REG - Impax Environ Mkts - Annual Financial Report
03/04/2023 07:00
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RNS Number : 0189V Impax Environmental Markets PLC 03 April 2023
LEI: 213800RAR6ZDJLZDND86
Impax Environmental Markets plc
Annual Report & Accounts
For the year ended 31 December 2022
Investment Objective
The investment objective of Impax Environmental Markets plc (the "Company" or
"IEM") is to enable investors to benefit from growth in the markets for
cleaner or more efficient delivery of basic services of energy, water and
waste.
Investments are made predominantly in quoted companies which provide, utilise,
implement or advise upon technology-based systems, products or services in
environmental markets, particularly those of alternative energy and energy
efficiency, water treatment and pollution control, and waste technology and
resource management (which includes sustainable food, agriculture and
forestry).
FINANCIAL INFORMATION
At 31 December 2022 2021
Net asset value ("NAV") per ordinary share 419.5p 496.4p
Ordinary share price 419.5p 547.0p
Ordinary share price premium to NAV(1) 0.0% 10.2%
Net assets £1,276m £1,4580m
Ongoing charges(1) 0.81% 0.85%
PERFORMANCE SUMMARY(2)
For the year ended 31 December 2022 2022 2032
% Change
NAV total return per ordinary share(1) -15.0% 21.3%
Share price total return per ordinary share(1) -22.8% 30.1%
MSCI AC world index(3) -8.1% 19.6%
FTSE ET100 index(3) -20.1% 13.1%
1. These are alternative performance measures
2. Total returns in sterling for the year to 31 December 2022
3. Source: Bloomberg and FactSet
ALTERNATIVE PERFORMANCE MEASURES ("APMS")
The disclosures as indicated in footnote 1 above are considered to represent
the Company's APMs. Definitions of these APMs and other performance measures
used by the Company, together with how these measures have been calculated,
can be found in the annual report.
STRATEGIC REPORT
Chairman's Statement
The year ended 31 December 2022 has seen the outbreak of a war in Europe, the
return of inflation and the highest interest rates in 15 years. These factors
created a difficult backdrop for financial markets across most asset classes
and especially for the higher rated 'growth' companies in which Impax
Environmental Markets plc tends to invest. Thus, after several years of strong
performance, IEM's share price declined and the Company's net asset value
underperformed its global equity comparator index during the year (the MSCI
ACWI index), while outperforming its environmental markets comparator index
(the FTSE Environmental Technology 100 index).
High inflation, driven by surging energy and food prices, and continuing
supply chain bottlenecks, were among the defining features of 2022. Global
consumer prices rose by 8.8%, prompting central banks to tighten monetary
policy dramatically. Rising interest rates typically act to the detriment of
smaller and growth companies, as the value ascribed to their future cashflows
is discounted at a higher rate. This process, often referred to as
'de-rating', has been seen across our portfolio and, while painful for our
existing holdings, is now creating interesting investment opportunities. There
are signs that inflation may be close to peaking, and that we may be near to
the end of the interest rate rises planned by central banks.
More than a year on from Russia's invasion of Ukraine, the war continues to
hang as a black cloud over the outlook for all western economies. It is a
deeply unpleasant conflict in which new horrors emerge on a weekly basis;
however, as noted in my previous report, for IEM there is something of a
silver lining within that cloud. High energy prices and Russia's use of
hydrocarbon exports as a weapon are causing a major re-think on fuel usage and
security of supply. This in turn is increasing the West's focus on renewable
sources of energy, while elevated gas prices drive up returns on investment in
solar, wind and other green power technologies.
PERFORMANCE
After many years of outperformance, there is no disguising the fact that 2022
was a difficult year for IEM, both on an absolute and relative basis, with IEM
losing ground relative to its global equity comparator index (the MSCI All
Countries World Index or "MSCI ACWI"). IEM's net asset value ("NAV") per share
on a total return basis declined by‑15.0%, compared to a fall in the MSCI
ACWI of -8.1%. As our Manager, Impax Asset Management (AIFM) Limited (the
"Manager", or "Impax"), explains in more detail, much of this was due to the
valuations at which our investee company holdings trade coming under pressure,
but some underperformance was also due to the fact that we do not invest in
sectors such as fossil fuels and commodity companies, which performed strongly
during 2022.
IEM's NAV did, however, outperform its environmental markets comparator, the
FTSE Environmental Technology 100 index ("FTSE ET100"), which fell by -20.1%
over the year. This index was greatly affected by sharp declines in some
expensive technology companies which dominate that index, including electric
car companies Tesla and Nio, and semiconductor names including Tokyo Electron
and Infineon Technologies, all of which are types of investment which our
Manager tends to avoid.
IEM's share price total return was -22.8% over the year, affected by the
-15.0% decline in NAV per share and exacerbated by the evaporation of the
premium at which our shares were trading at the start of the year. We ended
the year with our share price on par with NAV.
Notwithstanding the disappointing outcome for 2022, the longer term returns
for IEM remain very respectable: three-year annualised performance of the
share price and NAV are 9.0% and 10.6%, respectively, compared to 7.4% for
MSCI ACWI. Over five years, the annualised returns are 11.4% for the share
price and 9.5% for the NAV versus 7.7% for MSCI ACWI.
THE INVESTMENT CASE
The Board enthusiastically supports the Manager's belief that companies
offering solutions to the sustainability challenges facing the world will tend
to outperform the wider market over the longer term.
The rise in energy prices that is causing financial hardship is expected, over
the longer-term, to be a boost for IEM and the sectors in which it invests.
High fossil fuel prices and concerns about energy security, allied with
efforts to mitigate and adapt to climate change, support the economics of
energy efficiency investments and reinforce the case for the transition away
from hydrocarbons and towards renewables. This is a message which IEM has been
preaching for many years; what is new for 2022 is that the outrageous
behaviour of Russia should be the factor to validate the thesis beyond doubt.
"We welcome the sharply increased scrutiny by investors, media and
regulators of the ESG credentials of sustainable investment products, of which
IEM has been one for more than two decades."
This transition is being supported by continuing positive policy developments.
The EU has responded to the energy crisis by redoubling its policy support for
clean energy, with the introduction of its €210 billion REPowerEU package of
legislation.(1) In an unexpected development in July 2022, the US Senate
passed the Inflation Reduction Act ("IRA"), President Joe Biden's re-badged
climate legislation. This contains US$369 billion in subsidies for green
technologies.(2) Changes of government in both Australia and Brazil have
improved the climate policy outlook in those important economies. In China,
meanwhile, the 14(th) Five‑Year Plan is driving the deployment of
renewables.
There was a meaningful agreement to tackle biodiversity loss at the COP15
biodiversity summit in December 2022. An important pledge was made to protect
30% of the world's land and oceans, alongside commitments on reducing risks
posed to nature from nutrients and pesticides, and a pledge to direct US$200
billion towards protecting biodiversity by 2030(3). While it arguably fell
short of what some had hoped for, it provides a framework for starting to
address the global crisis in nature. Society has come to understand that it
cannot address climate change without solving biodiversity challenges, and
vice versa.
The financial services industry is trying to catch up rapidly and is now
offering investors many products purporting to be sympathetic to environmental
concerns. We welcome the sharply increased scrutiny by investors, media and
regulators of the environmental, social and governance (ESG) credentials of
sustainable investment vehicles, of which IEM has been one for more than two
decades. The Company has always been transparent in its approach to, and
management of, ESG factors (even before the term ESG was invented), and in
recent years the Company has tracked and disclosed measures of the impact that
the portfolio investments make on a number of environmental metrics. We also
report our climate risks and opportunities, which we continue to develop in
line with the recommendations of the Task Force on Climate-related Financial
Disclosures.. Ensuring that we continue to follow leading market practice in
this area is squarely on the Board's agenda.
DIVIDEND
IEM's net revenue return for the year was £13.6 million, compared with £9.4
million earned during 2021. The increase reflects the recovery in earnings
seen in our underlying investments as they put behind them the effects of the
Covid-19 pandemic.
IEM's dividend policy, as approved by shareholders at the May 2022 AGM, is to
declare two dividends each year. On 28 July 2022, the Board announced a first
interim dividend for this financial year of 1.5 pence per Ordinary Share which
was paid on 26 August. The second interim dividend, of 2.5 pence per Ordinary
Share, was declared on 1 February 2023 and paid on 10 March 2023. The total
dividend per share paid for 2022 is therefore 4.0 pence per share, an
increase of 42.9% on the 2.8 pence paid in respect of 2021.
It remains the Board's intention to pay out substantially all earnings by way
of dividends, the quantum of which is affected both by the level of dividends
received by the Company and by the number of shares in issue at the relevant
record date.
GEARING
At 31 December 2022, IEM's net gearing was 2.1%, slightly above the 1.6% net
gearing at the end of 2021. In recent years IEM has made little use of
gearing, allocating whatever new capacity was available from our Manager to
issue additional equity and thereby meet the strong investor demand that
prevailed. The Manager continues to advise of capacity constraints with our
investment bias towards the smaller end of the market; any increase in our
capital by way of borrowings results in a concomitant reduction in our ability
to issue equity. However, as discussed below, IEM is now trading close to NAV
and expanding the investment capacity via increased gearing has become an
option which is under active consideration; credit facilities are due for
renewal in September 2023.
PREMIUM AND DISCOUNT CONTROL
IEM's Ordinary Shares traded at a premium to NAV of 10.2% on 31 December 2021,
at NAV (no premium or discount) on 31 December 2022 and traded during the year
between a premium of 14.1% and a discount of -6.6%.
The premium or discount to underlying NAV is actively monitored by the Board
and our brokers. Having started the year with continued investor demand and
issuing shares at a premium, in February 2022 - with the onset of the Ukraine
war and in tandem with many other investment companies - IEM's shares moved to
a discount. Since then, the Board has used its authority judiciously to
purchase its own shares, to prevent a material discount from emerging.
The Board's intention remains to keep IEM's shares trading close to NAV during
normal market conditions and it will continue to exercise its authority to buy
back or to issue shares accordingly.
There were 298.1 million Ordinary Shares in issue at the start of the year,
increasing to 304.2 million by the year end, reflecting new shares issued of
7.6 million with 3.1 million bought back into treasury. Of the shares bought
back, 1.6 million were subsequently reissued from treasury, resulting in there
being 1.5 million shares in treasury at the year end.
1
https://ec.europa.eu/commission/presscorner/detail/en/ip_22_3131
2
https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/
3
https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7834
THE BOARD
The Board has established a Sustainability Reporting Committee to consider and
help the Board to assess the relevance to IEM of the growing body of
sustainability issues. The Committee will receive reports from the Manager
regarding its sustainability activities as they relate to IEM's portfolio, the
outcomes of such activities and its sustainability metrics. The Committee will
review and discuss the relevance of such activities and metrics in meeting
IEM's investment objective, investment policy and stakeholders' expectations,
make recommendations to the Board, and oversee IEM's regulatory and voluntary
sustainability reporting
At the AGM in May 2022, I was re-elected to the Board to serve for a tenth
year, taking account of the circumstances following the death of
chairman-designate Simon Fraser. I am delighted to report that Glen Suarez
joined the Board in August 2022 and will succeed me as Chairman at the
conclusion of the 2023 AGM, whereupon I will retire from the Board. Glen, who
is currently executive chairman at Knight Vinke Asset Management, was
previously chairman of Edinburgh Investment Trust plc, and earlier spent eight
years as head of European energy, infrastructure and utilities investment
banking at Morgan Stanley.
