REG - Impax Environ Mkts - Annual Financial Report
11/04/2024 07:00
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RNS Number : 1108K Impax Environmental Markets PLC 11 April 2024
LEI: 213800RAR6ZDJLZDND86
IMPAX ENVIRONMENTAL MARKETS PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDING
31 DECEMBER 2023
London 11 April 2024. Impax Environmental Markets plc (LSE: IEM) (the
"Company" or "IEM") the UK's largest environmental investment trust investing
in the transition to a more sustainable economy, today announced its final
results for the year ended 31 December 2023.
Highlights of Results:
Net asset value ("NAV") per ordinary share of 434.3p, up from 419.5p
NAV total return increase of 4.5%
Net assets of £1,221m, down from £1,276m
Ordinary Share price of 400.0p, down from 419.5p
Share price total return decrease of 3.7%
6% increase in net revenue return of £14.4 m (£13.3m)
Total dividend paid in 2023 of 4.6p per ordinary share, a 15% increase (4.0p)
Glen Suarez, Chairman of Impax Environmental Markets comments: "IEM provides
shareholders with a financial return generated from exposure to an exciting
growth story - innovative solutions to environmental challenges or improving
resource efficiency.
"The hypothesis underpinning IEM's investment strategy is that companies
providing solutions for the world's most pressing environmental challenges,
across a diverse range of end markets, will deliver financial outperformance.
There are many drivers for this, some of which are regulatory, and others
which result from changing customer preferences and social factors. In many
cases, our portfolio companies are providing solutions that are cost effective
and technically better than the less sustainable alternatives they are
replacing. In short, I believe that prospects for the Company are stronger
today than they have ever been.
"I was delighted to take up the role of Chairman following last year's AGM,
and would like to thank my predecessor as Chairman, John Scott, and Board
member Vicky Hastings for the services they provided to the Company and to
shareholders over the past ten years. Since my tenure began, we welcomed Guy
Walker to the Board, with Elizabeth Surkovic joining us at the beginning of
2024. Together with our fellow Board members, we maintain a focus on
performance and generating positive returns for our shareholders."
Jon Forster, co-portfolio manager of IEM, comments: "IEM is founded on the
belief that amid rising environmental challenges, companies enabling the
cleaner and more efficient delivery of basic needs - such as power, water and
food, or mitigating environmental risks like pollution, and climate change -
will grow earnings faster than the global economy over the long-term. This
basic investment thesis remains firmly intact.
"Markets provided a challenging backdrop for performance in 2023. Elevated
economic uncertainty, persistent high inflation and interest rates led to weak
performance in the "mid and small cap" and "growth" companies that are IEM's
core focus. A narrow breadth of strong performance in MSCI ACWI by the
so-called "Magnificent 7" mega cap technology stocks created headwinds to the
Company's relative performance. Despite strong performance in some
Environmental Markets, a few sectors suffered from temporary headwinds, which
are detailed in the annual report.
"Compelling valuations were a key driver in the decision to refinance and
increase gearing, with the upside potential more than sufficient to compensate
for an increase in the overall cost of debt. Looking forward, we remain
positive, based on the more favourable market outlook for mid and small caps,
the strong long-term drivers of Environmental Markets and the attractive
portfolio valuation."
Contact:
Montfort Communications
iem@montfort.london
Gay Collins/Nita Shah
+44(0)7798 626282
IEM at a Glance
IEM Overview
Impax Environmental Markets plc ("IEM" or the "Company") is founded on the
belief that, with insatiable demand for higher living standards on a finite
planet, companies enabling the cleaner and more efficient delivery of basic
needs - such as power, water and food - or mitigating environmental risks like
pollution and climate change, will grow earnings faster than the global
economy over the long‑term.
IEM provides its shareholders with exposure to this exciting growth story. The
Company invests in a well-researched and diversified portfolio of
fast-growing, globally-listed companies providing innovative solutions to
environmental challenges or improving resource efficiency. IEM's investment
opportunity set is also likely to expand rapidly as regulation, technological
innovation, and consumer preferences accelerate demand for sustainable
solutions. The Board believes this approach can deliver superior
risk-adjusted returns over the long-term.
IEM has recently experienced a period of weaker performance as a result of
sharply rising interest rates and economic uncertainty. However, the
underlying earnings of IEM's portfolio companies remain robust with excellent
prospects for growth. As the shift to a more sustainable economy accelerates,
IEM should benefit from many positive trends, including requirements for
countries to improve energy security, the drive by thousands of companies to
achieve "net zero" targets, and regulations such as the US Inflation
Reduction Act, which support US domestic manufacturing in emerging industries.
The Manager
The Manager of IEM, Impax Asset Management (AIFM) Limited (the "Manager", or
"Impax"), uses a proprietary classification system to define these higher
growth markets. This approach has been in place since IEM was founded in 2002
and is curated by a dedicated Impax team.
As of today, the system identifies six sectors: Energy, Clean and efficient
transport, Water, Circular economy, Smart environment and Sustainable food.
The range of activities included has naturally grown as technologies advance
and more industries look to address material environmental challenges.
To qualify for IEM's investable universe, a company must derive at least 50%
of its revenues from these Environmental Markets. As a result, IEM's
investments are predominantly in small and medium-sized companies, which tend
to focus their business models on fewer activities.
The Manager then follows a rigorous, performance-focused process based on
bottom-up research to invest in proven and profitable companies. The breadth
of the Environmental Markets opportunity set enables Impax to create a
diversified portfolio spanning traditional sector boundaries. Once a company
is purchased, its share price is continually monitored within the context of a
live 'valuation range' which incorporates worst and best-case assumptions.
The Manager also maintains an active dialogue with executive management. Doing
so is an important part of the investment process, and helps promote greater
transparency around ESG and sustainability issues. Engagement outcomes,
company valuations, as well as portfolio risk metrics and the macro-outlook,
all inform buy and sell decisions.
The Portfolio
The IEM portfolio is built with a focus on financial returns, and its
long-term performance against global equity markets remains compelling.
Reflecting this, the investment managers are personally invested in the
Company. Two of IEM's three co-portfolio managers - Bruce Jenkyn-Jones and Jon
Forster - have worked together since its launch in 2002, while Fotis
Chatzimichalakis has worked on IEM since 2015. IEM also benefits from
competitive fees and a committed Board, which in 2023 authorised the Manager
to increase gearing to reflect the high conviction and low valuations across
the portfolio. Since IEM's shares began to trade at a discount in 2022, the
Board has bought back shares at a steady rate. All buybacks were accretive to
the Company.
Additionally, by focusing on Environmental Markets, the portfolio generates
outcomes beyond financial returns. Annually, for each £10m invested, enough
clean, renewable energy is generated to power 360 homes and the equivalent of
1,410 households' water consumption and 240 tonnes of domestic waste are
saved. In addition, whilst the Manager does not target them in the investment
process, 84% of revenues generated by portfolio companies were covered by
United Nations sustainable development goals in 2023.
Investment Objective
The investment objective of Impax Environmental Markets plc 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 2023 2023 2022
Net asset value ("NAV") per ordinary share with debt at bookcost 434.9p 419.5p
NAV per ordinary share with debt at fair value(1,2)
434.3p 419.5p
Ordinary share price discount to NAV(2, 3) 7.9% 0.0%
Ordinary share price 400.0p 419.5p
Ongoing charges (2,3) 0.83% 0.81%
Net assets £1,221m £1,276m
Performance Summary(4)
For the year ended 31 December 2023 2023 2022
% change
NAV total return per ordinary share(2,3) 4.5% (15.0%)
Share price total return per ordinary share(2) -3.7% (22.8%)
Comparator Benchmarks
MSCI AC World index(5) 15.3% (8.1%)
FTSE ET100 index(5) 18.3% (20.1%)
1 For 31 December 2022 and before, the NAV with debt at fair
value approximated to the NAV with debt at bookcost. Consequently only one NAV
was reported.
2 These are alternative performance measures.
3 With debt at fair value.
4 Total returns in sterling for the year to 31 December.
5 Source: Bloomberg and FactSet.
Alternative performance measures ("APMs")
The disclosures as indicated in footnote 2 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 on pages 97 and 98 of the annual report.
STRATEGIC REPORT
Chairman's Statement
Dear Shareholder
I took over as Chairman of the Company at last year's AGM so this is my first
full year as Chairman. I thought it would be helpful to restate the case for
investing in the Company after the past two difficult years. In short,
I believe with the Manager that prospects for the Company are stronger today
than they have ever been.
Impax Environmental Markets plc seeks to achieve sustainable, above-market
returns over the longer-term by investing globally in companies that are
developing innovative solutions to the resource challenges that we face.
The portfolio of global equities is diversified. While just under 50% of
holdings are listed in the US, the Company also has exposure to Europe (24%),
the UK (9%) and India (3%). These investments are across a broad range of
sectors as detailed in the annual report on page 24.
The Company's portfolio in 2023 underperformed the broader equity markets.
Such periods of short term underperformance are not unusual given the nature
of IEM's investment philosophy and approach, particularly in periods of rising
interest rates. This is discussed further in the Manager's Report. However,
history shows that, in the long-term, what matters most for shareholder
returns is growth in earnings of the portfolio's companies - and given the
nature of investee companies' profitability and expected revenue growth the
Manager strongly believes that there is significant potential for the Company
to generate very attractive returns for shareholders in the future.
The Investment Case
The hypothesis underpinning IEM's investment strategy is that companies
providing solutions for the world's most pressing environmental challenges,
across a diverse range of end markets, will deliver financial outperformance.
There are many drivers for this, some of which are regulatory, and others
which result from changing customer preferences and social factors. In many
cases, our portfolio companies are providing solutions that are cost effective
and technically better than the less-sustainable alternatives they are
replacing.
Renewable energy is a case in point. Improvements in technology, economies of
scale and greater experience in building, operating and maintaining renewable
energy systems mean that the costs of wind and solar power generation have
fallen dramatically in recent years. They are now the cheapest sources of
new-build electricity generation in the vast majority of the world, according
to Bloomberg New Energy Finance.(1) In more than half of the world, new wind
and solar plants are cheaper than existing fossil fuel power generation
sources. In these areas, it costs less to build new renewables facilities than
it does to cover the operating costs of coal- and gas-fired plants that have
already been built. Regardless of their contribution to reducing carbon
emissions and the reduction of local air pollution, renewables increasingly
make sense in pure economic terms, presenting an attractive long-term
investment opportunity for investors like IEM. The UK, with its extensive
offshore resources, is potentially one of the biggest beneficiaries of this
with significant potential for exports.
Similar cost reductions are underway in battery technologies that can help to
address the challenge of intermittent output from wind and solar facilities.
Wind and solar plants can improve their reliability by using batteries to
store and sell excess power during periods of high demand. Batteries are
already providing valuable - and often lucrative - grid‑balancing services,
and can help ease bottlenecks in electricity distribution networks, deferring
or avoiding costly upgrades. Again, this is creating enormous demand. The
International Energy Agency is forecasting a 75% growth in investment in
battery energy storage from 2022 to 2023, to $35 billion; under its net-zero
scenario, it sees the market growing 35-fold by 2030.(2)
1
https://rmi.org/wp-content/uploads/dlm_uploads/2023/07/rmi_x_change_electricity_2023.pdf.
