Stock In Focus: I’m Troubled By ESG And Surprised By Impax Asset Management

13th Aug '19 by Roland Head

9 comments 4198 reads

I’m a firm believer in a quantitative approach to investment - relying on the power of data and proven factors to select stocks. One of the things I like about investment is the intellectual challenge of the process and the way in which it can be abstracted from day-to-day life.

However, by detaching myself in this way, I wonder whether I’m doing my full duty as the part-owner of a business. Focusing only on a company’s numbers can make it uncomfortably easy to condone things for which I wouldn’t want to take personal responsibility.

I don’t claim any kind of moral high ground here. I’ve profited from owning shares in a number of businesses that I wouldn’t want to work for. But I’m starting to wonder whether I’m comfortable with this situation, or if I need a more structured approach to ethical and environmental issues.

I’ve been having a think about how I might do this, and have come up with three options.

DIY: As a general rule, I only invest in stocks that I’ve selected myself. I don’t generally buy funds, either.

Logically, if I wanted to take ethical investing seriously, I’d have to understand the issues, do my own research, and form my own ranking system.

That sounds like a lot of work, unless I could use tools such as Stockopedia to develop a screening system that recognises ESG (Environmental, Social and Governance) factors. This would be an interesting project, but I’m not yet convinced that I could make meaningful ESG judgements from financial data alone.

The index tracker option: ESG investing is increasingly on institutions’ radar. Index providers such as MSCI and FTSE Russel have developed ESG scoring frameworks and related indices to facilitate investment in well-ranked companies.

However, the top holdings from each provider’s UK ESG indices suggest heavy concentration, and very few obvious themes:

Source: MSCI UK ESG Leaders Index factsheet, 31 July 2019, FTSE4Good Index Series factsheet, 31 July 2019.

Judging from these stock selections, FTSE and MSCI use very different sets of criteria to score firms for ESG. This highlights one problem with ESG investing -- existing rating systems appear to be highly subjective and inconsistent.

I own several of these stocks and would be happy enough to own most of the others. But I’m not sure I’d describe…

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Brilliant Leader

13th Aug '19

As ever, some excellent analysis Roland. I have owned Impax Asset Management (LON:IPX) for a couple of years now (maybe three years even) and have taken some profits along the way. I have passed them over for recent portfolio top ups, partly because of value and partly because of the stage of cycle we are at. AuM is in part affected by market performance.

This said, since passing £10bn AuM the company have been winning some fairly significant mandates (due to scalability I presume) which I think will be an ongoing trend. In short, I would see a significant market sell off as an opportunity to load up on Impax Asset Management (LON:IPX) but for now, I am retaining a modest holding with a watchful eye on a valuation opportunity.

Cheers
Simon

Dexx the Dog

With all the "moral" investors selling out of the non-ESG stocks, the big sovereign funds and institutional investors, this must surely act to depress the share price of the non-virtuous stocks.

Does this mean there is a future opportunity for income plays from depressed sin stocks once the moral investors have all sold out?

Roland Head

Hi Andy,

I can see that some unloved non-ESG stocks do present possible buying opportunities. For example, the current valuations of big tobacco and big oil.

Conversely, some bears would argue that depressed valuations are deserved not so much for ethical reasons, but because these companies are potentially in a multi-decade run-off scenario.

These arguments have been knocking around for a while, as a shareholder in some such companies, my view is that the reality lies somewhere in the middle.

I do believe that there are some attractive income opportunities in big cap stocks at the moment and have been buying accordingly.

DYOR, of course!

Regards,
Roland

andrea34

Although Impax Asset Management (LON:IPX) may be a good long term, I am very cautious about investing in fund managers at the moment with the current volatility and Brexit likely to be an even bigger factor in the coming months.

Hi Simon,

Thanks for your comment. I agree that the link between market performance and AUM is a risk with Impax Asset Management (LON:IPX). Given the rapid recent expansion, any impact from a market fall may be hard to predict -- and could be severe, given high asset values in many sectors.

For an asset manager with a good track record, I would tend to view a market dip as a buying opportunity, rather than a reason to sell. But it could be very uncomfortable for a while...

Another point that interests me about the rapid increase in AUM is whether Impax will be able to maintain a genuine differentiated focus on impact investing. One area I'd like to research in more detail is the nature of the firm's investments.

Good luck with your holding.

Cheers,
Roland

They are a good follow on Twitter Roland - company specific and ESG sector generally

topvest

14th Aug '19

An interesting summary which I agree with. I purchased all of mine in 2016 at the 40s and 50s and top-sliced a couple of times to make it a nil cost share. It's no longer cheap, but once we get through any possible bear market it should be able to grow AUM much further. I see no reason why it can't notch-up £30bn AUM in the next 5-10 years. I will continue to hold as Ian Simms is an intelligent iconoclast - he probably has 5-10 years before retirement so will want to keep his baby moving to some sort of crystallisation event no doubt.

Sachiv Mehta

15th Aug '19

Hi - why would you invest in an asset management firm and not an ETF from blackrock or similar that keep the costs much lower(to be honest, i haven't done the math yet), more transparent in showing their holdings to you(from an ESG perspective you can reconcile easier)? I'm just getting started on this part of our strategy, so this article has been quite helpful! thanks!

SMinvest - thanks for your comment. I was considering Impax Asset Management (LON:IPX) as a possible ESG investment because I mostly buy stocks, not funds. I was attracted by Impax's specialist focus on impact investing, which I hope would provide exposure to a differentiated set of assets to a general stock market fund.

I've not so far been tempted by ESG ETFs because my brief research into ESG indices such as those run by MCSI and FTSE suggests that they aren't particularly differentiated investments (see the examples in my article).

One point I should make is that investing in Impax stock is not equivalent to buying an ESG ETF.

In general terms, investing in an asset manager can be seen as similar to a *leveraged* investment in stocks. This is because fee income is normally linked to the value of assets under management (AUM).

When markets are rising, clients invest more cash and asset values rise. So AUM rises very quickly.

When markets are falling, the opposite tends to happen. Asset values fall and clients withdraw cash. AUM can fall fast, cutting fee income sharply.

In truth, I haven't yet decided how I will approach ESG in my own investing. I think that Impax could be an attractive stock, although I'm not sure that the shares are particularly cheap at the moment.

As always, please DYOR.

Cheers,
Roland

Stock in Focus: I’m troubled by ESG and surprised by Impax Asset Management

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Roland Head

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