As previously announced, Vicky Hastings is retiring at the conclusion of the
2023 AGM after 10 years and Nick Hurd stepped down from the Board at the end
of 2022. I would like to thank both Vicky and Nick for their excellent service
and invaluable contributions to the Company during their tenures. Recruitment
is underway to find their replacements.
ANNUAL GENERAL MEETING
This year's annual general meeting will be held at 7th Floor, 30 Panton
Street, London, SW1Y 4AJ on Tuesday,
16 May 2023 at 3.00pm.
We are pleased to invite shareholders to attend the AGM in person to meet the
Board and our investment managers. There will be a presentation and the
opportunity to ask questions. Shareholders are welcome to join through our
website at www.impaxenvironmentalmarkets.co.uk. As is our normal practice,
there will be live voting for those physically present at the AGM. We are not
able to offer live voting via the website, and we therefore request all
shareholders, and particularly those who cannot attend physically, to submit
their votes by proxy, ahead of the deadline of 3.00pm on 12 May 2023, to
ensure that their vote counts at the AGM.
Shareholders' questions for either the Board or the investment managers should
be submitted to clientservices@impaxam.com (mailto:clientservices@impaxam.com)
by midday on 12 May 2023. IEM's website at www.impaxenvironmentalmarkets.co.uk
can be used to access more insights and also subscribe for regular
communications.
OUTLOOK
After the macro-economic and geopolitical challenges of the past year, I am
hopeful that 2023 will provide a more encouraging backdrop for environmental
markets generally and for IEM in particular. While there appears to be no
immediate prospect of the war in Ukraine coming to an end, we are adapting to
the supply and price shocks it has created. High energy prices and energy
security considerations have strengthened the case for investment in
alternative sources and accelerated the net-zero transition.
Geopolitical tensions make that transition less smooth than might otherwise
have been the case. COP27 demonstrated the difficulty of maintaining momentum
in global policy in the context of intense geopolitical rivalry and wars, both
actual and (dis)informational. For the time being, we are seeing the
regionalisation of climate policy, with progress in some parts of the world
being at odds with foot dragging (or worse) in others. As discussed in more
detail in the Manager's Report, the Inflation Reduction Act in the US and
REPowerEU in Europe show how progress at the regional and country level can
maintain the overall momentum in environmental policy.
When IEM was founded in 2002, with an initial market value of £50 million, it
faced a lonely existence in an investment sector which had yet to be properly
classified. 21 years on, ESG is on everyone's lips and the sector - which our
investment managers at Impax Asset Management have played a large part in
defining - is now centre stage, looking at an investable universe which is
many times deeper than two decades ago. Taking advantage of this, IEM has
delivered a 16.1% annualised share price total return over the past 10 years
and the Company is now a member of the FTSE 250 index, with a market
capitalisation at 25 March 2023 of some £1.3 billion. The Board takes this
opportunity to record its appreciation to Bruce Jenkyn‑Jones (who has been
at the helm from the start), Jon Forster (who has also been on board since
inception) and Fotis Chatzimichalakis (who became one of our investment
managers in October 2021), but also to the rest of the team for their
collective achievement in steering IEM with such a steady hand.
It has been deeply rewarding for those of us who have been able to observe
this transformation in the fortunes of environmentally-friendly investing, a
good example of how you can make money for investors while leaving the world a
better and cleaner place. Notwithstanding the substantial market correction we
saw in 2022, widespread recognition of the urgent need to address the world's
environmental and social challenges provides our investment managers with the
continuing opportunity to generate above-market returns. I remain convinced of
the merits of the investment mandate on which the Company is based.
John Scott, Chairman
31 March 2023
Manager's Report
Following strong performance in the last three years, 2022 proved a
challenging year for most parts of the market, including IEM. Since the
interim report, performance was broadly in line with MSCI ACWI and ahead of
the FTSE ET100, leading to full year NAV performance nearly 7% behind MSCI
ACWI but slightly more than 5% ahead of the FTSE ET100.
Many of the themes highlighted in the interim report remained relevant for the
full year. As discussed in the Chairman's Statement, rising interest rates led
to a 'de-rating' or decline of valuation multiples for growth companies which
are a core focus of IEM, and a switch into cheaper value sectors such as
energy and financials to which IEM has no exposure since these companies
generally do not meet our criterion of having a minimum of 50% revenues
generated from environmental products or services. This trend continued in the
second half, with the underperformance of MSCI ACWI Growth Index vs. MSCI ACWI
Value Index widening from 17.3% at the interim report to 23.5% for the full
year. This provided a challenging backdrop for IEM's performance and was seen
across a broad swathe of environmental markets and regions.
Whilst there were other challenges, as discussed below, portfolio holdings
mostly did a creditable job navigating the difficulties of disrupted supply
chains and an inflationary environment, and crucially demonstrated the pricing
power essential to maintaining profitability. Ongoing strength in renewable
energy holdings and a resurgence of M&A activity for some stocks in the
portfolio which then performed well, are also discussed below.
KEY DEVELOPMENTS AND DRIVERS FOR ENVIRONMENTAL MARKETS
Energy and climate
The Russian invasion of Ukraine, and its subsequent use of energy exports as a
weapon against the West, upended energy markets in 2022 and created wider
economic disruption with dramatic increases in energy prices generating a
significant reaction from consuming countries. With widespread concerns of
recession across Europe, prompt action by the EU in particular - both by
increasing the supply of natural gas from other sources and influencing demand
- along with a relatively warm winter, has enabled sufficient gas to be stored
in Europe, allowing power and gas prices to retreat from their August highs.
The response is also triggering a faster transition away from fossil fuels.
The International Energy Agency said the energy crisis is driving "a sharp
acceleration" in the installation of renewables; and has increased its
five‑year forecast by 30% over the last year as energy security concerns
have prompted governments to increase policy support for renewables.(4)
Specifically, the EU's REPowerEU package directs funding to increase renewable
energy generation, raises the bloc's energy efficiency target and sets
ambitious goals for hydrogen production. In addition, the EU has tightened the
emission reduction targets in its 'Fit for 55' package, phasing out free
allowances more quickly, and creating a social climate fund to support
vulnerable households and small businesses.(5)
The EU is also pursuing measures to ensure that its climate policy does not
simply export its greenhouse gas emissions to countries without equivalent
costs on carbon. From October 2023, it will begin introducing its Carbon
Border Adjustment Mechanism, which will require exporters of carbon-intensive
commodities such as iron and steel, cement, fertilisers and aluminium to
either buy EU carbon allowances or demonstrate they have paid a carbon price
domestically.(6) While this is a contentious application of carbon pricing to
international trade, we would expect that, over time, it will encourage
tighter climate policy within exporting countries.
4
https://www.iea.org/news/renewable-power-s-growth-is-being-turbocharged-as-countries-seek-to-strengthen-energy-security
5
https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/
6
https://taxation-customs.ec.europa.eu/green-taxation-0/carbon-border-adjustment-mechanism_en
Across the Atlantic, the US Inflation Reduction Act - so named to win the
crucial casting vote of conservative Democratic Senator Joe Manchin - provided
an unexpected boost to the clean energy agenda. Manchin's support revived a
version of President Biden's Build Back Better legislation which, while
considerably smaller in dollar terms than the original proposal, still
represents the largest financial commitment to addressing climate change in
any individual policy yet crafted. It provides US$369 billion in a balanced
package of clean energy, electric vehicle and clean technology tax incentives
and subsidies, including support for domestic manufacturing. These measures
will get the US close to the 40% reduction in greenhouse gas emissions by
2030(7) that the Biden administration committed to when it re-joined the Paris
Agreement. As far as IEM is concerned, it will provide a material boost in
earnings to a range of our holdings with material US exposure (44% of the
portfolio has end market exposure to the US), including SolarEdge (Solar
Energy Generation Equipment, US), Ormat (Renewable Energy Developers &
IPPs, US) and EDP Renovaveis (Renewable Energy Developers & IPPs,
Portugal).
Despite these positive developments, the world is still on course to exceed
the Paris Agreement's less‑ambitious goal of holding warming below 2°C -
let alone stay below the preferred 1.5°C threshold. Current policies around
the world would lead to a range of 2.2°C to 3.4°C of warming by the end of
the century, according to Climate Action Tracker.(8) While this is a sobering
observation, the implication that governments are likely to take further
policy action to promote the transition to net zero should support our
investments that are exposed to this theme. More investment will also be
needed in adaptation to the effects of climate change. IEM invests in climate
adaptation in Water Distribution & Infrastructure (Advanced Drainage
Systems and Zurn Elkay Water Solutions, both US) and Water Treatment (Amiad
Water Systems, Israel and Pentair, US), as well as backup power solutions and
power storage, as provided by Generac (Power Storage & UPS, US).
Within climate and energy, we favour energy efficiency names rather than
renewable energy generators. The latter continue to face obstacles to growth,
particularly around planning and permitting, and the sub-sector continues to
face uncertainties around the exact shape of regulatory intervention in energy
markets. Energy efficiency, however, tends to be a more straightforward
investment proposition driven, as it is, by simple economics. These become
much more compelling when energy prices are high, benefitting amongst others
industrial steam specialist Spirax Sarco Engineering (UK), heat pump supplier
Nibe (Sweden) and efficient lighting company Signify (Netherlands).
Biodiversity and sustainable food production
While the UN climate talks may have underwhelmed in 2022, a breakthrough
international agreement was reached on biodiversity at the end of the year. At
COP15 of the Convention on Biological Diversity in Montreal, a Global
Biodiversity Framework ("GBF") was agreed, setting important targets for the
protection of nature by 2030 and pledges for US$30 billion/year in financing
for biodiversity protection in poor countries by that date.(9) Important
targets in the GBF include a goal of protecting 30% of land and oceans,
cutting nutrient pollution and overall risks from pesticides and toxic
chemicals by half by 2030.
Agreement on an ambitious GBF, which hung in the balance over two years of
negotiations, coincides with growing concerns about biodiversity loss and
rising interest among companies and investors in reducing their impacts and
dependencies on nature.
Many of the themes pursued by IEM help to reduce pressures on biodiversity,
caused by drivers such as land-use change, overexploitation of organisms,
climate change, pollution and invasive non-native species. For example,
solutions around food waste reduction, plant-based proteins, alternative feeds
to soy, resource efficiency and circularity help to reduce pressures on
tropical forests. Alternative animal feeds and sustainable aquaculture can
help to address overexploitation of species, while our clean energy and energy
efficiency picks help to address climate change, which puts stress on
biodiversity.
The Company's investments in water treatment, pollution control and testing
all contribute to efforts to reduce run-off and pollutants that harm nature,
while its investments in companies which recycle and treat plastics can help
reduce pressures on marine biodiversity, in particular. IEM also invests in
Amiad Water Systems (Water Treatment, Israel) that treats ballast water
transported around the world by shipping companies, which helps to address the
spread of non‑native invasive species.