2
https://www.iea.org/energy-system/electricity/grid-scale-storage.
Then there is the global food system, which produces around a third of
greenhouse gas emissions.(1) It also consumes millions of tonnes of chemical
fertilisers and pesticides and causes 80% of deforestation. Not only is there
a clear environmental case for more sustainable agriculture, there is also a
compelling business case. Precision agriculture, using satellite imaging and
artificial intelligence, can help farmers precisely plan planting, irrigation,
and fertiliser and pesticide use. It can cut the use of costly inputs and
increase yields and quality, thus boosting profitability whilst cutting
agriculture's environmental impacts. Companies providing these services
present a clear growth opportunity.
Beyond this, the revolution in AI is likely to be one of the big drivers of
profit growth in portfolio companies in which we invest. As it currently
stands, 8% of the Company's portfolio is invested in stocks which are likely
to benefit from the AI revolution. This is discussed further in the Manager's
Report.
As the global debate around greenhouse gas emissions evolves, it is important
to highlight that the IEM portfolio will have some exposure to fossil fuels.
The Board feels that, within IEM's mandate, a modest amount of such exposure
is acceptable, but only where an investee company is making a contribution to
a reduction in pollutants and has a credible plan to transition away from
fossil fuels.
Performance
The growth in the Company is the result of robust performance over the
longer-term. However, the past two years of challenging macroeconomic
conditions have reversed some of these gains.
For the year ended 31 December 2023, the Company's net asset value returned
4.5%, underperforming both its global equities comparator index (the MSCI All
Country World Index, "MSCI ACWI") return of 15.3%, and its environmental
markets comparator index (the FTSE Environmental Technology 100 Index, "FTSE
ET100" return of 18.3%.
The share price total return decreased by 3.7%. This reflected the widening of
the Company's discount during the year by 8% as discussed below in the Premium
and Discount Control section.
In any investment strategy, periods of underperformance are to be expected.
Since early 2022, central banks have been aggressively increasing interest
rates to fight inflation. IEM looks to invest in smaller companies which are
growing. Higher interest rates have a two-fold effect. First, they increase
the discount rate applied to future earnings. This lowers the premium afforded
to 'growth' companies relative to slower-growing companies already producing
substantial cash earnings. Second, these small and growing businesses often
borrow to help fund that growth. As interest rates rise, so too does their
cost of debt. While IEM looks to avoid stocks with excessive debt burdens,
markets have reacted to higher rates indiscriminately, selling first and
asking questions later.
These headwinds overwhelm the tailwind of strong earnings growth in the short
term. However, the sharp pullback in valuations seen across these areas more
than corrects for some of the premiums reached in preceding years. Moreover,
inflation has fallen substantially around the world, and markets are pricing
in the likelihood of interest rates plateauing and may soon begin to fall.
Dividend
IEM's net revenue return for the year was £14.4 million, compared with £13.3
million in 2022.
IEM's dividend policy, as approved by shareholders at the May 2023 AGM, is to
declare two dividends each year. On 28 July 2023, the Board announced a first
interim dividend for this financial year of 1.7 pence per share, which was
paid on 1 September. The second interim dividend of 2.9 pence per share was
declared on 2 February 2024 and paid on 15 March 2024. The total dividend per
share paid for 2023 is therefore 4.6 pence per share, an increase of 15% on
the 4.0 pence paid in respect of 2022.
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. The Board does not expect dividends to form a significant
proportion of total return in the near future.
Gearing
The Board and Manager believe that gearing, or the ability to borrow capital
to invest, is an attractive feature of investment trusts and can enhance
long-term performance. In 2014, when the gearing facility was put in place,
the Board and Manager agreed the Company could borrow up to 10% of net assets.
On 6 September 2023 the existing five year £50.3 million facilities with
Scotiabank came up for renewal which, due to IEM's growth, represented net
gearing of only 3% at that time.
As discussed in the Half-yearly Report, the Board, after extensive discussions
with the Manager, based in part on compelling portfolio valuation, decided to
put in place a mix of structural fixed and floating rate debt which had a mix
of maturity dates and interest rates, alongside a new two-year Scotiabank
facility. The Company accordingly placed €60 million of privately placed
notes ("Notes") with Pricoa Private Capital (part of PGIM, Inc), which were
predominantly used to repay the pre-existing Scotiabank debt facilities. It
also put in place a new £80.35 million
facility with Scotiabank - a two-year multi-currency revolving credit
facility, floating at reference rate plus 1.6% of which was fully drawn down
in Euros (€40.9 million) in September 2023. The Scotiabank facility includes
provision for an additional £45 million drawings as an uncommitted
"accordion", with final availability subject to approval by
Scotiabank. The Notes documentation provides scope for US $59.834 million
additional note issuance.
The Notes break down is set out below:
Principal
amount Maturity Interest rate
€20m 7y Floating: 6m EURIBOR +1.35%
€30m 10y Fixed: 4.48%
€10m 12y Fixed: 4.63%
As a consequence of the Company's change to borrowings as set out above, at
the close of the year the Company's net gearing was 6.2%. This was higher than
the 2.1% of net gearing at year end 2022. In summary, total year end
borrowings have a weighted maturity of 6.4 years and a mix of 40% fixed and
60% floating interest rate debt.
Premium and Discount Control
The premium or discount at which the shares trade to the underlying NAV is
actively monitored by the Board and the Company's corporate brokers.
At 31 December 2023, the Company's shares traded at a discount to net asset
value ("NAV") with debt at fair value of 7.9%. At the previous year end,
shares were trading at NAV with no discount or premium. During the year the
shares traded between a premium to NAV of 1.3% and a discount of 10.4% with an
average of 5.1%.
In the first half of 2023, the shares continued to trade close to NAV, but the
discount widened in the second half as investors withdrew from the UK market.
This affected almost all investment trusts in the UK market. During the
year, the Company bought back some 23.1 million shares, representing 7.3% of
the issued share capital at the start of the year. The Board will continue to
exercise its authority to buyback or issue shares depending on the
circumstances in the interests of shareholders.
Following this year's buybacks, there were 281.1 million shares in issue at
the year end (2022: 304.2 million) with 24.5 million (2022: 1.4 million)
shares held in treasury.
The Manager
In Impax, the Company has an investment management firm which has a long and
successful track record. It has been investing in Environmental Markets for 26
years. As it has grown, Impax has recruited strategically to increase the
breadth and depth of its knowledge and capabilities as a firm. This includes
analysts who are experts in their sector. A more detailed explanation of the
Manager's investment process and philosophy is set out on pages 26 to 28 of
the annual report.
The Board undertakes both an ongoing and formal annual review of the
investment and other performance metrics of the Manager, and believes that it
is in the best interests of shareholders to continue with the Manager.
Fees
Following discussions with the Manager, the Board is pleased to announce the
addition of a new tier to the fee structure. From 1 January 2024, assets under
management in the Company of over £1.4 billion will have a fee of 0.45% pa.
The complete fee structure is outlined below.
IEM's Fee Structure - per annum
Up to £475m NAV 0.90%
Between £475m and below £1.4bn NAV 0.65%
Above £1.4b NAV 0.45%
The Board
As previously mentioned, I took over as Chairman following the AGM in May
2023.
I would like to thank my predecessor as Chairman, John Scott, as well as Vicky
Hastings for the services that they provided to the Company and to
shareholders over the past 10 years.
In May 2023, we welcomed Guy Walker to the Board. He brings a wealth of
market, industry knowledge and experience. We also welcomed Elizabeth Surkovic
to the Board at the beginning of 2024. She has worked in environmental policy
making and regulation in the private and public sectors. Details of their
resumes are set out on in the annual report on pages 52 and 53.
I would like to thank my fellow directors for the time contribution and the
judgement they have brought to bear on the issues affecting the Company this
year.
Board Diversity
The Board recognises the importance and value of diversity on the Board. I am
pleased to report that the Board meets the FCA Listing Rules targets on gender
diversity, female representation in a senior role, and ethnic representation
on the Board.
Annual General Meeting ("AGM")
This year's annual general meeting will be held at 7th Floor, 30 Panton
Street, London, SW1Y 4AJ on 20 May 2024 at 3.00pm. Shareholders are being
asked to approve two additional special resolutions this year: the adoption of
new articles of association and the cancellation of the share premium account.
Further information on these two items of business can be found on pages 105
to 107 of the annual report.
We are pleased to invite shareholders to attend the AGM in person to meet the
Board and the 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 16 May 2024, 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 by 3.00pm on 17 May 2024. IEM's
website at www.impaxenvironmentalmarkets.co.uk can be used to access more
insights and also subscribe for regular communications.
Outlook
Higher interest rates have led many investors to sour on the environmental
markets theme as part of the wider 'risk‑off' mood that has weighed on
sentiment towards smaller companies more broadly. With interest rates set to
head downwards, the Board and the Manager are confident that this sentiment
will similarly change direction. In the meantime, the shares of many companies
in IEM's investment universe have been substantially derated by the market.
This can create valuable opportunities for an investment manager with
long-term horizons.
The Company's investment hypothesis remains firmly in place. Across the
end-markets that it addresses, policy and regulation continue to put growing
pressure on companies to emit less carbon, become more energy efficient,
produce less waste and reduce their impacts on the natural environment.
Consumer preferences are also moving towards more sustainable products and
services, at competitive price points.
This emphasis on cost-competitiveness is fundamental to successful investing
in environmental markets. IEM seeks well-managed, disciplined companies that
combine a focus on sustainability with economically profitable business
propositions and with attractive investment upside. Such companies will
deliver financial outperformance. As Chairman, I will maintain a relentless
focus on that performance, and challenge the Manager to ensure we generate
positive investment returns for our shareholders over the long-term.
Glen Suarez, Chairman
10 April 2024
Manager's Report
Global Equities in 2023
Markets provided a challenging backdrop for performance in 2023. Investor
sentiment was dominated by expectations around inflation, rising interest
rates and their potential impact on the real economy. Alongside macroeconomic
uncertainty, increasing geopolitical risk also drove more defensive
positioning. Lastly, widespread enthusiasm for Artificial Intelligence ("AI")
concentrated performance in a handful of mega-cap technology names. As a
result, equity markets delivered positive, albeit volatile returns.
Equity markets once again remained in thrall to central banks. Focused mainly
on the US Federal Reserve ("Fed"), investors swung sharply between optimism
that the interest rate cycle was peaking and concern that central banks would
raise rates too far. Having appeared to accept fully the prospect of "higher
for longer" rates in October, lower US Consumer Price Index data and resilient
economic activity in November prompted a strong year-end rally. Expectations
are now for a soft economic landing and multiple rate cuts through 2024.
A higher cost of capital weighed on some key areas of portfolio exposure.
Sectors exposed to long duration financing, such as Independent Power
Producers and Solar Energy, faced some of the biggest headwinds. Fears of an
economic slowdown also hampered sectors with more cyclical characteristics
such as Industrials and Materials, to which the Company has significant
exposure. Smaller companies, which are perceived to be more geared towards the
economic cycle, also meaningfully underperformed larger ones. These smaller
companies make up around 83% of the portfolio and have contributed to a
notable derating in the portfolio's valuation premium.
