would have been ridiculous. Yet such has been the backlash against the “net zero”, “climate change” and “environmental, social and governance (ESG)” agenda that any fund that puts kowtowing to the environmental establishment above the pursuit of profit has been hammered.
Renewable energy funds have sunk from trading at large premiums to net asset value (NAV) to a weighted average sector discount of 22%. Funds focused on “sustainability” have underperformed and ESG has gone from being the focus of every investment presentation to becoming a token page at the back. Investors have returned to concentrating on companies that focus on maximising profits rather than saving the planet. Hence firms involved in the exploration and production of hydrocarbons are back in demand, as are the aerospace and defence sectors.
A green investment trust to buy
Impax Environmental Markets (LSE: IEM) long predates the recent boom and bust cycle, having launched in 2002. Its objective is to “achieve sustainable, above-market returns over the longer term by investing globally in firms that are developing innovative solutions to resource challenges in environmental markets”. Had it sacrificed returns to curry favour with the fundamentalists, it would not now have assets of over £1 billion. Inevitably, it has still been caught up in the sell-off.
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The share price peaked at nearly £6 in late 2021, when it traded at a premium to NAV, but now trades below £4, on a discount of about 10%. Performance in NAV and share-price terms has now fallen behind the MSCI All Country World Index over all time periods since inception.
Yet the portfolio’s valuation premium relative to global equity markets is below its 10-year average, despite supportive expectations for company earnings growth, says lead manager at IEM, Bruce Jenkyn-Jones. “Small and mid-cap stocks, the major part of the portfolio, continue to trade at a discount to large-cap peers and many investments are at valuations well below their peaks, despite strong growth drivers.”
Does the trust diversify your portfolio?
The portfolio of roughly 60 stocks is international, with 49% based in North America, 36% in Europe and 10% in Asia Pacific, excluding Japan. It is also well-balanced by theme: 21% in resource efficiency and waste; 18% in energy management and efficiency; 17% in water infrastructure and technologies; 13% in food and agriculture; 10% in alternative energy; 9% in digital infrastructure; 6% in transport; and 4% in environmental services.
These broad categories include packaging firms replacing plastics with paper, construction groups focused on renovation and refitting rather than new-build or on improving their energy efficiency, and food businesses displacing chemicals with natural ingredients. Others seek to benefit from the modernisation and growth of electricity networks, from reducing the water intensity of the semiconductor industry, reducing the environmental impact of steel manufacturing, or improving the reliability and cost of renewable energy.
The portfolio is growth-orientated: the average earnings multiple is 20% above the MSCI index, but growth is 1.5 times higher, which will steadily erode the valuation premium. After the backlash against the climate change agenda, “expectations are now much more realistic and valuations much more fairly priced,” says Jenkyn-Jones.
New technology offers the opportunity for significant environmental improvement while raising living standards and the quality of life. The investment opportunity is not going to disappear and few can claim the expertise of the team at Impax. This is a trust to lock away for the long term.
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