IEM has published its Policy on Nature, Biodiversity, and Deforestation on the
website and a section on biodiversity features in the annual report.
Biodiversity loss, climate change and food production are intimately linked,
and the three themes were prominently addressed at COP27. At the climate
talks, food security was "a fundamental priority", highlighted on the summit's
cover decision for the first time, alongside protecting nature and water. At
the talks, the UN Food and Agricultural Organization committed to developing a
net-zero, nature positive roadmap for the sector, which accounts for around
one-fifth of global emissions. IEM's investments in sustainable food and
agriculture are well-positioned to help deliver against such a roadmap.
7
https://www.science.org/content/article/surprise-climate-bill-will-meet-ambitious-goal-40-cut-us-emissions-energy-models#:~:text=The%20
backers%E2%80%94Senate%20Majority%20Leader,by%202030%2C%20compared%20with%202005.
8 https://climateactiontracker.org/
9
https://www.unep.org/news-and-stories/story/cop15-ends-landmark-biodiversity-agreement
ABSOLUTE PERFORMANCE CONTRIBUTORS AND DETRACTORS
Contributors
The themes highlighted in the Interim Report remain relevant for the year as a
whole.
Renewable energy holdings continued to deliver solid performance, benefitting
from supportive policy momentum, elevated power prices and a normalisation of
supply chains. The strength was across both project developers such as Terna
Energy (Greece), Ormat (US) and Northland Power (Canada), and renewable energy
equipment manufacturers like SolarEdge Technologies (Solar Energy Generation
Equipment, US) and Vestas (Wind Power Generation Equipment, Denmark).
After a reset in valuations, M&A activity in environmental markets has
picked up. Those companies in the portfolio targeted for merger or acquisition
performed well. Switch (Cloud Computing, US) has been taken private at an
attractive premium - from the initial indication of a likely takeover in
August 2021, to the deal announcement in May 2022, the share price of the
company appreciated 62%. For 2022, Switch positively contributed 0.53% to the
portfolio's performance. Terna Energy (Renewable Energy Developers & IPPs,
Greece) also benefitted from takeover interest, contributing 0.64% to
performance, with the company being viewed as a potential takeout target,
while Brambles (Resource Circularity & Efficiency, Australia) contributed
0.44% to performance as the company attracted interest from private equity
buyers.
Another cluster of strength during the year was companies with a 'value'
orientation, with CIA Saneamento Basico (Water Utilities, Brazil) and Graphic
Packaging (Food Safety & Packaging, US) standing out. The former is a
regulated water utility in Sao Paolo, Brazil and during the year rose on
expectations of more favourable regulatory conditions that could lead to an
eventual privatisation of the company. Graphic Packaging, a packaging company
with a high recycled inputs content, performed well, supported by resilient
consumer end-markets and an improving price / cost environment.
Finally, earnings delivery has been solid overall during the year with
holdings navigating this challenging market and exhibiting pricing power in
the current inflationary environment. Clean Harbors (Hazardous Waste
Management, US) delivered very good results, reflecting its dominant market
position in a supply constrained market. PTC (Efficient IT, US) benefitted
from a subscription-based business model and a resilient growth profile.
Detractors
The market rotation from 'growth' towards 'value' companies continued
throughout the year and has led to a material de-rating of holdings exposed to
these style factors. These companies' share prices dropped as investors took
into account rising interest rates when assessing future cashflows, resulting
in lower valuations today. Names most impacted include Cryoport (Resource
Circularity & Efficiency, US), Spirax Sarco Engineering (Industrial Energy
Efficiency, UK), Eurofins (Environmental Testing & Monitoring, France),
Croda (Recycled, Recyclable Products, UK) and Nibe (Buildings Energy
Efficiency, Sweden).
Against the backdrop of rising interest rates and increased likelihood of a
recession, companies exposed to cyclical end-markets suffered during the year.
Holdings exposed to construction activity have been particularly weak, with
water infrastructure and treatment companies like Aalberts (Netherlands),
Advanced Drainage (US), Zurn Elkay Water Solutions (US), and Pentair (US)
standing out. Similarly, Lenzing (Resource Circularity & Efficiency,
Austria) fell following weakness in textile markets and rising energy costs.
Finally, Generac (Power Storage & UPS, US) suffered during the year due to
supply chain constraints and on the back of concerns around the company's
sales outlook for 2023 after two years of strong growth. Royal DSM
(Sustainable Agriculture, Netherlands) struggled with rising input costs
(namely energy) and concerns around the resilience of the nutrition business
in a recessionary environment.
We remain positive on the long-term prospects for the holdings discussed in
this section and made selective additions to our holdings over the year.
RELATIVE PERFORMANCE ANALYSIS
PERFORMANCE RELATIVE TO MSCI ACWI 12 MONTHS ENDED
31 DECEMBER 2022
%
NAV total return (15.0)
MSCI ACWI total return (8.1)
Relative performance (6.9)
Analysis of relative performance
Portfolio total return (13.5)
MSCI ACWI total return (8.1)
Portfolio underperformance (5.4)
Borrowing:
Gearing effect (0.4)
Finance costs (0.1)
Management fee (0.7)
Other expenses (0.1)
Trading Costs (0.1)
Share transactions:
Issues 0.1
Buy-backs -
Tax (0.2)
Total relative NAV performance (6.9)
PERFORMANCE RELATIVE TO FTSE ET100 12 MONTHS ENDED
31 DECEMBER 2022
%
NAV total return (15.0)
FTSE ET100 total return (20.1)
Relative performance 5.1
Analysis of relative performance
Portfolio total return (13.5)
FTSE ET100 total return (20.1)
Portfolio outperformance 6.6
Borrowing:
Gearing effect (0.4)
Finance costs (0.1)
Management fee (0.7)
Other expenses (0.1)
Trading Costs (0.1)
Share transactions:
Issues 0.1
Buy-backs -
Tax (0.2)
Total relative NAV performance 5.1
PORTFOLIO POSITIONING, ACTIVITY, VALUATION AND RISK
At the end of the year, IEM's portfolio comprised 58 listed holdings with no
active unlisted investments following the write down to zero in December of
the legacy unlisted position (previously 0.05%) in Ensyn. Portfolio detail is
provided on and positioning by sector and region is set out in the annual
report. Positioning is consistent with that presented in the interim report.
The portfolio maintains a balance of high-quality cyclical and defensive names
across a broad range of environmental markets and, whilst maintaining a high
exposure to more economically defensive business models, activity is
progressively shifting to cyclical and growth names with beaten down
valuations and strong balance sheets.
Activity in the second half of the year saw further consolidation of holdings
with the sale of Itron (Smart & Efficient Grids, US) following ongoing
execution challenges and Salmar (Sustainable Aquaculture, Norway) following
the announcement by the Norwegian government of a proposed 40% resource tax
for salmon farmers, negatively impacting industry economics and growth
prospects.
Rational (Technology & Logistics, Germany), a leading supplier of high
efficiency ovens into restaurants, fast food outlets and institutional markets
(schools, hospitals, etc), was added back into the portfolio following a share
price collapse prompted by recession fears and the impact on its customer
base. With best-in‑class margins and returns on capital and a strong 'net
cash' balance sheet, this company is well positioned to weather the current
challenges and provides exposure to a compelling growth story as restaurants
aim to reduce food waste, improve efficiency and simultaneously cope with
ongoing labour shortages.
DS Smith (Food Safety & Packaging, UK) was exited in favour of Smurfit
Kappa Group (Food Safety & Packaging, Ireland), a market leading
fibre-based packaging company with a consistent track record of organic
growth, compelling positioning in growth markets in Latin America and
attractive financial metrics.
Switch (Cloud Computing, US) was exited on the completion of the recent
M&A which resulted in the company being taken private.
Regarding valuation, the portfolio experienced a significant fall or
'de-rating' in its next 12 months' (or forward) price-to-earnings ratio, from
an undoubtedly high level of 24.6x, as flagged in the last annual report, to
18.4x at the end of the year. This forward price‑to‑earnings ratio is in
line with long-term average levels, despite an investment case that is
considered stronger given drivers including the recent policy push towards
net-zero emissions and actions to address energy security issues.
OUTLOOK
Equity markets have had a volatile start to 2023, with early strength reversed
in March by the sudden collapse of Silicon Valley Bank in the US and forced
takeover of Credit Suisse by UBS in Europe. Fears of a new credit crisis have
driven material underperformance of small and mid-cap markets in which IEM
invests vs MSCI ACWI overall. With this backdrop, the recent focus has been on
economically defensive sectors and business models and on companies with
strong balance sheets, which are well placed to weather these near-term
challenges.
Notwithstanding the above, with a medium-term perspective we believe that the
investment case underpinning IEM remains compelling, and that companies
providing innovative solutions to environmental challenges will continue to
thrive and experience superior growth relative to the global economy.
Continued strong policy support, energy price volatility and a renewed focus
on energy security are supportive of opportunities across a wide range of
environmental markets. Recent volatility leaves the portfolio valuation in
line with long term average levels, which is considered attractive given the
strengthening underlying investment case.
Investment Managers
Bruce Jenkyn-Jones
Jon Forster
Fotis Chatzimichalakis
31 March 2023
PRINCIPAL RISKS AND UNCERTAINTIES
The Board is responsible for the management of risks faced by the Company and,
through delegation to the Audit Committee, has established procedures to
manage risk, oversee the internal control framework and determine the nature
and extent of the principal risks the Company is willing to take in order to
achieve its long-term strategic objectives. The Audit Committee carries out,
at least annually, a robust assessment of the principal risks and
uncertainties and reviews ongoing monitoring of both risks and controls. This
ensures heightened and emerging risks are identified outside of the normal
cycle of Board and Audit Committee meetings.
Risks are documented on a risk register, grouped into four main categories:
Strategic and Business Objective Risks; Investment Management Risks;
Operations - Service Providers Risks; and Compliance, Regulatory and Corporate
Governance Risks. Risks are then rated before and after mitigating controls by
impact and likelihood of occurrence, with the assessed ratings charted on risk
matrices. The risk register is reviewed on an ongoing basis in an attempt to
capture all risks and to ensure appropriate mitigation is in place. Reviews
take into account changing factors including, but not restricted to, changes
to markets (both macro and micro), stakeholders, operations, regulation and
emerging risks. The top risks identified by this process are set out in the
table which follows, and the Board considers these to be the principal risks
of the Company.
The Board considered the risks posed by global economic conditions including
higher inflation and interest rates as a result of the war in Ukraine and the
secondary effects of the COVID-19 pandemic, with updates on market impact and
operational resilience received from the Manager, Administrator and other key
service providers. The Board is satisfied that the key service providers had,
and continue to have, the ability to continue their operations efficiently in
a remote or virtual working environment, whilst safeguarding their staff.
The Manager continues to provide regular updates to the Board on the financial
impacts on the portfolio performance and investee companies, as well as the
long-term effects and opportunities for the sectors in which the Company
invests.
Emerging risks are considered by the Board at its quarterly meetings and by
the Audit Committee as part of its risk management and internal control
review. Failure to identify emerging risks may cause reactive actions rather
than being proactive and the Company could be forced to change its structure,
objective or strategy and, in worst case, could cause the Company to become
unviable or otherwise fail.