Investors have also taken more defensive positions because of geopolitical
uncertainty.(1) Although Russia's invasion of Ukraine has largely ceased to
drive up inflation, the conflict remains a source of tension. Similarly,
diplomatic tensions between the US and China continue to have read-across to
globally important sectors such as semiconductor manufacturing. More recently,
October's attack by Hamas on Israel, and subsequent fighting in Gaza, have led
to an escalation of tensions across the Middle East. The initial spike in oil
prices subsided rapidly, but with some trade ships now avoiding the Red Sea -
driving up prices and journey times - there is clear inflationary potential
should the conflict spiral further.
The extent of these challenges partly explains why positive equity returns
this year have been concentrated in a handful of stocks. However, the public
launch of Chat-GPT also spurred a wave of enthusiasm for companies with
AI exposure. Having fallen dramatically in 2022, shares in the so-called
"Magnificent Seven" (Microsoft, Amazon, Nvidia, Alphabet, Meta, Apple and
Tesla) delivered around half of the MSCI ACWI's gains, making relative
outperformance without them difficult. Strong sentiment was further compounded
by their ability to generate strong margins and growth despite high interest
rates.
In addition to these top-down factors, several sector-specific trends played
out across the portfolio. Independent Power Producers ("IPPs") of renewable
energy not only faced rapidly rising interest rates, but also higher costs for
labour and materials, just as power prices declined. For solar energy
companies with residential exposure such as SolarEdge, higher interest rates
translated into greater financing costs for consumers. In the US, this was
combined with a new regulatory regime for the state of California (the
country's largest solar market), while Europe dealt with Chinese oversupply.
Destocking also proved to be an issue for natural ingredients companies.
Having built up inventory during the Covid-19 pandemic, often at elevated
cost, companies like DSM Firmenich, Corbion and Croda struggled with softer
demand from health care, consumer goods and cosmetics end markets.
There are signs that these challenges are starting to abate. The interest rate
trajectory already appears more supportive for smaller companies with a growth
tilt, in which IEM invests. Likewise, many IPPs are demonstrating their
ability to generate returns above the cost of capital. In Ingredients, there
are signs that destocking is finally coming to an end. Solar end markets may
continue to endure some headwinds in the near-term, but the economics remain
sound. As a result, heading into 2024, the investment managers have high
conviction in a portfolio in which debt is low, valuations remain attractive
and the thesis for environmental markets is stronger than ever.
1 As at 31 December 2023.
Key Developments and Drivers for Environmental Markets
The Company is founded on the belief that amid rising environmental
challenges, companies enabling the cleaner and more efficient delivery of
basic needs - such as power, water and food - or mitigating environmental
risks like pollution and climate change, will grow earnings faster than the
global economy over the long-term.
In recent years, a combination of rapidly rising interest rates, increased
cost of living and heightened geopolitical risk has presented a challenge to
this thesis. However, during the Covid-19 pandemic, the share prices of many
companies exposed to structural growth opportunities - be they
sustainability-related solutions or digitalisation - arguably overestimated
the durability of increased demand in the medium-term. However, as conditions
normalise, it is clear that the long-term trajectory of both increasing
demand and support for environmental solutions remains intact.
Electrification
Some of the lowest-hanging fruit to reduce greenhouse gas ("GHG") emissions
can be delivered through electrification. Powering processes with electricity
can deliver dramatic efficiency gains, with some estimates concluding that
electrifying global energy systems could reduce total energy demand by around
40%.(1)
Yet many "non-power" sectors still rely on fossil fuels as a source of energy.
Even in a developed market like the US, electricity accounts for only slightly
more than one-third of primary energy consumption.(2)
The decarbonisation opportunity therefore lies in broadening electricity's use
cases across sectors. According to the IEA, emissions from transport,
buildings, and industry account for 56% of all CO(2) globally.(3) While
Electric Vehicles ("EVs") are now commonplace, global penetration remains low.
By contrast, the electrification of heating and cooling, through heat pumps,
and the electrification of industrial processes, is in its infancy.
Within Industrials, the Company has exposure to this theme through holdings
like UK-listed Spirax Sarco. The company's core business is to help
industrial customers make more efficient use of steam in their manufacturing
process, thereby reducing costs and emissions. Acquisitions of electrical
heating companies in recent years positions the company to participate in a
broader electrification of industry.
By partnering closely with clients, Spirax's engineers embed themselves within
operations to improve efficiency and lower energy usage. For example, working
with a subsidiary of the multinational drinks company Diageo, Spirax
overhauled existing boiler infrastructure to remove net zero emissions across
direct operations.(4) With only 5% of industrial heat generated from
electricity,(5) there is significant growth potential for such applications.
1 The world will need less energy after the energy transition
(sustainabilitybynumbers.com).
2 US Energy Information Agency, 2022.
3 Global energy-related CO(2) emissions by sector - Charts -
Data & Statistics - IEA.
4 Our impact | Spirax Sarco Engineering plc.
5 Investor Presentation March 2023
(spiraxsarcoengineering.com).
Electrification also has the potential to transform the energy used in
buildings. Portfolio holding NIBE Industrier produces heat pumps for
residential and commercial use, which draw on ambient thermal energy and use
electricity to transfer this into heating systems. Russia's invasion of
Ukraine in 2022 exposed the geopolitical and economic vulnerabilities of
fossil fuel dependence, boosting uptake for alternative solutions like NIBE's.
According to the IEA, global sales of heat pumps grew by 11% in 2022.(1) In
the near-term, normalisation of subsidies and increased competition may
present some headwinds, but long-term growth potential remains strong. NIBE's
products are complemented by those of another portfolio holding Kingspan,
whose insulation helps to reduce the aggregate level of energy required for
both heating and cooling.
The pace of electrification has increased most rapidly in areas where
technological advances have made it most compelling. In transport, the battery
packs that power EVs now cost about one-tenth of what they did 15 years
ago.(2) As a result, almost one-fifth of new cars sold globally in 2023 are
expected to be EVs.(3) While concerns about the cost of living have slowed
EVs' growth of late, with continuing cost reductions enabled by technological
innovation and wider adoption, EVs could hit price parity with internal
combustion engine models in Europe over the course of 2024.(4)
The rise of EVs, alongside the increasing penetration of technology across
transportation, underpins our investment thesis in Littelfuse. The US-based
manufacturer of circuit protection and sensing devices currently derives
around a third of its revenues from transportation end markets. Alongside
passenger vehicles, this includes construction equipment, public transport,
and EV charging infrastructure. As electrification continues to disrupt
vehicle manufacturing, Littelfuse's products play a vital role in helping to
improve the safety, reliability, and efficiency of electric systems.
As these sectors electrify, demand for sustainable electricity will increase.
The EU Commission expects European power demand to rise 60% between now and
2030,(5) with renewables contributing much of the supply. This long-term
driver underpins the investment case for all our renewables holdings, which
account for c.11% of the portfolio.
At the same time, a range of 'midstream' technologies will play an important
role in storing, transforming and delivering clean power to end users.
Electricity grids originally designed to connect consumers to local power
stations will need to become larger and more flexible. They will also need to
connect across greater distances, with greater penetration of renewables
increasing the need to move power from where it is generated to where it is
consumed. Energy storage facilities and smart demand-side management will
likewise need to increase to deal with renewable power's intermittency.
This additional investment is required over and above increasingly vital
maintenance spend. By way of example, the U.S. Department of Energy found that
70% of U.S. transmission lines are more than 25 years old in its last
network-infrastructure review in 2015. Lines typically have a 50 year
lifespan, after which efficiency drops off and operating costs rise. In this
vein, November 2023 saw the EU announce its "Grid Action Plan", which seeks to
ease permitting for transmission and distribution networks, improve financing
and reduce grid interconnection queues.
This long-term infrastructure development is central to Impax's investment
case for Prysmian. Listed in Italy, the company manufactures electrical cables
for the power grid, as well as fibre optics. Prysmian has market-leading
positions across a range of segments, but particularly in high voltage
transmission. These cables are used to transmit electricity large distances
with minimal energy loss, for example when connecting renewables to the grid.
Prysmian's significant exposure to the US and European markets make it a
likely beneficiary from government stimulus.
Artificial Intelligence
The launch of Chat-GPT in November 2022 unleashed a wave of public enthusiasm
for artificial intelligence ("AI"). Its biggest beneficiary has been Nvidia
(not held), a designer of graphics processing units ("GPUs") and related
services whose computing technology enables the processing of large language
models ("LLMs"). Market sentiment has been matched by financial fundamentals,
with the company recording year on year revenue growth of 265% in the quarter
ending January 2024. IEM has no direct exposure to AI development. The
manager's investable universe is focused on companies which derive at least
50% of their revenues from Environmental Markets, the bulk of which are small
and mid-cap companies. AI is undoubtedly a powerful technology that will shape
many sectors. However, the resources required and resulting network advantages
conferred mean that today's leading efforts are dominated by mega-cap
technology companies such as Microsoft (through OpenAI), Alphabet or Meta.
Nevertheless, IEM does hold companies with indirect AI exposure. These stocks
either provide products and services for organisations developing AI, or
actively employ AI in their business models. As a result, their shares have
performed well over the Company's financial year. By way of example,
Monolithic Power Systems ("MPS") is a leading analogue semiconductor company.
AI's complex computational processes require a greater and more precise
delivery of power. MPS' integrated chip component systems provide this, at the
same time as reducing energy consumption for customers. This makes them
critical for data centres, as well as helping to improve efficiency across a
wide range of end markets such as personal computing, autos and industry. As a
leading supplier to Nvidia, MPS has been a key beneficiary from the recent
surge in investment. The portfolio also holds two companies which are already
integrating AI into their business offering. The software companies PTC and
Altair Engineering are leaders in computer-aided design ("CAD") and
computer-aided engineering ("CAE"), respectively. PTC's solutions are used
during the design, operation, and maintenance phase of complex products; while
Altair's focus on simulation and generative design. By leveraging AI and
machine learning, both companies are able to offer a range of IIOT
("Industrial Internet of Things") solutions; data-driven capabilities that
combine industrial connectivity and real-time data analytics to improve and
optimise the design and manufacturing process.
1 Global heat pump sales continue double-digit growth -
Analysis - IEA.
2 Office of Energy Efficiency and Renewable Energy, 4 October
2021: DOE Estimates That Electric Vehicle Battery Pack Costs in 2021 are 87%
Lower than in 2008.
3 IEA, 2023: Electric vehicles.
4 Rocky Mountain Institute, September 2023.
5 EU Commission announces electricity grid action plan |
Reuters.
Solar
Within the Company's portfolio, the solar energy sector faced some of the
strongest headwinds in 2023. A combination of higher interest rates, new US
regulation, and inventory destocking interacted with a sharp drop in European
power prices. As a result, many stocks which had reached all-time highs in the
wake of Russia's invasion of Ukraine fell sharply.
Higher interest rates reduce demand for residential solar by raising the cost
of financing. In the US in particular, most domestic solar installations are
paid for with a long-term loan. Higher upfront prices have been lifted further
by soaring wage costs for installation. In Europe, the price of electricity
has plummeted from recent peaks - see chart below. This dynamic creates an
increasingly long and unappealing payback period - how long it takes the
system to pay itself off.
This payback period drew particular focus in the US state of California. New
state regulations known as Net Energy Metering ("NEM") 3.0 became effective in
April 2023, and cut the export price for new systems by 75%, while also
requiring the installation of a battery as storage.(1) California matters
because it represents almost two-fifths of the US residential solar installed
base and has historically set the trend for US solar regulation.(2)
Companies with European solar exposure were insulated from this regulatory
headwind, and saw less impact from higher rates given lower levels of
financing. However, unlike the US, Europe's market can fall victim to Chinese
oversupply. In 2023, Chinese manufacturers dumped an estimated 40GW of excess
inventory (equivalent to a year's worth of installations) into Europe.(3) This
effectively crushed pricing power even while underlying demand remained
robust.
However, after a difficult year, the fundamental drivers for long-term growth
in solar energy remain in place. These include incentives to decarbonise,
higher household electricity consumption and a drive for self-sufficiency.
In 2023, Bloomberg New Energy Finance ("BNEF") estimates that new global
solar PV installations will total 413GW - four-fifths more than in 2022 and
far exceeding recent expectations.
Historically, investing in solar stocks has required a distinctly contrarian
mindset. Market participants are flighty, with the type of short term focus
usually reserved for hedge funds and speculators. The extent of the recent
sell-off therefore occasions another look at the space. Companies with
market-leading technology have quality business models and barriers to entry
high enough to benefit from the industry's long-term growth.
1 Kennedy, R., 4 Nov 2022: California set to release
anti-rooftop solar net metering plan. PV Magazine.
2 Solar Energy Industries Association / Wood Mackenzie Power
& Renewables, September 2023: U.S. Solar Market Insight 2023 Q3.
3 Bellini, E. & Kennedy, R., 20 July 2023: European
warehouses store 40 GW of unsold solar panels. PV Magazine.
"Broad public support for environmental solutions also remains high,
particularly when the financial and geopolitical benefits are made clear."
Likewise, not every player in the market is succumbing to price competition
arising from mass, low-cost Chinese manufacturing. Indeed, some companies are
benefiting as lower prices for commoditised products increase aggregate solar
demand, without the corresponding increase in supply for specialist
components. This is the thesis which underpins the Company's position in
SolarEdge, a US-listed producer of optimisers and related components, and
continues to inform the manager's scrutiny of the investable universe.
Policy
Recent macroeconomic and geopolitical changes have put an increased focus on
energy security and the cost of living. As a result, policy measures which
seek to create a more sustainable economy but involve upfront costs have been
the victim of political pushback. In the UK, the most notable example came in
September 2023, when Prime Minister Rishi Sunak rolled back the deadline for
selling new petrol and diesel cars, as well as the phasing out of gas boilers.
This trend has been seen across geographies and partly reflects the vaulting
ambition of targets set during COVID-19 - a time of lower economic activity
and more stable geopolitics. However, it also reflects politicians'
willingness to use sustainability policy as a wedge issue on the campaign
trail, even if the impact is limited in practice.
Across the board, incidences of real and direct policy change have thus far
been limited with few long-term strategic shifts. Such developments ultimately
amount to an understandable delay but do not change the destination. Existing
regulations, consumer demand and corporate strategy also continue to be
effective drivers of growth for environmental markets. Indeed, business
leaders remain focused on competing long-term and some of the most vocal
opponents of the UK Government's measures were the car manufacturers.(1)
Broad public support for environmental solutions also remains high,
particularly when the financial and geopolitical benefits are made clear. This
continued level of policy support for environmental markets was evident at COP
28, November's UN conference on climate change held in Dubai. The meeting
produced an historic agreement on the need to "transition away from fossil
fuels in energy systems".(2) Over 130 countries also endorsed the Global
Renewables and Energy Pledge to triple renewable energy capacity and double
the rate of energy efficiency improvements to 2030, specifically calling
attention to permitting and ensuring cross-border grid interconnections.(3)
The event was also a testament to the power of collective engagement. As part
of the Farm Animal Investment Risk and Return Initiative ("FAIRR"), Impax is
one of several stakeholders that has campaigned for a greater focus on the
role food systems play in climate change. Historically absent from COP
agreements, this year saw a whole day devoted to food and agriculture.
At COP 28, the UN's Food and Agriculture Organisation launched a road map to
bring the world's food production in line with global climate goals.(3) A
corresponding declaration on sustainable agriculture also demonstrated that
governments are increasingly willing to co-opt entire sectors into their
national plans for decarbonisation. With over 13% of IEM's portfolio invested
in companies deriving revenues from Sustainable Food and Agriculture, these
initiatives further strengthen the Manager's conviction in the long-term
growth prospects of the sector.
Looking forward, one of the biggest determinants of environmental policy is
likely to be the US Presidential Election. At the time of writing, Donald
Trump is the presumed Republican candidate, and has made his opposition to the
Inflation Reduction Act - which provides funding, as well as broader
legislative support for renewable energy - well known.
Impax views Donald Trump's chances of frustrating the legislation as limited.
Doing so would require a comprehensive victory in the Senate and Congress,
while also reversing significant spending and job creation in many Republican
states. Since passage of the Inflation Reduction Act in 2022, more than
US$160bn has been committed by the private sector to new clean energy
manufacturing facilities in states that often or sometimes have Republican
congressional majorities.(4) State-level political dynamics will matter too.
Today, 17 US states have legally binding 100% clean energy targets.(4) These
cannot be undone at the federal level. Nevertheless, the prospect will
continue to hang over relevant sectors until November 2024 at least, affecting
valuations accordingly.
1 E.ON boss hits out at Sunak's plan to row back on net zero
policies
2 COP28: Landmark summit takes direct aim at fossil fuels -
BBC News.
3 Summary_GCA_COP28.pdf (unfccc.int).
4 Lawrence Berkeley National Laboratory, June 2023: U.S. State
Renewables Portfolio & Clean Electricity Standards: 2023 Status Update.
Absolute performance contributors and detractors
The Company's net asset value ("NAV") delivered positive absolute returns of
4.5% in 2023. However, this lagged the MSCI All Country World Index ("MSCI
ACWI"), a broad reflection of global equity markets, by 10.8%.
Crucially, the bulk of this difference was driven by stocks not held in the
portfolio. Net returns from owned companies was in fact positive, although
sizeable positive contributions from positions in construction and digital
infrastructure were partially offset by holdings in the solar, renewable IPPs
and natural ingredients sectors.
This relative underperformance was driven by a combination of top-down
macroeconomic factors, extreme market concentration and a handful of
sector-specific headwinds. Crucially, the bulk of portfolio underperformance
was driven by stocks not held in the portfolio.
IEM has no exposure to the Magnificent Seven, accounting for a performance
headwind of 7.7%. These companies benefitted from a combination of market
enthusiasm for AI, as well as their ability to generate strong margins and
defensive growth despite high interest rates. While the Company could hold
Tesla on account of its EV and renewables exposure, the investment managers
view its governance practices as inadequate. The remaining stocks fail to meet
the investment process requirement of having at least 50% of revenues from
Environmental Markets.
Within the portfolio, companies operating in the Solar Energy sector delivered
some of the strongest negative returns. As discussed above, higher interest
rates pushed out payback periods for customers financing the capital
expenditure of a new system, just as fossil fuel prices came down from their
2022 highs. At the same time, new legislation in California has served to
weaken US demand, while in Europe massive Chinese over-supply has left almost
no pricing power to boost margins. Consequently, SolarEdge Technologies and
Xinyi Solar have made some of the largest negative contributions to
performance.
Investing in the solar sector requires a contrarian approach. Investor time
horizons are typically short-term, with an almost total focus on growth.
Across the industry, near-term visibility on underlying demand remains
uncertain. Having added to positions mid-way through the year, this
uncertainty compounded poor performance. Given the sector's longer-term
drivers and the superior profitability of these positions, the investment
managers continue to hold both names, but are monitoring progress on headwinds
before increasing exposure further.
The portfolio's IPP holdings also delivered some of the weakest absolute
performance for the year. The sector saw rising project costs, perceived lower
future returns, and at the margin, the increasing yield on offer from bonds,
all weigh on investor sentiment. Within the portfolio the share prices of
companies like Northland Power, Terna Energy, and EDP Renovaveis fell to
levels which not only discounted the value of pipeline projects, but even
existing operational assets.
Such moves reflect an intensely top-down market focused on headline-driven
sentiment, rather than recognising portfolio holdings' stated strategies and
still resilient spreads above their cost of capital. Northland Power, for
example, expects to initiate few new projects in the coming years and will
instead focus on operating and selling down its assets with a view to boosting
cash returns. The tail end of 2023 saw the share prices of both IPP and solar
names rally. Yet these gains were driven entirely by interest rate
expectations, with financial fundamentals a potential further catalyst to the
upside.
Natural ingredients companies represent the third significant group of stocks
to weaken performance. As identified in the interim report, DSM-Firmenich
continued to suffer from low vitamin volumes and pricing across animal and
human nutrition. China's weaker than expected reopening has led to a flood of
cheap vitamin production without the corresponding demand. Croda, conversely,
has been hit by weaker personal care markets while Corbion faced lower demand
for polylactic acid for bioplastics, with a focus in the industry on
lower-cost alternatives.
As 2023 progressed, conversations with investee companies' management
repeatedly saw executives point to worsening demand transparency from end
clients as a result of the COVID-19 pandemic. Additions to these holdings
earlier in the year thus proved too soon, despite the robust fundamentals of
each company. Nonetheless, there are now signs that this temporary destocking
dynamic has largely played out.
By contrast absolute returns for the year have been negative, pockets of the
portfolio have demonstrated the long‑term resilience that one would expect
from a Company with diverse exposure to environmental markets. The two biggest
areas of positivity were the Digital Infrastructure sector and companies with
exposure to US construction.
In Digital Infrastructure, the portfolio benefited from strong performance in
industrial software holdings PTC and Altair. The two US-listed companies
produce computer-assisted design (CAD) and simulation software, respectively.
Given their central role in modern manufacturing, both names have benefited
from solid growth in recurring subscription revenues, as well as continued
penetration across industrial markets.
Monolithic Power Systems, a producer of power management solutions, also
boosted performance. The company delivered robust earnings growth, with
meaningful tailwinds from its exposure to AI, where it is chief supplier to
Nvidia - the leading producer of graphical processing units used in AI
systems.
US 30-year mortgage rates briefly hit 8% in 2023.(1) Despite this, US
construction proved one of the strongest performance areas for the portfolio,
confounding many commentators' expectations at the start of the year. In the
US, mortgages are applied to the property (rather than the owner) and cannot
be transferred. Thus, while higher rates did cause demand to drop, supply also
collapsed as homeowners choose to move on to more affordable arrangements.
With new home construction still suppressed post pandemic, an easing of
building supply chains made for ideal trading conditions.