The experience and knowledge of the Directors is invaluable in consideration
of emerging risks, as are update papers and advice received from the Board's
key service providers such as the Company's Manager, broker, Company Secretary
and auditor. The AIC also provides regular updates and draws members'
attention to forthcoming industry and/or regulatory issues.
TREND: INCREASING NEUTRAL REDUCING
POTENTIAL RISK MITIGATION TREND
STRATEGIC AND BUSINESS OBJECTIVE RISKS
Economic and market risks Neutral
Price movements of the Company's investments are highly correlated to the There are inherent risks involved in stock selection. The Manager is
performance of global equities in general and small and mid-cap equities in experienced and employs its expertise in selecting the stocks in which the
particular. Falls in stock markets are likely to adversely affect the Company invests. The Manager spreads the investment risk over a wide portfolio
performance of the Company's investments. of investments in its three main sectors: energy, water and waste, as well as
geographically. At year end, the Company held investments in 58 companies and
Changes in general economic and market conditions, such as currency exchange the largest holding represented 2.9% of net assets.
rates, interest rates, rates of inflation, industry conditions, tax laws,
political events and trends can substantially and adversely affect the value The Manager will not normally hedge against foreign currency movements, but
of investments. Market risk includes the potential impact of events which are the Manager takes account of the risk when making investment decisions.
outside the Company's control such as the Russian invasion of Ukraine. Further details on financial risks and risk mitigation are disclosed in note
16 to the accounts.
The Company invests in companies with small market capitalisations, which are
likely to be subject to higher valuation uncertainties and liquidity risks The high risk rating remains unchanged, however, this reflects continued
than larger capitalisation securities. The Company may also invest in unquoted uncertainty in markets, though for changed reasons. Covid-19 and Covid-19
securities which generally have greater valuation uncertainties and liquidity secondary effects have decreased, however, uncertainty continues due to
risks than securities listed or traded on a regulated market. inflation, interest rates and cost concerns following the Ukraine war, added
to which are possible negative consequences arising from the recent tensions
being seen in the financial system.
Environmental markets Neutral
The Company invests in companies operating in environmental markets. Such
companies carry risks that governments may alter the regulatory and financial
support for environmental improvement, costs of technology may not fall, The Company invests in a broad portfolio of investments which are spread
capital spending by their customers is reduced or deferred and their products amongst several environmental market sectors. The Manager has a rigorous
or services are not adopted. investment process which takes into account relevant factors prior to
investment decisions taking place. As well as reviews of the portfolio and
relevant industry matters at quarterly Board meetings, the Board has an annual
strategy day at which the overall strategy of the Company is discussed.
Share price trades at excessive premium to net asset value The Board has made a statement on premium/discount control in normal market
conditions as detailed in the annual report and in the Chairman's Statement.
Market demand combined with limited capacity results in excessive share price
Decreasing
premium to NAV and returns to shareholders may be affected. Excessive premium The Company utilises its powers to issue and buy back shares when
may also result in being unable to grow the Company through share issuance. circumstances are appropriate, following consultation with the Manager and the
Company's broker.
The Board monitors the level of premium/discount and receives regular
shareholder feedback from the Company's Manager and broker.
Share price trades at excessive discount to net asset value Increasing
It is in the long-term interests of shareholders that shares do not trade at a
significant discount to their net asset value.
Investor demand for the shares fell with the onset of the Ukraine war, in
tandem with other investment company shares. This moved the shares from a
premium to NAV to a discount. As explained in the Chairman's Statement, the
Board's intention remains to keep the Company's shares trading close to NAV.
Even so, and especially where markets are volatile, the discount may increase.
Financing risk Increasing
The Company may borrow money for investment purposes. If investment markets The Board has authorised the Manager to use its discretion to utilise gearing
fall in value, any borrowing will enhance the level of loss. up to 10% of net assets. Any borrowing above this level requires Board
approval. Borrowing facilities are renewed on a cost effective and timely
Capacity constraints on the availability of desirable companies for investment basis.
may mean the Company is unable to achieve the level of gearing wanted.
The Manager keeps under regular review the opportunities for enhancing returns
by the prudent use of gearing.
The Company's fixed rate loans and revolving credit facility both expire on 6
September 2023. Higher interest rates will increase the cost of borrowings for
the Company and borrowings may not be available of acceptable types, amounts
and/or interest rates.
OPERATIONS - SERVICE PROVIDERS RISKS
Failure or breach of Information Technology (IT) - including cyber- security, Neutral
and physical security risks
Failure of IT or physical security could potentially lead to breaches of
confidentiality, data records being compromised and the inability to make The Company's key service providers report periodically to the Board on their
investment decisions. In addition, unauthorised physical access to buildings procedures to mitigate cyber security risks including their alignment with
could lead to damage or loss of equipment. The underlying risks primarily industry standards, their physical and data security procedures and their
exist in the third party service providers to whom the Company has outsourced business continuity planning.
its depositary, registration, administration and investment management
activities. The Board also meets with its service providers on a periodic basis.
Operational risk Due diligence is undertaken before contracts are entered into with third party Increasing
service providers, taking into account the quality and cost of services
The Board has contractually delegated to third party service providers the offered, including policies and procedures, and risk management and controls
management of the investment portfolio, and services covering: depositary and systems in operation in so far as they are relevant to the Company.
custody; registrar; company secretarial and fund accounting. The security of Thereafter, the performance of the provider is subject to regular review and
the Company's assets, dealing procedures, accounting records and adherence to report to the Board. The Board monitors key persons as part of this oversight.
regulatory and legal requirements depend on the effective operation of the
systems of these third party service providers. The control of risks related to the Company's business areas is described in
detail in the corporate governance report.
Failure by any service provider to carry out its obligations to the Company
could have a material adverse effect on the Company's performance. Disruption The risk rating is increased to reflect the acquisition during the year of
to the accounting, payment systems or custody records (including cyber Sanne Fund Services (UK) Limited ("Sanne") by Apex. A transition plan to move
security risk) could prevent the accurate reporting and monitoring of the and integrate the two companies was presented to the Board. This set out a
Company's financial position. programme to ensure the seamless move of the fund accounting and company
secretarial services provided by Sanne, with no diminution of service quality
either at or after transition, and recognised the importance to the Company of
IEM-experienced staff.
Whilst not being identified as principal risks after mitigation controls are
applied, other relevant risks to the Company include the following:
STRATEGIC AND BUSINESS OBJECTIVE RISKS
Global pandemic risk Neutral
The rapid spread of infectious disease may cause governments to implement The Manager spreads the investment risk over a wide portfolio of investments.
policies to restrict the gathering, interaction or movement of people and take Risk analysis includes scenario analysis of possible negative market events.
other measures as deemed appropriate to prevent its spread, causing disruption
to markets generally, investee companies, the operations of the Company and The Company's key service providers report periodically to the Board on their
its key service providers. business continuity plans and procedures. The Board monitors the adequacy of
controls in place at the key service providers and their planned response to
an extended period of disruption, to ensure that the impact to the Company is
limited.
During times of elevated volatility and market stress, the Company's
closed-end fund structure protects it from the liquidity requirements that can
arise for open-ended funds.
Physical climate change risk Neutral
While efforts to mitigate climate change continue, the physical impacts are Physical climate change risk is still an emerging topic for investors as well
already emerging in the form of changing weather patterns. Extreme weather as for the management teams of investee companies. It has been a focus area of
events can result in flooding, drought, fires and storm damage, potentially research and engagement by the Manager to identify companies particularly
impairing the operations of an investee company at a certain location, or exposed to this risk and to open a dialogue with them on management options.
impacting locations of companies within their supply chain. Details of engagement with investee companies are given in the annual report.
The Company invests in a broad portfolio of companies which are spread
geographically, limiting the impact of location specific weather events.
INVESTMENT MANAGEMENT RISKS
Financial risks Neutral
The Company's investment activities expose it to a variety of financial risks The Company will not normally hedge against foreign currency movements
which include foreign currency risk, portfolio liquidity risk and interest affecting the value of its investments, although, the Manager takes account of
rate risk. this risk when making investment decisions.
The Company invests in securities which are not denominated or quoted in The Company invests in range of global listed equities and the Manager
sterling. Movements of exchange rates between sterling and other currencies in monitors the foreign currency exposure and liquidity of holdings within the
which the Company's investments are denominated may have an unfavourable portfolio and reports on these to the Board at each meeting.
effect on the return on the investments made by the Company.
Interest rate risk is limited due to the low level of gearing.
Further details on financial risks and risk mitigation are disclosed in note
16 to the accounts.
COMPLIANCE, REGULATORY AND CORPORATE GOVERNANCE RISKS
Regulatory risks Neutral
Loss of investment trust status would lead to the Company being subject to tax The Company has contracted out relevant services to appropriately qualified
on any gains on the disposal of its investments. professionals, who monitor, and report to the Board on regulatory compliance.
In addition, the Company's broker, auditor, Company Secretary and Manager
Breaches of the FCA's rules applicable to listed entities could result in provide the Board with regulatory updates on a regular basis.
financial penalties or suspension of trading of the Company's shares. Breaches
of the Companies Act 2006 could result in financial penalties or legal The Manager reports on regulatory matters to the Board on a quarterly basis.
proceedings against the Company or its Directors. The assessment of regulatory risks forms part of the Board's risk assessment
programme.
Failure of the Manager to meet its regulatory obligations could have adverse
consequences on the Company.
VIABILITY STATEMENT
The continuation of the Company is subject to the approval of shareholders
every three years. The continuation of the Company was approved at the
Company's 2022 AGM with 99.99% votes in favour of the continuation resolution.
The next vote will take place at the Company's 2025 AGM.
The Directors have assessed the viability of the Company for the period to 31
December 2027 (the "Viability Period"). The Board believes that the Viability
Period, being approximately five years, is an appropriate time horizon over
which to assess the viability of the Company, particularly when taking into
account the long-term nature of the Company's investment strategy, the
principal risks outlined above such as a severe market downturn or climate
change and its gearing. Based on this assessment, the Directors have a
reasonable expectation that the Company will be able to continue to operate
and to meet its liabilities as they fall due over the Viability Period.
The Board reviewed the Company's income and expenditure projections and other
funding requirements.in normal and worst case market conditions. The level of
the ongoing charges is dependent to a large extent on the level of net assets,
the most significant contributor being the investment management fee. The
Company's income from investments and cash from the sale of investments (which
are readily realisable) provide substantial cover to the Company's operating
expenses, and any other expenditure likely to be faced by the Company over the
Viability Period. Such expenditure to include buybacks of shares in order to
operate the Company's discount control policy and repayment of the Company's
borrowings, which at the date of this report represented less than 4.0% of the
Company's investments.
In its assessment of the prospects of the Company, the Board considered each
of the principal risks and uncertainties and the liquidity and solvency of the
Company.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable laws and regulations.
Company law requires the Directors to prepare accounts for each financial
year. Under that law the Directors have elected to prepare the financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice, including FRS 102 'The Financial Reporting Standard applicable in
the UK and the Republic of Ireland'. Under company law the Directors must not
approve the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company as at the end of the
year and of the net return for the year. In preparing these accounts, the
Directors are required to:
· select suitable accounting policies and then apply them
consistently;
· make judgements and estimates which are reasonable and
prudent; and
· state whether applicable accounting standards have been
followed, subject to any material departures disclosed and explained in the
accounts.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and which disclose
with reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the accounts comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The accounts are published on the www.impaxenvironmentalmarkets.co.uk and
www.impaxam.com websites which are maintained by the Company's Manager, Impax
Asset Management (AIFM) Limited ("Impax"). The work carried out by the auditor
does not involve consideration of the maintenance and integrity of these
websites and, accordingly, the auditor accepts no responsibility for any
changes that have occurred to the accounts since being initially presented on
the website. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
Directors' confirmation statement
The Directors each confirm to the best of their knowledge that:
(a) the accounts, prepared in accordance with applicable accounting
standards, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company; and
(b) this Annual Report includes a fair review of the development and
performance of the business and position of the Company, together with a
description of the principal risks and uncertainties that it faces.
Having taken advice from the Audit Committee, the Directors consider that the
Annual Report and financial statements, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
For and on behalf of the Board
John Scott
Chairman
31 March 2023
Income Statement
YEAR ENDED 31 DECEMBER 2022 YEAR ENDED 31 DECEMBER 2021
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
NOTES £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments 2 - (226,293) (226,293) - 239,534 239,534
Net foreign exchange losses - (2,778) (2,778) - (314) (314)
Income 3 20,160 - 20,160 15,195 - 15,195
Investment management fees 4 (2,420) (7,258) (9,678) (2,471) (7,412) (9,883)
Other expenses 5 (1,037) - (1,037) (1,360) - (1,360)
(Loss)/return on ordinary activities before finance costs and taxation 16,703 (236,329) (219,626) 11,364 231,808 243,172
Finance costs 6 (475) (1,424) (1,899) (368) (1,103) (1,471)
(Loss)/return on ordinary activities before taxation 16,228 (237,753) (221,525) 10,996 230,705 241,701
Taxation 7 (2,956) 211 (2,745) (1,605) 342 (1,263)
(Loss)/return on ordinary activities after taxation 13,272 (237,542) (224,270) 9,391 231,047 240,438
(Loss)/return per Ordinary Share 8 4.37p (78.18p) (73.81p) 3.29p 81.06p 84.35p
The total column of the Income Statement is the profit and loss account of the
Company.
The supplementary revenue and capital columns are provided for information
purposes in accordance with the Statement of Recommended Practice issued by
the Association of Investment Companies. All revenue and capital items in the
above statement derive from continuing operations. No operations were acquired
or discontinued during the year.
Return on ordinary activities after taxation is also the "Total comprehensive
income for the year".
Balance Sheet
AS AT AS AT
31 DECEMBER 31 DECEMBER
2022 2021
NOTES £'000 £'000
Fixed assets
Investments at fair value through profit or loss 2 1,302,605 1,503,750
Current assets
Dividend receivable 512 274
Taxation recoverable 90 23
Other debtors 108 -
Cash and cash equivalents 26,327 28,319
27,037 28,616
Creditors: amounts falling due within one year
Trade and other payables 10 (1,929) (3,036)
Bank loans and credit facility 11 (51,606) -
(53,535) (3,036)
Net current (liabilities)/assets (26,498) 25,580
Total assets less current liabilities 1,276,107 1,529,330
Creditors: amounts falling due after more than one year
Capital gains tax provision 7 (169) (579)
Bank loans and credit facility 11 - (49,113)
Net assets 1,275,938 1,479,638
Capital and reserves: equity
Share capital 12 30,562 29,806
Share premium account 423,098 388,262
Capital redemption reserve 9,877 9,877
Share purchase reserve 141,872 147,855
Capital reserve 13 657,373 894,915
Revenue reserve 13,156 8,923
Shareholders' funds 1,275,938 1,479,638
Net assets per Ordinary Share 14 419.49p 496.42p
Approved by the Board of Directors and authorised for issue on 31 March 2023
and signed on their behalf by:
John Scott
Chairman
Impax Environmental Market plc incorporated in England with registered number
4348393.
Statement of Changes in Equity
CAPITAL
SHARE REDEMP- SHARE
SHARE PREMIUM TION PURCHASE CAPITAL REVENUE
YEAR ENDED CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE TOTAL
31 DECEMBER 2022 NOTE £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening equity as at 1 January 2022 29,806 388,262 9,877 147,855 894,915 8,923 1,479,638
Dividends paid 9 - - - - - (9,039) (9,039)
Net proceeds from issue of new
shares 12 756 34,162 - - - - 34,918
Net proceeds of shares sold from
treasury 12 - 674 - 6,904 - - 7,578
Cost of share buybacks 12 - - - (12,887) - - (12,887)
(Loss)/return for the year - - - - (237,542) 13,272 (224,270)
Closing equity as at 31 December 2022 30,562 423,098 9,877 141,872 657,373 13,156 1,275,938
CAPITAL
SHARE REDEMP- SHARE
SHARE PREMIUM TION PURCHASE CAPITAL REVENUE
YEAR ENDED CAPITAL ACCOUNT RESERVE RESERVE RESERVE RESERVE TOTAL
31 DECEMBER 2021 NOTE £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening equity as at 1 January 2021 26,588 239,059 9,877 147,855 663,868 6,033 1,093,280
Dividends paid 9 - - - - - (6,501) (6,501)
Net proceeds from issue of new
shares 12 3,218 149,203 - - - - 152,421
Return for the year - - - - 231,047 9,391 240,438
Closing equity as at 31 December 2021 29,806 388,262 9,877 147,855 894,915 8,923 1,479,638
Statement of Cash Flows
YEAR ENDED YEAR ENDED
31 DECEMBER 31 DECEMBER
2022 2021
NOTES £'000 £'000
Operating activities
(Loss)/return on ordinary activities before finance costs and taxation* (219,626) 243,172
Less: Tax deducted at source on income from investments (3,155) (1,776)
Foreign exchange non cash flow losses 2,775 205
Adjustment for losses/(gains) on investments 226,293 (239,534)
Special dividends received as capital 393 -
Increase in other debtors (413) (99)
(Decrease)/increase in other creditors (1,142) 821
Net cash flow from operating activities 5,125 2,789
Investing activities
Sale of investments 313,189 336,772
Purchase of investments (338,730) (485,732)
Net cash flow used in investing (25,541) (148,960)
Financing activities
Equity dividends paid 9 (9,039) (6,501)
Repayment of revolving credit facility (282) -
Finance costs paid (1,864) (1,467)
Net proceeds from issue of new shares 12 34,918 152,421
Net proceeds of shares sold from treasury 12 7,578 -
Cost of share buybacks 12 (12,887) -
Net cash flow from financing 12 18,424 144,453
Decrease in cash (1,992) (1,718)
Cash and cash equivalents at start of year 28,319 30,037
Cash and Cash equivalents at end of year 26,327 28,319
* Cash inflow includes dividend income received during the
year ended 31 December 2022 of £20,348,000 (2021: £15,117,000) and bank
interest of £205,000 (2021: £nil).
Changes in net debt note
YEAR ENDED YEAR ENDED
31 DECEMBER 31 DECEMBER
2022 2021
£'000 £'000
Net debt at start of year (20,794) (18,871)
Decrease in cash and cash equivalents (1,992) (1,718)
Foreign exchange movements (2,775) (205)
Repayment of revolving credit facility 282 -
Net debt at end of year (25,279) (20,794)
Notes to the Financial Statements
1 ACCOUNTING POLICIES
The Company is an investment company within the meaning of Section 833 of the
Companies Act 2006.
The accounts have been prepared in accordance with applicable UK accounting
standards. The particular accounting policies adopted are described below.
(a) Basis of accounting
The accounts are prepared in accordance with UK Generally Accepted Accounting
Practice ('UK GAAP') including FRS 102 'The Financial Reporting Standard
applicable in the UK and Republic of Ireland' and the Statement of Recommended
Practice 'Financial statements of investment trust companies and venture
capital trusts' ('SORP') issued by the Association of Investment Companies in
July 2022.
The accounts have been prepared on a going concern basis. Details of the
Directors' assessment of the going concern status of the Company, which
considered the adequacy of the Company's resources and the macroeconomic
backdrop such as higher inflation and interest rates and possible recession,
are given in the annual report..
Amounts in the accounts have been rounded to the nearest £'000 unless
otherwise stated.
(b) Investments
Securities of companies quoted on regulated stock exchanges and the Company's
holdings in unquoted companies have been classified as 'at fair value through
profit or loss' and are initially recognised on the trade date and measured at
fair value in accordance with sections 11 and 12 of FRS 102. Investments are
measured at subsequent reporting dates at fair value by reference to their
market bid prices. Any unquoted investments are measured at fair value which
is determined by the Directors in accordance with the International Private
Equity and Venture Capital guidelines.
Changes in fair value are included in the Income Statement as a capital item.
(c) Reporting currency
The accounts are presented in sterling which is the functional currency of the
Company. Sterling is the reference currency for this UK registered and listed
company.
(d) Income from investments
Investment income from shares is accounted for when the Company's right to
receive the income is established, which is usually considered to be the
ex-dividend date. Overseas income is grossed up at the appropriate rate of tax
but UK dividend income is not grossed up for tax credits.
Special dividends are assessed on their individual merits and may be credited
to the Income Statement as a capital item if considered to be closely linked
to reconstructions of the investee company or other capital transactions. All
other investment income is credited to the Income Statement as a revenue item.
(e) Nature and purpose of equity and reserves:
Share capital represents the 10p nominal value of the issued share capital.
The share premium account arose from the net proceeds of new shares and from
the excess proceeds received on the sale of shares from treasury over the
repurchase cost.
The capital redemption reserve represents the nominal value of shares
repurchased for cancellation.
The share purchase reserve was created following shareholders' approval and
confirmation of the Court, through the cancellation and transfer of
£44,125,000 in December 2002 and £246,486,789 in July 2009 from the share
premium account. This reserve may only be used for share repurchases, both
into treasury or for cancellation. When shares are subsequently reissued from
treasury, the amount equal to their repurchase cost is reflected in this
reserve, with any proceeds in excess of the repurchase cost transferred to the
share premium account.
The capital reserve reflects any:
· gains or losses on the disposal of investments;
· exchange movements of a capital nature;
· the increases and decreases in the fair value of
investments which have been recognised in the capital column of the income
statement; and
· expenses which are capital in nature.
Any gains in the fair value of investments that are not readily convertible to
cash are treated as unrealised gains in the capital reserve.
The revenue reserve reflects all income and expenditure recognised in the
revenue column of the income statement and is distributable by way of
dividend.
The Company's distributable reserves consists of the share purchase reserve,
the capital reserve attributable to realised profits and the revenue reserve.
The share purchase reserve may only be used for share repurchases, both into
treasury or for cancellation.
(f) Expenses
All expenses are accounted for on an accruals basis. Expenses are recognised
through the Income Statement as revenue items except as follows:
Management fees
In accordance with the Company's stated policy and the Directors' expectation
of the split of future returns, three quarters of investment management fees
are charged as a capital item in the Income Statement. There is no performance
fee arrangement with the Manager.
Finance costs
Finance costs include interest payable and direct loan costs. In accordance
with Directors' expectation of the split of future returns, three quarters of
finance costs are charged as capital items in the Income Statement. Loan
arrangement costs are amortised over the term of the loan.