Across IEM there is c.20% aggregate exposure to construction as at 31 December
2023. This exposure is diversified by region, category (residential,
commercial and infrastructure) as well as type (new build vs refurbishment).
While residential construction's surprising strength drew the bulk of market
commentary, municipal and commercial end markets also proved robust. Companies
which performed strongly include Pentair and Zurn Elkay Water Solutions, with
the former's acquisition of Manitowoc Ice providing additional diversification
in the form of exposure to the food sector. Other strong performers included
wood plastic composite decking company Azek and HVAC manufacturer Lennox,
which benefit from refurbishing as well as new build activity.
1 Bloomberg as at 31 December 2023.
Relative Performance Analysis
12 Months ended
31 December 2023
Performance relative to MSCI ACWI %
NAV total return 4.5
MSCI ACWI total return 15.3
Relative performance (10.8)
Analysis of relative performance:
Portfolio total return 5.3
MSCI ACWI total return 15.3
Portfolio underperformance (10.0)
Borrowing:
Gearing effect 0.2
Finance costs (0.3)
Management fee (0.8)
Other expenses (0.1)
Trading Costs (0.1)
Share transactions:
Buybacks 0.4
Tax (0.1)
Total relative NAV performance (10.8)
12 Months ended
31 December 2023
Performance relative to FTSE ET100 %
NAV total return 4.5
FTSE ET100 total return 18.3
Relative performance (13.8)
Analysis of relative performance:
Portfolio total return 5.3
FTSE ET100 total return 18.3
Portfolio underperformance (13.0)
Borrowing:
Gearing effect 0.2
Finance costs (0.3)
Management fee (0.8)
Other expenses (0.1)
Trading Costs (0.1)
Share transactions:
Buybacks 0.4
Tax (0.1)
Total relative NAV performance (13.8)
Portfolio positioning, activity, valuation and risk
At the end of the year, IEM's portfolio comprised 63 listed holdings.
Portfolio detail is provided on pages 22 and 23 of the annual report and
positioning by sector and region is set out on page 24.
The Company's positioning is in line with what was presented in the
Half-yearly Report. The portfolio maintains a balance of high-quality cyclical
and defensive business models across a broad range of environmental markets.
In terms of activity, cheaper valuations have enabled the Manager to continue
taking new positions in more cyclical businesses with strong long-term
fundamentals, as well as adding selectively to defensive names. The investment
managers have also been looking for new holdings with exposure to Asia over
the year.
Having initiated a position in Kingspan in the first half of 2023, the team
added a further three positions in cyclical companies whose valuations had
derated substantially. Shimano is the world's leading manufacturer of bicycle
components, and its shares traded significantly lower after strong performance
during Covid-19. Shimano's products can lower emissions by displacing
combustion engines, as well as benefiting human health through increased
exercise. The purchase was funded by exiting Giant, a Taiwanese bicycle
manufacturer, where the manager perceived limited further upside.
Prysmian manufactures electrical wires for the power grid, as well as fibre
optic cables. Rapid growth in renewables, as well as the electrification of
power systems, heating and transport are driving substantial investment in the
grid. With significant market share, particularly in the more operationally
demanding High Voltage segment, the team believes Prysmian is well-placed to
benefit.
Lastly, the Company switched its holding in Smurfit Kappa for a position in
Mondi. This was triggered by Smurfit's announcement in September that it
intended to acquire WestRock, a rival. Some synergies are immediately evident,
however there is little clarity on management's strategy to lift returns above
Westrock's current cost of capital. In addition, while both Smurfit and Mondi
operate in the paper and packaging sector, the latter is a net producer giving
it greater pricing stability and security of supply as cyclical demand picks
up.
On the defensive side of the portfolio, the Manager bought a position in
Steris. The company is a leading provider of sterilisation equipment and
related services for the healthcare industry whose growth is underpinned by
several secular tailwinds such as ageing populations and greater sterilisation
outsourcing. Steris also delivers industry leading water savings in its
products.
The Company also initiated a position in Veralto, a spin-out from US testing
and analysis company Danaher. The new business is focused on providing quality
control services for the water, food, and pharmaceutical markets. As part of
Danaher, the company established a track record of high margin recurring
business and strong growth.
Lastly, 2023 saw the Manager modestly increase the portfolio's Asian exposure
with two transactions in the first half of the year. In the more defensive
consumer market, IEM purchased Dabur India. As documented previously, Dabur is
a leading supplier of natural ingredients with strong market share in fast
growing markets. The Company also purchased Shenzhen Innovance Technology, a
producer of industrial automation products and electrical motors for EVs.
The holding marks the Company's first foray into the Chinese A-share market,
which has been under pressure in 2023. However, the company's track record of
growth, compounded with the still abundant domestic opportunity made for an
attractive entry point.
Valuation and Gearing
Regarding valuation, over the course of 2023 the portfolio occupied a fairly
narrow range for its next 12 months' (or forward) price-to-earnings (PE)
ratio. Starting the year at 18.4x, the portfolio actually finished slightly
higher at 20.7x. However, this ratio dropped sharply at several points during
the year when markets took the view that higher interest rates would have a
greater impact on smaller companies. The figure is also skewed by portfolio
holdings where short term downward revisions to earnings have not necessarily
fed through to the share price.
More significant was the relative PE premium for the portfolio compared to the
broad MSCI ACWI of equities, which fell steadily over the course of the year.
Starting the year at around 29%, the relative premium fell to 26%. Despite
rallying sharply in latter months as interest rate expectations changed, this
premium remains in line with long-term average levels. Yet public policy and
technological developments have made the investment case for environmental
markets stronger than ever.
Compelling valuations were a key driver of the Board and Manager's decision to
refinance and increase gearing towards the end of the year. Absolute and
relative PE premiums were at an historic low even as underlying investment
cases remained robust. The Manager thus perceived meaningful upside potential,
more than sufficient to compensate for an increase in the overall cost of
debt. Moreover, central banks - led by the US Federal Reserve - have indicated
their willingness to cut interest rates from current levels. Electing to
increase gearing with a combination of fixed and floating debt should allow
the Company to benefit from any drop in rates.
Outlook
The Manager does not pick stocks on the basis of macroeconomic forecasting.
However, macro trends should be more supportive. This contrasts sharply to
2023 when macro concerns and higher interest rates made for meaningful
headwinds. While the Fed has pushed back on the date of a cut, interest rates
are expected to fall. If economic data also remains resilient, it should
further benefit the Company's small and mid-cap exposure. Even in the event of
a mild recession, the consistent returns profiles of IEM's holdings should
bear out.
Secondly, underlying earnings growth in the portfolio is expected to be
robust. This is particularly the case in companies whose earnings have been
depressed by short term headwinds. For example, there are clear signs of
destocking across natural ingredients companies coming to an end. Geopolitics
remain a potential risk factor, particularly from inflationary shipping
disruptions in the Suez Canal. The team is monitoring any impact closely.
Lastly, the Manager believes valuations continue to be attractive. The
portfolio's premium relative to the MSCI ACWI is around the ten-year average,
with shares in the Company itself trading at a further discount to NAV. As
January showed, the macro backdrop will still drive sentiment in the short
term, but the holdings are demonstrating their ability to operate successfully
in a world of higher rates and costs. As fundamentals continue to improve,
they should exert an increasingly positive influence on the holdings' share
prices within the IEM portfolio.
Investment Managers
Jon Forster
Fotis Chatzimichalakis
Bruce Jenkyn-Jones
10 April 2024
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 controls 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 following section,
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 and disruption to supply chains as a
result of the wars in Ukraine and the Middle East, 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.
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.
Potential risk Mitigation Trend
Strategic and business objective risks
Economic and market risks
Price movements of the Company's investments are highly correlated to the There are inherent risks involved in stock selection. The Manager is Neutral
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.
Changes in general economic and market conditions, such as currency exchange
rates, interest rates, rates of inflation, industry conditions, tax laws, At year end, the Company held investments in 63 companies and the largest
political events and trends can substantially and adversely affect the value holding represented 2.9% of net assets.
of investments. Market risk includes the potential impact of events which are
outside the Company's control such as the war in the Middle East and the The Manager will not normally hedge against foreign currency movements, but
ongoing war in Ukraine. the Manager takes account of the risk when making investment decisions.
Further details on financial risks and risk mitigation are disclosed in note
The Company holds a significant part of its portfolio in companies with small 16 to the accounts.
market capitalisations, which are likely to be subject to higher valuation
uncertainties and liquidity risks than larger capitalisation securities. The The high risk rating remains unchanged; this reflects continued uncertainty in
Company may also invest in unquoted securities which generally have greater markets, though for changed reasons. Interest rates have stabilised and
valuation uncertainties and liquidity risks than securities listed or traded inflation reduced but geo-political uncertainty continues to remain high.
on a regulated market.
Environmental markets
The Company invests in companies operating in environmental markets. Such The Company invests in a broad portfolio of investments which are spread Neutral
companies carry risks that governments may alter the regulatory and financial amongst several environmental market sectors. The Manager has a rigorous
support for environmental improvement, costs of technology may not fall, investment process which takes into account relevant factors prior to
capital spending by their customers is reduced or deferred and their products investment decisions taking place. As well as reviews of the portfolio and
or services are not adopted. 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 discount to net asset value
It is in the long-term interests of shareholders that shares do not trade at a The Board monitors the level of premium/discount and receives regular Neutral
significant discount to net asset value. shareholder feedback from the Company's Manager and broker.
Investor demand for the Company's shares may fall, causing the discount to The Board has the power, granted by shareholders, to buy back shares when in
widen. the best interests of the Company, and this should reduce supply of shares and
thus reduce or stop widening of the discount and may reduce volatility.
Financing risk
The Company may borrow money for investment purposes. If investment markets The Board has authorised the Manager to use its discretion to utilise gearing Decreasing
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.
Capacity constraints on the availability of desirable companies for investment
may mean the Company is unable to achieve the level of gearing wanted. Borrowing facilities are renewed on a cost effective and timely basis.
The Manager keeps under regular review the opportunities for enhancing returns
by the prudent use of gearing.
The risk rating decreased following the successful refinancing of the
Company's revolving credit facility.
Investment Management
Underperformance of the Investment Manager
Consistent long-term underperformance by the investment manager may lead to At each board meeting the investment manager reports on the performance of the Increasing
poor performance of the Company compared to its benchmark comparators and Company including comparisons to its peers and benchmark comparators.
peers, a widening of discount to NAV, a reduction in capital and dissatisfied
shareholders. The Board considers various portfolio metrics including top contributors and
detractors to performance, sub-sector and regional performance, investment
rationale, valuation and growth statistics, key activity in the period,
attribution analysis, portfolio positioning and risk, and the Manager's
outlook. The Board considers the rationale behind new additions, for which the
Manager provides details including the environmental benefit. The Board also
considers the macro and geopolitical risks and uncertainties that effect the
portfolio and the Company.
The risk rating increased as the likelihood of long-term underperformance
increased following a second year of underperformance.
Operations - service providers risks
Failure or breach of Information Technology (IT) - including cyber- security,
and physical security risks
Neutral
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. industry standards, their physical and data security procedures and their
business continuity planning.
The underlying risks primarily exist in the third party service providers to
whom the Company has outsourced its depositary, registration, administration The Board meets with its key service providers at each board meeting and
and investment management activities. directors often engage with service providers intraboard.
Operational risk
The Board has contractually delegated to third party service providers the Due diligence is undertaken before contracts are entered into with third party Increasing
management of the investment portfolio, and services covering: depositary and service providers, taking into account the quality and cost of services
custody; registrar; company secretarial and fund accounting. The security of offered, including policies and procedures, and risk management and controls
the Company's assets, dealing procedures, accounting records and adherence to systems in operation in so far as they are relevant to the Company.
regulatory and legal requirements depend on the effective operation of the Thereafter, the performance of the provider is subject to regular review and
systems of these third party service providers. report to the Board. The Board monitors key persons as part of this oversight.
Failure by any service provider to carry out its obligations to the Company The control of risks related to the Company's business areas is described in
could have a material adverse effect on the Company's performance. Disruption detail in the corporate governance report.
to the accounting, payment systems or custody records (including cyber
security risk) could prevent the accurate reporting and monitoring of the The risk rating was increased due to organisational and personnel changes at
Company's financial position. the Company's company secretarial provider.
Whilst not being identified as principal risks after mitigation controls are
applied, other relevant risks to the Company include the following:
Potential risk Mitigation Trend
Strategic and business objective risks
Global pandemic risk
The rapid spread of infectious disease may cause governments to implement The Manager spreads the investment risk over a wide portfolio of investments. Neutral
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
While efforts to mitigate climate change continue, the physical impacts are Physical climate change risk is still an emerging topic for investors as well Neutral
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 on pages 38 and 39 of
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
The Company's investment activities expose it to a variety of financial risks The Manager does not actively 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 and has borrowings which are not denominated Non-sterling borrowings will effectively hedge non-sterling investments for
or quoted in sterling. Movements of exchange rates between sterling and other matching currencies.
currencies in which the Company's investments are denominated may have an
unfavourable effect on the return on the investments made by the Company. The Company invests in range of global listed equities and the Manager
monitors the foreign currency exposure and liquidity of holdings within the
The Company's main exposure is its floating-rate €20m seven-year Note and portfolio and reports on these to the Board at each meeting.
its €40m revolving credit facility, details of which are shown in Note 11.
Interest rate risk on borrowing was reduced by fixing two of the Notes.
Further details on financial risks and risk mitigation are disclosed in note
16 to the accounts.
Regulatory risks
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 2028 (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 and its gearing. The Board have also assumed
that shareholders will approve the continuation of the Company on each
continuation resolution proposed during the Viability Period. 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 6.8% 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
Glen Suarez
Chairman
10 April 2024
Income Statement
Year ended 31 December 2023 Year ended 31 December 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments 2 - 43,767 43,767 - (226,293) (226,293)
Net foreign exchange losses - (464) (464) - (2,778) (2,778)
Income 3 20,279 - 20,279 20,160 - 20,160
Investment management fee 4 (2,320) (6,960) (9,280) (2,420) (7,258) (9,678)
Other expenses 5 (1,143) - (1,143) (1,037) - (1,037)
Return/(loss) on ordinary activities before finance costs and taxation 16,816 36,343 53,159 16,703 (236,329) (219,626)
Finance costs 6 (799) (2,395) (3,194) (475) (1,424) (1,899)
Return/(loss) on ordinary activities before taxation 16,017 33,948 49,965 16,228 (237,753) (221,525)
Taxation 7 (1,601) 133 (1,468) (2,956) 211 (2,745)
Return/(loss) on ordinary activities after taxation 14,416 34,081 48,497 13,272 (237,542) (224,270)
Return/(loss) per ordinary share 8 4.86p 11.49p 16.35p 4.37p (78.18p) (73.81p)
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
2023 2022
Notes £'000 £'000
Fixed assets
Investments at fair value through profit or loss 2 1,295,847 1,302,605
Current assets
Dividends receivable 586 512
Taxation recoverable 39 90
Other debtors 166 108
Cash and cash equivalents 16,804 26,327
17,595 27,037
Creditors: amounts falling due within one year
Trade and other payables 10 (3,821) (1,929)
Bank loans and revolving credit facility 11 - (51,606)
(3,821) (53,535)
Net current assets/ (liabilities) 13,744 (26,498)
Total assets less current liabilities 1,309,621 1,276,107
Creditors: amounts falling due after more than one year
Capital gains tax provision 7 (40) (169)
Notes 11 (51,785) -
Revolving credit facility 11 (35,312) -
Net assets 1,222,484 1,275,938
Capital and reserves: equity
Share capital 12 30,562 30,562
Share premium account 423,098 423,098
Capital redemption reserve 9,877 9,877
Share purchase reserve 52,557 141,872
Capital reserve 13 691,532 657,373
Revenue reserve 14,858 13,156
Shareholders' funds 1,222,484 1,275,938
Net assets per ordinary share - debt at bookcost 14 434.87p 419.49p
Net assets per ordinary share - debt at fair value 14 434.34p 419.49p
Approved by the Board of Directors and authorised for issue on 10 April 2024
and signed on their behalf by:
Glen Suarez, Chairman
Impax Environmental Market plc incorporated in England with registered number
4348393.
Statement of Changes in Equity
Share Capital Share
Share premium redemption purchase Capital Revenue
Year ended capital account reserve reserve reserve reserve Total
31 December 2023 Note £'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening equity as at 1 January 2023 30,562 423,098 9,877 141,872 657,373 13,156 1,275,938
Dividends paid 9 - - - - - (12,636) (12,636)
Cost of share buybacks 12 - - - (89,315) - - (89,315)
Return for the year - - - - 34,081 14,416 48,497
Closing equity as at
31 December 2023 30,562 423,098 9,877 52,557 691,454 14,936 1,222,484
Share Capital Share
Share premium redemption 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
The Company's distributable reserves consists of the Share purchase reserve,
Capital reserve attributable to realised profits and Revenue reserve.
Statement of Cash Flows
Year ended Year ended
31 December 31 December
2023 2022
Notes £'000 £'000
Operating activities
Return/(loss) on ordinary activities before finance costs and taxation 53,159 (219,626)
Less: Tax deducted at source on income from investments (1,597) (3,155)
Foreign exchange losses 464 2,775
Adjustment for (gains)/losses on investments (43,767) 226,293
Special dividends received as capital 132 393
Scrip dividend received (323) -
Increase in other debtors (81) (413)
Increase/(decrease) in other creditors 583 (1,142)
Net cash flow from operating activities 8,570 5,125
Investing activities
Sale of investments 478,935 313,189
Purchase of investments (428,547) (338,730)
Net cash flow from/(used in) investing 50,388 (25,541)
Financing activities
Equity dividends paid 9 (12,636) (9,039)
Proceeds from Notes and revolving credit facility 86,099 -
Repayment of revolving credit facility and bank loan (50,744) (282)
Finance costs paid (1,885) (1,864)
Net proceeds from issue of new shares 12 - 34,918
Net proceeds of shares sold from treasury 12 - 7,578
Cost of share buybacks 12 (89,315) (12,887)
Net cash flow (used in)/from financing (68,481) 18,424
Decrease in cash (9,523) (1,992)
Cash and cash equivalents at start of year 26,327 28,319
Cash and cash equivalents at end of year 16,804 26,327
Cash inflow includes dividend income received during the year ended 31
December 2023 of £19,285,000 (2022: £20,348,000) and bank interest of
£646,000 (2022: £205,000).
Changes in net debt
Year ended Year ended
31 December 31 December
2023 2022
£'000 £'000
Net debt at start of year (25,279) (20,794)
Decrease in cash and cash equivalents (9,523) (1,992)
Foreign exchange movements (136) (2,775)
Proceeds from Notes and revolving credit facility (86,099) -
Repayment of revolving credit facility and bank loan 50,744 282
Net debt at end of year (70,293) (25,279)
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 on page 57 of 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. The
ordinary element of scrip dividends received in lieu of cash dividends is
recognised as revenue. Any enhancement above the cash dividend is treated as
capital.
Scrip dividends received in lieu of cash dividends are recognised as revenue
except for any excess above the cash dividend, which is recognised as capital.
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 cumulative income and expenditure recognised in
the revenue column of the Income Statement less cumulative dividends paid, 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 and finance costs
All expenses are accounted for on an accruals basis. Expenses are recognised
through the Income Statement as revenue items except as follows:
Management fee
In accordance with the Company's stated policy and the Directors' expectation
of the split of future returns, three quarters of the investment management
fee 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.
Arrangement costs for revolving credit facilities and Notes are amortised over
the term of the borrowing.
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
Notes and other borrowings are initially recorded at the proceeds received net
of direct issue costs and subsequently measured at amortised cost.
(j) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents include bank
overdrafts repayable on demand and short term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
(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 and of the Company's borrowing in note 11.
(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 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
2023 2022
£'000 £'000
(a) Summary of valuation
Analysis of closing balance:
UK quoted securities 107,156 88,985
Overseas quoted securities 1,188,691 1,213,620
Total investments 1,295,847 1,302,605
(b) Movements during the year:
Opening balance of investments, at cost 1,122,306 1,031,903
Additions, at cost 428,182 338,730
Disposals, at cost (399,201) (248,327)
Cost of investments at 31 December 1,151,287 1,122,306
Revaluation of investments to fair value:
Opening balance of capital reserve - investments held 180,299 471,847
Unrealised losses on investments held (35,739) (291,548)
Balance of capital reserve - investments held at 31 December 144,560 180,299
Fair value of investments at 31 December 1,295,847 1,302,605
(c) Gains/(losses) on investments in year (per Income Statement)
Gain on disposal of investments(1) 79,976 65,492
Net transaction costs (608) (630)
Special dividends received as capital 132 393
Unrealised losses on investments held (35,733) (291,548)
Gains/(losses) on investments 45,767 (226,293)
1 Gain on bookcost at purchase date upon disposal.
During the year, the Company incurred transaction costs on purchases totalling
in aggregate £684,000 (2022: £588,000) and on disposals totalling in
aggregate £453,000 (2022: £313,000). Following MiFID II, the Manager has
rebated £530,000 (2022: £271,000) in respect of transaction research costs
for the year ended 31 December 2023. Transaction costs are recorded in the
capital column of the Income Statement.
The Company received £478,935,000 (2022: £327,757,000) from investments sold
in the year. The bookcost of these investments when they were purchased was
£399,201,000 (2022: £262,265,000). 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.
During the year special dividends of £132,000 (2022: £393,000) were
recognised on an ex-dividend basis and treated as capital.
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 2023 31 December 2022
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 1,295,847 - - 1,295,847 1,302,605 - - 1,302,605
1,295,847 - - 1,295,847 1,302,605 - - 1,302,605
The Company held no unquoted investments during the year or at the year end.
In the prior year, the Company's one unquoted investment, which had been
valued at £582,000 at 31 December 2021, was written down in full.
3 Income
2023 2022
£'000 £'000
Dividends from UK listed investments 1,401 2,295
Dividends from overseas listed investments 17,909 17,660
Scrip dividends received 323 -
Bank interest received 646 205
Total Income 20,279 20,160
Dividends from overseas listed investments includes special dividends
classified as revenue of £75,000 (2022: £283,000).