Transaction costs
Transaction costs incurred on the acquisition and disposal of investments are
charged to the Income Statement as a capital item.
(g) Taxation
Irrecoverable taxation on dividends is recognised on an accruals basis in the
Income Statement.
Deferred taxation
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the financial reporting date, where
transactions or events that result in an obligation to pay more tax in the
future or right to pay less tax in the future have occurred at the financial
reporting date. This is subject to deferred tax assets only being recognised
if it is considered more likely than not that there will be suitable profits
from which the future reversal of the timing differences can be deducted.
Deferred tax assets and liabilities are measured at the rates applicable to
the legal jurisdictions in which they arise.
(h) Foreign currency translation
All transactions and income in foreign currencies are translated into sterling
at the rates of exchange on the dates of such transactions or income
recognition. Monetary assets and liabilities and financial instruments carried
at fair value denominated in foreign currency are translated into sterling at
the rates of exchange at the balance sheet date. Any gain or loss arising from
a change in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in the Income Statement as either a
capital or revenue item depending on the nature of the gain or loss.
(i) Financial liabilities
Bank loans and overdrafts are measured at amortised cost. They are initially
recorded at the proceeds received net of direct issue costs.
(j) Cash and cash equivalents
Cash comprises cash and demand deposits. Cash equivalents are short term,
highly liquid investments that are readily convertible to known amounts of
cash, are subject to insignificant risks of changes in value, and are held for
the purpose of meeting short-term cash commitments rather than for investment
or other purposes.
(k) Estimates and assumptions
The preparation of financial statements requires the Directors to make
estimates and assumptions that affect items reported in the Balance Sheet and
Income Statement. Although these estimates are based on management's best
knowledge of current facts, circumstances and, to some extent, future events
and actions, the Company's actual results may ultimately differ from those
estimates, possibly significantly.
The assumptions regarding the valuation of unquoted financial instruments are
disclosed in note 2.
(l) Dividend payable
Final dividends payable to equity shareholders are recognised in the financial
statements when they have been approved by shareholders and become a liability
of the Company. Interim dividends payable are recognised in the period in
which they are paid. The capital reserve attributable to realised profits and
revenue reserve may be used to fund dividend distributions.
(m) Treasury shares
Treasury shares are recognised at cost as a deduction from equity
shareholders' funds. Subsequent consideration received for the sale of such
shares is also recognised in equity, with any difference between the sale
proceeds and the original cost being taken to share premium account. No gain
or loss is recognised in the financial statements on transactions in treasury
shares.
2 INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS
2022 2021
£'000 £'000
(a) Summary of valuation
Analysis of closing balance:
UK quoted securities 88,985 118,644
Overseas quoted securities 1,213,620 1,384,524
Overseas unquoted securities - 582
Total investments 1,302,605 1,503,750
(b) Movements during the year:
Opening balance of investments, at cost 1,031,903 748,272
Additions, at cost 338,730 484,211
Disposals, at cost (248,327) (200,580)
Cost of investments at 31 December 1,122,306 1,031,903
Revaluation of investments to fair value:
Opening balance of capital reserve - investments held 471,847 364,617
Unrealised (losses)/gains on investments held (291,548) 107,230
Balance of capital reserve - investments held at 31 December 180,299 471,847
Fair value of investments at 31 December 1,302,605 1,503,750
(c) Gains/(losses) on investments in year (per Income Statement)
Gains on disposal of investments 65,492 132,716
Net transaction costs (630) (412)
Special dividends received as capital 393 -
Unrealised (losses)/gains on investments held (291,548) 107,230
(Losses)/gains on investments (226,293) 239,534
During the year, the Company incurred transaction costs on purchases totalling
in aggregate £588,000 (2021: £508,000) and on disposals totalling in
aggregate £313,000 (2021: £246,000). Following MiFID II, the Manager has
rebated £271,000 (2021: £299,000) in respect of transaction research costs
for the year ended 31 December 2022, and nil (2021: £43,000) in relation to
prior periods. Transaction costs are recorded in the capital column of the
Income Statement.
The Company received £327,757,000 (2021: £333,296,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£262,265,000 (2021: £200,580,000). These investments have been revalued over
time and until they were sold any unrealised gains/losses were included in the
fair value of the investments.
Classification of financial instruments
FRS 102 requires classification of financial instruments within the fair value
hierarchy be determined by reference to the source of inputs used to derive
the fair value and the lowest level input that is significant to the fair
value measurement as a whole. The classifications and their descriptions are
below:
Level 1
The unadjusted quoted price in an active market for identical assets or
liabilities that the entity can access at the measurement date.
Level 2
Holdings in companies with no quoted prices. Inputs other than quoted prices
included within Level 1 that are observable (i.e. developed using market data)
for the asset or liability, either directly or indirectly.
Level 3
Inputs are unobservable (i.e. for which market data is unavailable) for the
asset or liability.
The classification of the Company's investments held at fair value is detailed
in the table below:
31 DECEMBER 2022 31 DECEMBER 2021
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investments at fair value
through profit or loss
- Quoted 1,302,605 - - 1,302,605 1,503,168 - - 1,503,168
- Unquoted - - - - - - 582 582
1,302,605 - - 1,302,605 1,503,168 - 582 1,503,750
The movement on the Level 3 unquoted investments during the year is shown
below:
2022 2021
£'000 £'000
Opening balance 582 577
Writedown of investment to nil (582) -
Foreign exchange movements - 5
Closing balance - 582
Unquoted investments are valued using relevant financial data available on
those investments and applying International Private Equity and Venture
Capital guidelines. This includes, where appropriate, consideration of price
of recent market transactions, earnings multiples, discounted cash flows, net
assets and liquidity discounts.
At the year end the Company had one unlisted holding (2021: one).
3 INCOME
2022 2021
£'000 £'000
Dividends from UK listed investments 2,295 1,484
Dividends from overseas listed investments 17,660 13,711
Bank interest received 205 -
Total Income 20,160 15,195
Dividends from overseas limited investments includes special dividends of
£283,000 (2021: nil).
4 INVESTMENT MANAGEMENT FEES
2022 2021
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fees 2,420 7,258 9,678 2,471 7,412 9,883
At 31 December 2022, investment management fees accrued were £1,601,000
(2021: 2,730,000).
5 OTHER EXPENSES
2022 2021
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Secretary and administrator fees 250 - 250 276 - 276
Depository fees* 104 - 104 162 - 162
Depository fees refund* (66) - (66) - - -
Custody fees* 170 - 170 219 - 219
Custody fees refund* (55) - (55) - - -
Directors' fees- see below 171 - 171 162 - 162
Directors' expenses 3 - 4 - - -
Directors' other costs- see below 9 - 8 17 - 17
Directors' D&O insurance 16 - 16 13 - 13
Director recruitment fees 20 - 20 20 - 20
Broker retainer 24 - 24 50 - 50
Auditor's fee 42 - 42 37 - 37
Tax advisor fees 9 - 9 8 - 8
Association of Investment Companies 21 - 21 21 - 21
Registrar's fees 119 - 119 146 - 146
Marketing fees 61 - 61 75 - 75
FCA and listing fees 107 - 107 64 - 64
Printing fees 30 - 30 30 - 30
Other expenses 2 - 2 60 - 60
1,037 - 1,037 1,360 - 1,360
Full detail on Directors' fees in the year is provided in the Directors'
Remuneration Implementation Report. Employer's National Insurance upon the
fees is included as appropriate in Directors' other costs. At 31 December
2022, Directors' fees, Directors' expenses and national insurance fees
outstanding were £7,000 (2021: £1,000).
* Refunds of £66,000 and £55,000 were received respectively
for depository and custody fees charged in 2021 due to revised depository and
custody fee rates being retrospectively applied from 1 January 2021.
6 FINANCE COSTS
2022 2021
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Interest charges 471 1,414 1,885 364 1,091 1,455
Direct finance costs 4 10 14 4 12 16
Total 475 1,424 1,899 368 1,103 1,471
Facility arrangement costs amounting to £72,000 are amortised over the life
of the facility on a straight-line basis.
7 TAXATION
(a) Analysis of charge in the year
2022 2021
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Overseas taxation 2,956 59 3,015 1,605 - 1,605
Decrease in CGT provision - (270) (270) - (342) (342)
Taxation 2,956 (211) 2,745 1,605 (342) 1,263
(b) Factors affecting total tax charge for the year:
The standard UK corporation tax rate at 31 December 2022 was 19% (2021:
19.00%). The tax charge differs from the charge resulting from applying the
standard rate of UK corporation tax for an investment trust company.
The differences are explained below:
2022 2021
£'000 £'000
(Loss)/return on ordinary activities before taxation (221,525) 241,701
Corporation tax at 19.00% (2021: 19.00%) (42,090) 45,923
Effects of:
Non-taxable UK dividend income (436) (282)
Non-taxable overseas dividend income (3,355) (2,605)
Non-taxable interest income (39) -
Movement in unutilised management expenses 2,036 2,136
Movement on non-trade relationship deficits 361 280
Losses/(gains) on investments not taxable 42,995 (45,512)
Loss in foreign currency movement 528 60
Capital gains tax provision movement (270) (342)
Overseas taxation 3,015 1,605
Total tax charge for the year 2,745 1,263
(c) Investment companies which have been approved by the HM Revenue &
Customs under section 1158 of the Corporation Tax Act 2010 are exempt from tax
on capital gains. Due to the Company's status as an Investment Trust, and the
intention to continue meeting the conditions required to obtain approval in
the foreseeable future, the Company has not provided for deferred tax on any
capital gains or losses arising on the revaluation of investments.
(d) The capital gains tax provision represents an estimate of the amount of
tax provisionally payable by the Company on direct investment in Indian
equities. It is calculated based on the long term or short term nature of the
investments and the unrealised gain thereon at the applicable tax rate at the
year end.
Movements on the capital gains tax provision for the year
2022 2021
£'000 £'000
Provision brought forward 579 1,092
Capital gains tax paid (140) (171)
Decrease in provision in year (270) (342)
Provision carried forward 169 579
(e) The Company has unrelieved excess management expenses and non-trade
relationship deficits of £90,629,000 (2021: £78,015,000). It is unlikely
that the Company will generate sufficient taxable profits in the future to
utilise these expenses and therefore no deferred tax asset has been
recognised. The unrecognised deferred tax asset calculated using a rate of 25%
(2021: 25%) amounts to £22,657,000 (2021: £19,500,000). The March 2021
Budget announced an increase to the main rate of corporation tax to 25% from
1st April 2023. This increase in the standard rate of corporation tax was
substantively enacted on 24th May 2021 and became effective from 2nd June
2021.
8 RETURN PER SHARE
YEAR ENDED YEAR ENDED
31 DECEMBER 31 DECEMBER
2022 2021
£'000 £'000
Revenue return after taxation (£'000s) 13,272 9,391
Capital (loss)/return after taxation (£'000s) (237,542) 231,047
Total net (loss)/return after tax (£'000s) (224,270) 240,438
Weighted average number of Ordinary Shares 303,853,145 285,059,568
Net return per Ordinary Share is based on the above totals of revenue and
capital and the weighted average number of Ordinary Shares in issue during
each year.