4 Investment management fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 2,320 6,960 9,280 2,420 7,258 9,678
At 31 December 2023, investment management fee accrued were £2,225,000
(£1,601,000).
5 Other expenses
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Secretary and administrator fees 266 - 266 250 - 250
Depositary fees* 95 - 95 104 - 104
Depositary fees refund* - - - (66) - (66)
Custody fees* 179 - 179 170 - 170
Custody fees refund* - - - (55) - (55)
Directors' fees- see below 158 - 158 171 - 171
Directors' expenses 11 - 11 3 - 4
Directors' other costs- see below 4 - 4 9 - 8
Directors' D&O insurance 15 - 15 16 - 16
Director recruitment fees 20 - 20 20 - 20
Broker retainer 24 - 24 24 - 24
Auditor's fee(#) 48 - 48 42 - 42
Tax advisor fees 10 - 10 9 - 9
Association of Investment Companies 22 - 22 21 - 21
Registrar's fees 64 - 64 119 - 119
Marketing fees 68 - 68 61 - 61
FCA and listing fees 113 - 113 107 - 107
Printing fees 37 - 37 30 - 30
Other expenses 9 - 9 2 - 2
1,143 - 1,143 1,037 - 1,037
Full details of the Directors' fees for the year is provided in the Directors'
Remuneration Implementation Report on page 65 of the annual report. Employer's
National Insurance for Directors' fees is included as appropriate in
Directors' other costs. At 31 December 2023, Directors' fees, Directors'
expenses and national insurance fees outstanding were £nil (2022: £7,000).
* Refunds of £66,000 and £55,000 were received
respectively for Depositary and Custody fees charged in 2021 due to revised
Depository and Custody fee rates being retrospectively applied from 1 January
2021.
# The auditor's fee for the audit of these financial
statements was £47,500, and the VAT on this is included in other expenses.
6 Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Interest
Interest on bank loans and repaid
revolving credit facility ("RCF") 263 787 1,050 471 1,414 1,885
Interest on current RCF 318 952 1,270 - - -
Interest on Notes 205 616 821 - - -
786 2,355 3,141 471 1,414 1,885
Direct finance costs
Bank loans and repaid RCF 3 9 12 4 10 14
Revolving credit facility 9 29 38 - - -
Notes 1 2 3 - - -
13 40 53 4 10 14
Total 799 2,395 3,194 475 1,424 1,899
The Company refinanced its borrowings in the year, details of which are set
out in note 11. The Notes and revolving credit facility arrangement costs
amounted to £252,000 and £217,000 respectively. These direct finance costs
are amortised over the life of each of the Notes and the facility.
7 Taxation
(a) Analysis of charge in the year
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Overseas taxation 1,601 - 1,601 2,956 59 3,015
Decrease in CGT provision - (133) (133) - (270) (270)
Taxation 1,601 (133) 1,468 2,956 (211) 2,745
(b) Factors affecting total tax charge for the year:
The effective UK corporation tax rate applicable to the company for the year
is 23.5% (2022: 19%). 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:
2023 2022
£'000 £'000
Return/(loss) on ordinary activities before taxation 49,965 (221,525)
Corporation tax at 23.5% (2022: 19%) 11,742 (42,090)
Effects of:
Non-taxable UK dividend income (329) (436)
Non-taxable overseas dividend income (4,285) (3,355)
Movement in unutilised management expenses 2,449 2,036
Non-taxable interest income (152) (39)
Movement on non-trade relationship deficits 751 361
(Gains)/losses on investments not taxable (10,285) 42,995
Loss in foreign currency movement 109 528
Capital gains tax provision movement (133) (270)
Overseas taxation 1,601 3,015
Total tax charge for the year 1,468 2,745
(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
2023 2022
£'000 £'000
Provision brought forward 169 579
Capital gains tax paid 4 (140)
Decrease in provision in year (133) (270)
Provision carried forward 40 169
(e) The Company has unrelieved excess management expenses and non-trade
relationship deficits of £103,393,000 (2022: £90,423,000). 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%
(2022: 25%) amounts to £25,848,000 (2022: £22,606,000).
8 Return per share
Year ended Year ended
31 December 31 December
2023 2022
£'000 £'000
Revenue return after taxation (£'000s) 14,416 13,272
Capital return/(loss) after taxation (£'000s) 34,081 (237,542)
Total net return/(loss) after tax (£'000s) 48,497 (224,270)
Weighted average number of ordinary shares 296,596,976 303,853,145
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
2023 2022
Rate £'000 Rate £'000
Interim in lieu of final for the previous year 2.50p 7,604 1.50 4,471
First interim for the current year 1.70p 5,032 1.50 4,568
4.20p 12,636 3.00p 9,039
(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
2023 2022
Rate £'000 Rate £'000
First interim for the current year 1.70p 5,032 1.50p 4,568
Second interim in lieu of final for the current year 2.90p 7,983 2.50p 7,604
4.60p 13,015 4.00p 12,172
The Board declared two dividends in respect of the year and expects to
continue paying two dividends annually.
10 Trade and other payables
2023 2022
£'000 £'000
Finance costs payable 1,442 133
Accrued management fee 2,225 1,601
Other accrued expenses 154 195
Total 3,821 1,929
11 Notes and credit facilities
On 1 September 2023, the Company closed and settled €60m privately placed
notes (the "Notes") issued to funds managed by Pricoa Private Capital.
The Notes consist of three tranches as follows:
· €20m maturing on 1 September 2030 with a floating coupon
of Euribor + 1.35%
· €30m maturing on 1 September 2033 with a fixed coupon of
4.48%; and
· €10m maturing on 1 September 2035 with a fixed coupon of
4.63%.
The proceeds of the Notes were used to repay the five-year fixed rate
multi-currency US$20 million and £15 million loans and £20 million
multi-currency revolving credit facility ("RCF") provided by The Bank of Nova
Scotia, London Branch ("Scotiabank") which matured on 6 September 2023.
In addition to the Notes referred to above, the Company put in place a new
two-year £80m multi-currency floating rate RCF with Scotiabank, expiring on 6
September 2025. The RCF has a non-utilisation fee of 52.5 basis points on
£35m. On 6 September 2023 an amount of €40,943,000 (equivalent to £35m)
was drawn down for 6 months under the RCF with a floating interest rate priced
at the relevant reference rate plus a margin of 1.6%.
The RCF is secured by a floating charge over the assets of the Company and
this floating charge has been extended to the Notes, so that the two lenders
rank pari passu.
A summary of the Company's borrowings follows.
2023 2022
Loan Loan
currency Bookcost currency Bookcost
Interest rate amount £'000 amount £'000
Notes - Fixed and floating rate
Series A - Floating 2030 Euribor + 1.35% €20,000,000 17,263 - -
Series B - Fixed 2033 4.48% €30,000,000 25,892 - -
Series C - Fixed 2035 4.63% €10,000,000 8,630 - -
51,785 - -
Bank Loans - Fixed Rate
Sterling 2.910% - - £15,000,000 15,000
Non-sterling 4.504% - - $20,000,000 16,531
- 31,531
RCF - floating rate
Sterling Six month SOFR +1.7% - - £10,000,000 10,000
Non-sterling Six month SONIA +1.7% - - $12,185,017 10,075
Six month EURIBOR +1.6% €40,943,000 35,312 - -
87,097 51,606
The maturity profile of the Notes and credit facility as follows:
2023 2022
Bookcost Bookcost
Payable at 31 December £'000 £'000
Bank loans payable less than one year - 31,531
Notes payable after more than one year 51,785 -
Revolving credit facility payable less than one year - 20,075
Revolving credit facility payable after more than one year 35,312 -
87,097 51,606
The Company's Notes and revolving credit facility contain the following
covenants:
1) Adjusted asset coverage should not be less than 4:1 in respect of
the revolving credit facility;
2) Borrowings expressed as a percentage of adjusted assets shall not
exceed 35% in respect of the Notes;
3) Net Asset Value should not be less than £260,000,000; and
4) 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 on page 41 of the annual report.
There were no breaches of any covenants either in the year just ended or the
prior year.
12 Share capital
2023 2022
Number £'000 Number £'000
Issued and fully paid shares of 10p each
Brought forward 304,167,039 30,416 298,061,439 29,806
New shares issued in year - - 7,562,100 756
Shares bought back and held in treasury (23,052,000) (2,305) (3,119,400) (312)
Treasury shares issued in year - - 1,662,900 166
Carried forward 281,115,039 28,111 304,167,039 30,416
Treasury shares of 10p each
Brought forward 1,456,500 146 - -
Shares bought back and held in treasury 23,052,000 2,305 3,119,400 312
Issued in year - - (1,662,900) (166)
Carried forward 24,508,500 2,451 1,456,500 146
Share capital 305,623,539 30,562 305,623,539 30,562
During the year, the total cost of shares bought back was £89,315,000 (2022:
12,887,000) after purchase costs of £452,000 (2022: £90,000). The Company
issued no shares during the year. In 2022, the Company received net proceeds
of £34,918,000 after issue costs of £208,000 from the issue of new shares,
and net proceeds of £7,578,000 after issue costs of £91,000 from the issue
of treasury shares.
As at 10 April 2024, the latest practicable date before publication of this
report, a further 11,795,000 ordinary shares have been bought back at a total
cost of £45,942,000 after purchase costs of £319,000.
13 Capital reserve
Realised capital reserve
2023 2022
£'000 £'000
Opening balance 477,074 423,068
Gains on disposal of investments 79,982 65,492
Net transaction costs (608) (630)
Net foreign exchange losses (464) (2,778)
Investment management fee charged to capital (6,960) (7,258)
Finance costs charged to capital (2,395) (1,424)
Special dividends received as capital 132 393
Taxation credit to capital 133 211
Balance at 31 December 546,894 477,074
Unrealised gains on investments
2023 2022
£'000 £'000
Unrealised gains brought forward 180,299 471,847
Unrealised (loss)/gains on investments held (35,739) (291,548)
Unrealised gains carried forward 144,560 180,299
Capital reserve balance at 31 December 691,454 657,373
14 Net Asset Value per ordinary share
The net asset value per ordinary share at the year end are shown below. These
were calculated using 281,115,039 (2022: 304,167,039) ordinary shares in
issue.
2023 2022
Net asset value Net asset value
attributable attributable
£'000 pence £'000 pence
Net asset value - Debt at par value 1,222,073 434.72 1,275,938 419.49
Add: amortised costs of borrowing 411 0.15 - -
Net Asset value - Debt at bookcost 1,222,484 434.87 1,275,938 419.49
A reconciliation of shareholders funds using debt at fair value is shown in
the Alternative Performance Measures on page 98 of the Annual Report. In prior
periods, the value of debt at par value was a fair approximation of the value
of debt at bookcost.
15 Transactions with the Manager and related party transactions
Details of the management contract can be found in the Directors' Report on
page 56 of the annual 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 on page 66
of the annual 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 on page 40 of
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 2023 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 2023.