There is no dilution to return per share as the Company has only Ordinary
Shares in issue.
9 DIVIDENDS
(a) Dividends paid in the year
2022 2021
RATE £'000 RATE £'000
Interim in lieu of final for the previous year 1.50p 4,471 1.00p 2,734
First interim for the current year 1.50p 4,568 1.30p 3,767
3.00p 9,039 2.30p 6,501
(b) Dividends paid and payable in respect of the financial year, which is the
basis on which the requirements of s1158-1159 of the Corporation Tax Act 2010
are considered
2022 2021
RATE £'000 RATE £'000
First interim for the current year 1.50p 4,568 1.30p 3,767
Second interim in lieu of final for the current year 2.50p 7,604 1.50p 4,471
4.00p 12,172 2.80p 8,238
The Board declared two dividends in respect of the year and expects to
continue paying two dividends annually.
10 TRADE AND OTHER PAYABLES
2022 2021
£'000 £'000
Finance costs payable 133 98
Accrued management fees 1,601 2,730
Other accrued expenses 195 208
Total 1,929 3,036
11 BANK LOANS AND CREDIT FACILITY
On 6 September 2018, the Company entered into five-year fixed rate
multi-currency US$20 million and £15 million loans with Scotiabank Europe plc
("Scotiabank"). The loans expire on 6 September 2023.
The Company also has a £20 million multi-currency revolving credit facility
("RCF") with Scotiabank which was fully drawn in two currencies, US $12.2
million and £10 million throughout the year. The facility expires on 6
September 2023.
A summary of the Company's loans follows.
2022 2021
BANK LOANS-FIXED RATE INTEREST RATE LOAN CURRENCY AMOUNT £'000 LOAN CURRENCY AMOUNT £'000
Sterling 2.910% 15,000,000 15,000 15,000,000 15,000
Non-sterling 4.504% 20,000,000 16,531 20,000,000 14,777
31,531 29,777
RCF-FLOATING RATE
Sterling Six month SONIA +1.7% 10,000,000 10,000 10,000,000 10,000
Non-sterling Six month SOFR +1.7% 12,185,017 10,075 12,637,000 9,336
51,606 49,113
The maturity profile of the bank loans and credit facility as follows:
2022 2021
PAYABLE AT 31 DECEMBER £'000 £'000
Bank loans payable less than one year 31,531 -
Bank loans payable after more than one year - 29,777
Revolving credit facility payable less than one year 20,075 -
Revolving credit facility payable after more than one year - 19,336
51,606 49,113
The Company's loans and revolving credit facility contain the following
covenants, with which failure to comply could necessitate the early repayment
of the loan:
1) Adjusted asset coverage should not be less than 4:1.
2) Net Asset Value should not be less than £260,000,000.
3) The maximum permitted borrowing should not exceed that permitted
in the Company's Articles of Association as described in the Gearing section
of the Investment Policy.
12 SHARE CAPITAL
2022 2021
NUMBER £'000 NUMBER £'000
Issued and fully paid shares of 10p each
Brought forward 298,061,439 29,806 265,877,138 26,588
New shares issued in year 7,562,100 756 32,184,301 3,218
Shares bought back and held in treasury (3,119,400) (312) - -
Treasury shares issued in year 1,662,900 166 - -
Carried forward 304,167,039 30,416 298,061,439 29,806
Treasury shares of 10p each
Brought forward - - - -
Shares bought back and held in treasury 3,119,400 312
Issued in year (1,662,900) (166) - -
Carried forward 1,456,500 146 - -
Share capital 305,623,539 30,562 298,061,439 29,806
The Company received aggregate gross proceeds of £35,126,000 (2021:
£153,493,000) from the issue of shares and net proceeds of £34,918,000
(2021: £152,421,000) after issue costs of £208,000 (2021: £1,072,000).
During the year, the Company bought back a total of 3,119,400 Ordinary Shares
(2021: nil) held in treasury for a total cost of £12,887,000 after purchase
costs of £90,000. In addition, 1,662,900 Ordinary Shares (2021: Nil) have
been re-issued for net proceeds of £7,578,000 after reissue costs of
£91,000.
As at 27 March 2023, the latest practicable date before publication of this
report, 725,000 Ordinary Shares have been
bought back at a total cost of £3,244,000 after purchase costs of £23,000.
13 CAPITAL RESERVE
Realised capital reserve
2022 2021
£'000 £'000
Opening balance 423,068 299,251
Gains on disposal of investments 65,492 132,716
Net transaction costs (630) (412)
Net foreign exchange losses (2,778) (314)
Investment management fees charged to capital (7,258) (7,412)
Finance costs charged to capital (1,424) (1,103)
Special dividends received as capital 393 -
Taxation credit to capital 211 342
Balance at 31 December 477,074 423,068
Unrealised gains on investments
2022 2021
£'000 £'000
Unrealised gains brought forward 471,847 364,617
Unrealised (losses)/gains on investments held (291,548) 107,230
Unrealised gains carried forward 180,299 471,847
Capital reserve balance at 31 December 657,039 894,915
14 NET ASSET VALUE PER SHARE
2022 2021
Net asset value (£'000) £1,275,938 1,479,638
Shares in issue (excluding shares held in treasury) 304,167,039 298,061,439
Net asset value per share at 31 December 419.49p 496.42p
15 TRANSACTIONS WITH THE MANAGER AND RELATED PARTY TRANSACTIONS
Details of the management contract can be found in the Directors' Report. Fees
payable to the Manager are detailed in note 4. Since 1 January 2018, the
Manager has agreed to rebate commission which relates to research fees to the
Company with such amount disclosed in note 2.
The Directors' fees are disclosed in note 5 and the Directors' shareholdings
are disclosed in the Directors' Remuneration Implementation Report.
16 FINANCIAL RISK MANAGEMENT
As an investment trust, the Company invests in equities for the long-term so
as to enable investors to benefit from growth in the markets for cleaner or
more efficient delivery of basic services of energy, water and waste, as
stated in the Company's investment objective which can be found in the annual
report. In pursuing its investment objective, the Company is exposed to a
variety of risks that could result in either a reduction in the Company's net
assets or a reduction of the profits available for dividends. These risks
include market risk (comprising currency risk, interest rate risk, and other
price risk), credit risk and liquidity risk and the Directors' approach to the
management of them is set out below. These metrics are monitored by the AIFM.
The objectives, policies and processes for managing the risks, and the methods
used to measure the risks, are set out below.
Market risks
The potential market risks are (i) currency risk, (ii) interest rate risk, and
(iii) other price risk. Each is considered in turn below.
(i) Currency risk
The Company invests in global equity markets and therefore is exposed to
currency risk as it affects the value of the shares in the base currency.
These currency exposures are not hedged. The Manager monitors currency
exposure as part of its investment process. Currency exposures for the Company
as at 31 December 2022 are detailed in the table at the end of this note.
Currency sensitivity
The below table shows the strengthening/(weakening) of sterling against the
local currencies over the financial year for the Company's financial assets
and liabilities held at 31 December 2022.
2022 2021
%CHANGE(1) %CHANGE(1)
Australian Dollar (4.7%) 4.6%
Canadian Dollar (4.2%) (1.8%)
Danish Krone (4.9%) 6.0%
Euro (5.0%) 6.1%
Hong Kong Dollar (10.6%) (0.3%)
Indian Rupee (1.1%) 0.9%
Israeli Shekel 1.3% (4.6%)
Korean Won (5.4%) 7.7%
Norwegian Krone (0.5%) 1.7%
Swedish Krona 3.1% 8.3%
Swiss Franc (9.3%) 2.1%
Taiwanese Dollar (1.4%) (2.3%)
US Dollar (10.7%) (0.9%)
1 Percentage change of Sterling against local currency from
1 January to 31 December.
Based on the financial assets and liabilities at 31 December 2022 and all
other things being equal, if sterling had weakened by 10%, the profit after
taxation for the year ended 31 December 2022 and the Company's net assets at
31 December 2022 would have increased by the amounts shown in the table
below. If sterling had strengthened by 10% this would have had the opposite
effect.
2022 2021
POTENTIAL POTENTIAL
EFFECT EFFECT
£'000 £'000
Australian Dollar 3,335 3,127
Canadian Dollar 5,606 6,925
Danish Krone 2,777 2,595
Euro 25,237 23,141
Hong Kong Dollar 1,955 3,017
Indian Rupee 2,249 2,492
Israeli Shekel 461 537
Korean Won 1,486 2,067
Norwegian Krone 2,336 4,706
Swedish Krona 2,135 3,052
Swiss Franc 5,655 4,751
Taiwanese Dollar 6,451 8,475
US Dollar 59,587 71,532
Total 119,270 136,417
(ii) Interest rate risk
The Company is typically fully invested in global equities but will from time
to time hold interest bearing assets. These assets are cash balances that earn
interest at a floating rate and, typically, UK Treasury Bills when large
amounts of cash are held.
With the exception of cash, no significant interest rate risks arise in
respect of any current asset. The Company, generally, does not hold
significant cash balances, with short-term borrowings being used when
required. Cash held as a current asset is sterling and is held at the variable
interest rates of the custodian. Movement in interest rates will not
materially affect the Company's income and as such no sensitivity analysis is
required.
The Company had two bank loans in place during the year. The loan interest on
the current loans is based on a fixed rate as such no sensitivity analysis is
required.
The Company's £20 million multi-currency revolving credit facility is based
on a floating reference interest rate plus a margin of 1.70% per annum. If
interest rates had increased or decreased by 350 basis points, which is
regarded as reasonable based upon interest rate movements observed during the
year, the impact to the Company's profit or loss would be:
2022 2021
PROFIT OR LOSS £'000 PROFIT OR LOSS £'000
350 BPS 350 BPS 25 BPS 25 BPS
INCREASE DECREASE INCREASE DECREASE
31 December
Non-sterling Revolving Credit Facility (353) 353 (23) 23
Sterling Revolving Credit Facility (350) 350 (25) 25
(iii) Other price risk
The principal price risk for the Company is the price volatility of shares
that are owned by the Company. The Company is well diversified across
different sub-sectors and geographies and has a volatility level similar to
global stock market indices such as the MSCI ACWI Index to which the Company
has had an annualised tracking error of 6.8% (2021: 6.4%) over the ten year
period to 31 December 2022. The historic 3-year (annualised) volatility of the
Company to 31 December 2022 is 19.9% (2021: 16.6%).
At the year end the Company held investments with an aggregate market value of
£1,302,605,000 (2021: £1,503,750,000). All other things being equal, the
effect of a 10% increase or decrease in the share prices of the investments
held at the year end would have been an increase or decrease of £130,260,500
(2021: £150,375,000) in the profit after taxation for the year ended 31
December 2022 and the Company's net assets at 31 December 2022.
Overall sensitivity
The Manager has used the Parametric VaR to calculate value at risk ('VAR').
This model has been used to estimate the maximum expected loss from the
portfolio held at 31 December 2022 over 1 day, 5 day, 10 day and 21 day
periods given the historical performance of the fund over the previous five
years. The data in the previous five years is analysed under discrete periods
to provide 1 in 10, 1 in 20 and 1 in 100 possible outcomes. The results of the
analysis are shown below.
2022 2021
EXPECTED AS PERCENTAGE EXPECTED AS PERCENTAGE
AT LIMIT AT LIMIT
1 IN 20 1 IN 100 1 IN 20 1 IN 100
(95%) (99%) (95%) (99%)
1 day return 1.87 2.64 1.46 2.07
5 day return 4.18 5.91 3.27 4.63
10 day return 5.90 8.35 4.63 6.54
21 day return 8.76 12.39 6.86 9.70
The above analysis has been based on the following main assumptions:
· The distribution of share price returns will be the same in
the future as they were in the past.
· The portfolio weightings will remain as they were at 31
December 2022.
The above results suggest, for example, that there is a 5% or less chance of
the NAV falling by 4.18% or more over a 5 day period. Similarly, there is a 1%
or less chance of the NAV falling by 2.64% or more on any given day.
Credit risks
BNP Paribas Securities Services (the 'Depositary') has been appointed as
custodian and depositary to the Company.
Cash at bank at 31 December 2022 included £25,835,000 (2021: £27,887,000)
held in its bank accounts at the Depositary. The Company also held £492,000
(2021: £432,000) in its accounts with NatWest Group plc. The Board has
established guidelines that, under normal circumstances, the maximum level of
cash to be held at any one bank should be the lower of i) 5% of the Company's
net assets and ii) £30 million. These are guidelines and there may be
instances when this amount is exceeded for short periods of time.
Substantially all of the assets of the Company at the year end were held by
the Depositary or sub-custodians of the Depositary. Bankruptcy or insolvency
of the Depositary may cause the Company's rights with respect to securities
held by the Depositary to be delayed or limited. The Depositary segregates the
Company's assets from its own assets and only uses sub-custodians on its
approved list of sub-custodians. At the year end, the Depository held
£1,302,605,000 (2021: £1,503,168,000) in respect of quoted investments.
The credit rating of the Depositary, which is a Fitch rating of A+, was
reviewed at the time of appointment and is reviewed on a regular basis by the
Manager and/or the Board.
Credit risk arising on transactions with brokers relates to transactions
awaiting settlement. Risk relating to unsettled transactions is considered to
be low as trading is almost always done on a delivery versus payment basis.
There is credit risk on dividends receivable during the time between
recognition of the income entitlement and actual receipt of dividend.
Liquidity risks
The Company invests in a range of global equities with different market
capitalisations and liquidities and therefore needs to be conscious of
liquidity risk. The Manager monitors the liquidity risk by carrying out a
'Maturity Analysis' of the Company's listed equities based on the 3 Month
Average Liquidities of each investment and assuming 15% of the daily traded
volume.
Quantitative disclosures
The results of the Managers maturity analysis at 31 December 2022 are reported
in the following table as a percentage of the portfolio that could be
liquidated over different time periods. On 31 December 2022, 2.59%
(2021: 2.37%) of the portfolio by value (excluding unquoted investments)
might have taken more than three months to be realised.
2022 2021
Percentage of portfolio by value that could be liquidated in one week 65.9 64.5
Percentage of portfolio by value that could be liquidated in one month 92.4 92.1
Percentage of portfolio by value that could be liquidated in three months 97.4 97.6
Percentage of portfolio by value that could be liquidated in one year 98.9 98.6
The Company may invest up to 10% of its net assets into pre-IPO investments
which are possible candidates for flotation.
Liquidity risk
This is the risk that the Company will encounter difficulty in meeting its
obligations for financial liabilities as they fall due. This risk is minimised
because a majority of the Company's investments are in readily realisable
securities which can be sold to meet funding commitments. The maturity profile
analysis of the Company's financial liabilities is shown below. The Company
does not have derivative financial liabilities and the amounts shown are
undiscounted.
Financial liabilities by maturity at the year end are shown below on an
undiscounted basis:
2022 2021
WITHIN WITHIN
WITHIN 1 YEAR 1-3 YEARS TOTAL WITHIN 1 YEAR 1-3 YEARS TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Bank loans 31,531 - 31,531 - 29,777 29,777
Revolving credit facility 20,075 - 20,075 - 19,336 19,336
Interest cash flows on bank loans 887 - 887 1,102 827 1,929
Interest cash flows on revolving credit facility 794 - 794 401 304 705
Cash flows on other creditors 1,796 - 1,796 2,938 - 2,938
55,083 - 55,083 4,441 50,244 54,685
Financial assets and liabilities
All liabilities carrying amount approximates fair value.
The Company's financial assets and liabilities at 31 December 2022 comprised:
2022 2021
INTEREST NON-INTEREST INTEREST NON-INTEREST
BEARING BEARING TOTAL BEARING BEARING TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Investments
Australian Dollar - 33,347 33,347 - 31,273 31,273
Canadian Dollar - 55,901 55,901 - 69,087 69,087
Danish Krone - 27,769 27,769 - 25,948 25,948
Euro - 252,369 252,369 - 231,414 231,414
Hong Kong Dollar - 19,548 19,548 - 30,167 30,167
Indian Rupee - 23,074 23,074 - 25,496 25,496
Israeli Schekel - 4,608 4,608 - 5,370 5,370
Korean Won - 14,856 14,856 - 20,673 20,673
Norwegian Krone - 23,356 23,356 - 47,060 47,060
Sterling - 88,985 88,985 - 118,644 118,644
Swedish Krona - 21,346 21,346 - 30,524 30,524
Swiss Franc - 56,551 56,551 - 47,512 47,512
Taiwanese Dollar - 64,511 64,511 - 84,747 84,747
US Dollar - 616,384 616,384 - 735,835 735,835
- 1,302,605 1,302,605 - 1,503,750 1,503,750
Other assets and liabilities
Cash and cash equivalents
Sterling 23,705 - 23,705 24,722 - 24,722
Canadian Dollar - - - 97 - 97
Taiwanese Dollar 14 - 14 - - -
US Dollar 2,608 - 2,608 3,500 - 3,500
26,327 - 26,327 28,319 - 28,319
Short term net (creditors)/debtors
Sterling (25,000) (1,588) (26,588) - (2,918) (2,918)
Canadian Dollar - 68 68 - 60 60
US Dollar (26,606) 211 (26,395) - 96 96
(51,606) (1,309) (52,915) - (2,762) (2,762)
Long term creditors
Sterling - - - (25,000) - (25,000)
US Dollar - - - (24,113) - (24,113)
- - - (49,113) - (49,113)
Total (25,279) 1,301,296 1,276,017 (20,794) 1,500,988 1,480,194
Capital management
The Company considers its capital to consist of its share capital of Ordinary
Shares of 10p each, its distributable reserves and its borrowings.
At 31 December 2022 there were 305,623,539 Ordinary Shares in issue (2021:
298,061,439) of which 1,456,500 Ordinary Shares were held in treasury (2021:
nil).
The Company has a stated premium/discount control policy. The Manager and the
Company's broker monitor the demand for the Company's shares and the Directors
review the position at Board meetings. Further details on share issues and buy
backs during the year and the Company's policies for issuing further shares
and buying back shares (including the Company's premium/discount control
policy) can be found in the Directors' Report.
The Company's policy on borrowings is detailed in the Directors' Report.
Alternative Performance Measures (APMs)
APMs are often used to describe the performance of investment companies
although they are not specifically defined under FRS 102. The Directors assess
the Company's performance against a range of criteria which are viewed as
relevant to both the Company and its market sector. APM calculations for the
Company are shown below.
GEARING
A way to magnify income and capital returns, but which can also magnify
losses. A bank loan is a common method of gearing.
AT 31 DECEMBER 2022 2021
Total assets less cash/cash equivalents (£'000) a 1,303,315 1,504,047
Net assets (£'000) b 1,275,938 1,479,638
Gearing (net) (a÷b)-1 2.1% 1.6%
LEVERAGE
Under the Alternative Investment Fund Managers Directive ("AIFMD"), leverage
is any method by which the exposure of an Alternative Investment Fund ("AIF")
is increased through borrowing of cash or securities or leverage embedded in
derivative positions.
Under AIFMD, leverage is broadly similar to gearing, but is expressed as a
ratio between the assets (excluding borrowings) and the net assets (after
taking account of borrowing). Under the gross method, exposure represents the
sum of the Company's positions after deduction of cash balances, without
taking account of any hedging or netting arrangements. Under the commitment
method, exposure is calculated without the deduction of cash balances and
after certain hedging and netting positions are offset against each other.
ONGOING CHARGES
A measure, expressed as a percentage of the average daily net asset values
during the year, of the regular, recurring annual costs of running an
investment company.
YEAR END 31 DECEMBER 2022 2021
Average NAV (£'000) a 1,321,438 1,324,967
Investment Management fees (£'000) b 9,678 9,883
Other expenses (£'000) c 1,037 1,360
(b+c)÷a 0.81% 0.85%
PREMIUM/(DISCOUNT)
The amount, expressed as a percentage, by which the share price is more/(less)
than the Net Asset Value per Ordinary Share.
AT 31 DECEMBER 2022 2021
NAV per Ordinary Share (p) a 419.49 496.42
Share price (p) b 419.50 547.00
Premium/(discount) (b÷a)-1 0.0% 10.2%
TOTAL RETURN
A measure of performance that includes both income and capital returns. This
takes into account capital gains and reinvestment of dividends paid out by the
Company into its Ordinary Shares on the ex-dividend date.
SHARE
YEAR ENDED 31 DECEMBER 2022 PRICE NAV
Opening at 1 January 2022 (p) a 547.00 496.42
Closing at 31 December 2022 (p) b 419.50 419.49
Dividend/income adjustment factor(1) c 1.0066 1.0059
Adjusted closing (d = b x c) d 422.28 421.96
Total return (d÷a)-1 (22.8)% (15.0)%
SHARE
YEAR ENDED 31 DECEMBER 2021 PRICE NAV
Opening at 1 January 2021 (p) a 422.50 411.20
Closing at 31 December 2021 (p) b 547.00 496.42
Dividend/income adjustment factor(1) c 1.0049 1.0048
Adjusted closing (d = b x c) d 549.67 498.79
Total return (d÷a)-1 30.1% 21.3%
1. The dividend adjustment factor is calculated on the assumption that
dividends paid out by the Company are reinvested into the shares of the
Company at NAV at the ex-dividend date.
FINANCIAL INFORMATION
This announcement does not constitute the Company's statutory accounts. The
financial information for the year to 31 December 2022 is derived from the
statutory accounts for 2022, which will be delivered to the Registrar of
Companies. The auditor has reported on the 2022 accounts; their report was
unqualified and did not include a statement under Section 498(2) or (3) of the
Companies Act 2006.
The Annual Report for the year ended 31 December 2022 was approved on 31 March
2023. It will be made available on the Company's website at
www.impaxenvironmentalmarkets.co.uk.
The Annual Report will be submitted to the National Storage Mechanism and will
shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
This announcement contains regulated information under the Disclosure Guidance
and Transparency Rules of the FCA.
For further information contact:
Impax Asset Management p.french@impaxam.com
Paul French 0203 912 3032
Montfort Communications iem@montfort.london
Gay Collins/Nita Shah/Lesley Wang 07798 626282
Apex Listed Companies Services (UK) Limited 020 3327 9720
Company Secretary
END
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