2023 2022
%change(1) %change(1)
Australian Dollar 5.3% (4.7%)
Canadian Dollar 2.8% (4.2%)
Chinese Yuan 9.0% -
Danish Krone 2.3% (4.9%)
Euro 2.1% (5.0%)
Hong Kong Dollar 5.6% (10.6%)
Indian Rupee 6.5% (1.1%)
Israeli Shekel 8.2% 1.3%
Japanese Yen 13.4% -
Korean Won 8.1% (5.4%)
Norwegian Krone 8.8% (0.5%)
Swedish Krona 1.6% 3.1%
Swiss Franc (4.3%) (9.3%)
Taiwanese Dollar 5.5% (1.4%)
US Dollar 5.6% (10.7%)
1 Percentage change of Sterling against local currency from 1
January to 31 December.
Based on the financial assets and liabilities at 31 December 2023 and all
other things being equal, if sterling had strengthened by 10%, the profit
after taxation for the year ended 31 December 2023 and the Company's net
assets at 31 December 2023 would have decreased by the amounts shown in the
table below. If sterling had weakened by 10% this would have had the opposite
effect.
2023 2022
Potential Potential
effect effect
£'000 £'000
Australian Dollar 2,535 3,335
Canadian Dollar 5,026 5,606
Chinese Yuan 2,339 -
Danish Krone 2,636 2,777
Euro 17,983 25,237
Hong Kong Dollar 1,361 1,955
Indian Rupee 3,598 2,249
Israeli Shekel 284 461
Japanese Yen 1,694 -
Korean Won 1,248 1,486
Norwegian Krone 2,211 2,336
Swedish Krona 1,186 2,135
Swiss Franc 4,826 5,655
Taiwanese Dollar 1,691 6,451
US Dollar 61,677 59,587
Total 110,295 119,270
(ii) Interest rate risk
The Company had a mix of fixed and floating rate borrowings for both this and
the preceding year. The Company's borrowings are shown in note 11, including
detailing those borrowings which are floating and subject to interest rate
risk. In addition, that note and the Chairman's Statement sets out the
significant change to borrowings on 6 September 2023.
In summary,
From 1 January 2022 to 6 September 2023 the Company's had in place a £20
million multi-currency revolving credit facility based on a floating reference
interest rate plus a margin of 1.70% per annum.
From 1 September 2023, the Company put in place a two-year £80 million
multi-currency revolving credit facility based on a floating reference
interest rate plus a margin of 1.60% per annum, of which €40,943,000
(equivalent to £35m) was drawn down; and from 6 September 2023, the Company
put in place a seven-year €20 million Note at a rate of Euribor + 1.35%
If rates had increased or decreased by 350 basis points the impact to the
Company's profit or loss would be:
2023 2022
Profit or loss Profit or loss
350 bps 350 bps 350 bps 350 bps
increase decrease increase decrease
31 December
Non-sterling Note €20,000,000 (607) 607 - -
Non-sterling revolving credit facility €40,943,000 (1,242) 1,242 - -
$12,185,017 - - (353) 353
Sterling revolving credit facility £10,000,000 - - (350) 350
(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 7.5% (2022: 6.8%) over the ten year
period to 31 December 2023. The historic 3-year (annualised) volatility of the
Company to 31 December 2023 is 17.1% (2022: 19.9%).
At the year end the Company held investments with an aggregate market value of
£1,295,847,000 (2022: £1,302,605,000). 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 £129,584,700
(2022: £130,260,500) in the profit after taxation for the year ended 31
December 2023 and the Company's net assets at 31 December 2023.
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 2023 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.
2023 2022
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 1.83 2.59 1.87 2.64
5 day return 4.10 5.80 4.18 5.91
10 day return 5.80 8.20 5.90 8.35
21 day return 8.40 11.89 8.76 12.39
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 2023.
The above results suggest, for example, that there is a 5% or less chance of
the NAV falling by 4.1% or more over a 5 day period. Similarly, there is a 1%
or less chance of the NAV falling by 2.59% 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 2023 included £16,095,000 (2022: £25,835,000)
held in its bank accounts at the Depositary. The Company also held £709,000
(2022: £492,000) 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 or its sub-custodians 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
Depositary held £1,295,847,000 (2022: £1,302,605,000) 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
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:
2023 2022
Within Within More than Within Within
1 year 1-3 years 3 years Total 1 year 1-3 years Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Notes and bank loans - - 52,014 52,014 31,531 - 31,531
Revolving credit facility - 35,494 - 35,494 20,075 - 20,075
Interest cash flows on
Notes and bank loans 2,280 6,640 12,358 21,278 887 - 887
Interest cash flows on
revolving credit facility 1,883 1,412 - 3,295 794 794
Cash flows on other creditors 2,379 - - 2,379 1,796 - 1,796
6,542 43,546 64,372 114,460 55,083 - 55,083
Financial assets and liabilities
All liabilities carrying amount approximates fair value.
The Company's financial assets and liabilities at 31 December 2023 comprised:
2023 2022
Non- Non-
Interest interest Interest interest
bearing bearing Total bearing bearing Total
£'000 £'000 £'000 £'000 £'000 £'000
Investments
Australian Dollar - 25,347 25,347 - 33,347 33,347
Canadian Dollar - 50,159 50,159 - 55,901 55,901
Chinese Yuan - 23,394 23,394 - - -
Danish Krone - 26,360 26,360 - 27,769 27,769
Euro - 268,371 268,371 - 252,369 252,369
Hong Kong Dollar - 13,613 13,613 - 19,548 19,548
Indian Rupee - 35,979 35,979 - 23,074 23,074
Israeli Shekel - 2,837 2,837 - 4,608 4,608
Japanese Yen - 16,840 16,840 - - -
Korean Won - 12,483 12,483 - 14,856 14,856
Norwegian Krone - 22,111 22,111 - 23,356 23,356
Sterling - 107,156 107,156 - 88,985 88,985
Swedish Krona - 11,863 11,863 - 21,346 21,346
Swiss Franc - 48,258 48,258 - 56,551 56,551
Taiwanese Dollar - 16,604 16,604 - 64,511 64,511
US Dollar - 614,472 614,472 - 616,384 616,384
- 1,295,847 1,295,847 - 1,302,605 1,302,605
Other assets and liabilities
Cash and cash equivalents
Sterling 14,612 - 14,612 23,705 - 23,705
Taiwanese Dollar 303 - 303 14 - 14
US Dollar 1,889 - 1,889 2,608 - 2,608
16,804 - 16,804 26,327 - 26,327
Short term net (creditors)/debtors
Sterling - (2,234) (2,233) (25,000) (1,588) (26,588)
Canadian Dollar - 97 97 - 68 68
Euro - (1,442) (1,442) - - -
Japanese Yen - 98 98 - - -
US Dollar - 411 411 (26,606) 211 (26,395)
- (3,070) (3,069) (51,606) (1,309) (52,915)
Long-term creditors
Euro (87,097) - (87,097) - - -
Total (70,293) 1,292,778 1,222,485 (25,279) 1,301,296 1,276,017
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 2023 there were 305,623,539 ordinary shares in issue (2022:
305,623,539) of which 24,508,500 ordinary shares were held in Treasury (2022:
1,456,500).
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 during the year and the Company's policies for issuing
further shares and buying back shares (including the Company's
premium/discount control policy).
The Company's policy on borrowings is detailed in the Directors' Report in the
Annual Report.
Alternative Performance Measures (APMs) (unaudited)
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 2023 2022
Total assets less cash/cash equivalents (£'000) a 1,296,637 1,303,315
Net assets (Debt at fair value/bookcost) (£'000) b 1,220,980 1,275,938
Gearing (net) (a÷b)-1 6.2% 2.1%
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 daily net asset value (debt at fair
value) during the year, of the regular, recurring annual costs of running an
investment company.
Year end 31 December 2023 2022
Average NAV (£'000) a 1,253,409 1,321,438
Investment management fee (£'000) b 9,280 9,678
Other expenses (£'000) c 1,143 1,037
(b+c)÷a 0.83% 0.81%
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 2023 2022
NAV per ordinary share (Debt at bookcost) (p) a 434.87 419.49
Share price (p) b 400.00 419.50
(Discount)/premium (b÷a)-1 (8.0)% 0.0%
At 31 December 2023 2022
NAV per ordinary share (Debt at fair value) (p) a 434.33 419.49
Share price (p) b 400.00 419.50
(Discount)/premium (b÷a)-1 (7.9)% 0.0%
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.
NAV
NAV (Debt at
Share (Debt at bookcost
Year ended 31 December 2023 price fair value) value)
Opening at 1 January 2023 (p) a 419.49 419.49 419.49
Closing at 31 December 2023 (p) b 400.00 434.33 434.87
Dividend/income adjustment factor(1) c 1.0099 1.0093 1.0090
Adjusted closing (d = b x c) d 403.98 438.38 438.80
Total return (d÷a)-1 -3.7% 4.5% 4.6%
NAV
NAV (Debt at
Share (Debt at bookcost
Year ended 31 December 2022 price fair value) value)
Opening at 1 January 2022 (p) a 547.00 496.42 469.42
Closing at 31 December 2022 (p) b 419.50 419.49 419.49
Dividend/income adjustment factor(1) c 1.0066 1.0059 1.0059
Adjusted closing (d = b x c) d 422.28 421.96 421.96
Total return (d÷a)-1 (22.8)% (15.0)% (15.0)%
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.
Net asset value - debt at fair value
The net asset value per ordinary share with debt at fair value at the year end
are shown below. These were calculated using 281,115,039(2022: 304,167,039)
ordinary shares in issue.
2023 2022
Net asset value Net asset value
attributable attributable
£'000 pence £'000 pence
Net asset value - Debt at par value 1,222,484 434.87 1,275,938 419.49
Add: Notes and RCF par value 87,097 30.98
Less: Notes and RCF par value (88,601) (31.52)
Net Asset value - Debt at bookcost 1,220,980 434.33
In prior periods the Company's bank loans and RCF were valued at bookcost
which approximated to fair value. For the year ended 2022 bank loans and RCF
was valued at £51,606,000.
The fair value of the Notes is derived by aggregating the discounted value of
future cashflows, being the contractual
interest payments and the repayment of capital at maturity as each falls due.
The discount rate for each tranche
reflects the yield from the Euro Benchmark curve of similar maturity for each
tranche and the spread of similar credit
rated loans as observed via the ICE Bank of America Merrill Lynch Fixed Income
Index.
The fair value of the Notes is calculated daily for the purposes of the daily
NAV. The basis of this is set out above. A separate valuation was undertaken
by an independent debt valuation specialist firm and the NAV with debt at fair
value using the valuer's mid point valuation was not materially different from
the NAV with debt at fair value in the table above, being within 0.2%.
Financial Information
This announcement does not constitute the Company's statutory accounts. The
financial information for the year to 31 December 2023 is derived from the
statutory accounts for 2023, which will be delivered to the Registrar of
Companies. The auditor has reported on the 2023 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 2023 was approved on 10 April
2024. 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:
Montfort Communications iem@montfort.london
Gay Collins/Nita Shah 07798 626282
Apex Listed Companies Services (UK) Limited 020 3327 9720
Company Secretary
END
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