Company Announcements

 

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 value1,2	434.3p	419.5p
Ordinary share price discount to NAV2, 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 Summary⁴

For the year ended 31 December 2023 % change	2023	2022
NAV total return per ordinary share2,3	4.5%	(15.0%)
Share price total return per ordinary share2	-3.7%	(22.8%)
Comparator Benchmarks
MSCI AC World index5	15.3%	(8.1%)
FTSE ET100 index5	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 CO₂ 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 CO₂ 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 performance of global equities in general and small and mid-cap equities in particular. Falls in stock markets are likely to adversely affect the performance of the Company's investments. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends can substantially and adversely affect the value 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 ongoing war in Ukraine. The Company holds a significant part of its portfolio in companies with small market capitalisations, which are likely to be subject to higher valuation uncertainties and liquidity risks than larger capitalisation securities. The Company may also invest in unquoted securities which generally have greater valuation uncertainties and liquidity risks than securities listed or traded on a regulated market.	There are inherent risks involved in stock selection. The Manager is experienced and employs its expertise in selecting the stocks in which the Company invests. The Manager spreads the investment risk over a wide portfolio of investments in its three main sectors: energy, water and waste, as well as geographically. At year end, the Company held investments in 63 companies and the largest holding represented 2.9% of net assets. The Manager will not normally hedge against foreign currency movements, but the Manager takes account of the risk when making investment decisions. Further details on financial risks and risk mitigation are disclosed in note 16 to the accounts. The high risk rating remains unchanged; this reflects continued uncertainty in markets, though for changed reasons. Interest rates have stabilised and inflation reduced but geo-political uncertainty continues to remain high.		Neutral
Environmental markets The Company invests in companies operating in environmental markets. Such companies carry risks that governments may alter the regulatory and financial support for environmental improvement, costs of technology may not fall, capital spending by their customers is reduced or deferred and their products or services are not adopted.	The Company invests in a broad portfolio of investments which are spread amongst several environmental market sectors. The Manager has a rigorous investment process which takes into account relevant factors prior to investment decisions taking place. As well as reviews of the portfolio and relevant industry matters at quarterly Board meetings, the Board has an annual strategy day at which the overall strategy of the Company is discussed.		Neutral
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 significant discount to net asset value. Investor demand for the Company's shares may fall, causing the discount to widen.	The Board monitors the level of premium/discount and receives regular shareholder feedback from the Company's Manager and broker. The Board has the power, granted by shareholders, to buy back shares when in 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.		Neutral
Financing risk The Company may borrow money for investment purposes. If investment markets fall in value, any borrowing will enhance the level of loss. Capacity constraints on the availability of desirable companies for investment may mean the Company is unable to achieve the level of gearing wanted.	The Board has authorised the Manager to use its discretion to utilise gearing up to 10% of net assets. Any borrowing above this level requires Board approval. 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.		Decreasing
Investment Management
Underperformance of the Investment Manager Consistent long-term underperformance by the investment manager may lead to poor performance of the Company compared to its benchmark comparators and peers, a widening of discount to NAV, a reduction in capital and dissatisfied shareholders.	At each board meeting the investment manager reports on the performance of the Company including comparisons to its peers and benchmark comparators. 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.		Increasing
Operations - service providers risks
Failure or breach of Information Technology (IT) - including cyber- security, and physical security risks Failure of IT or physical security could potentially lead to breaches of confidentiality, data records being compromised and the inability to make investment decisions. In addition, unauthorised physical access to buildings could lead to damage or loss of equipment. The underlying risks primarily exist in the third party service providers to whom the Company has outsourced its depositary, registration, administration and investment management activities.	The Company's key service providers report periodically to the Board on their procedures to mitigate cyber security risks including their alignment with industry standards, their physical and data security procedures and their business continuity planning. The Board meets with its key service providers at each board meeting and directors often engage with service providers intraboard.		Neutral
Operational risk The Board has contractually delegated to third party service providers the management of the investment portfolio, and services covering: depositary and custody; registrar; company secretarial and fund accounting. The security of the Company's assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company's performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company's financial position.	Due diligence is undertaken before contracts are entered into with third party service providers, taking into account the quality and cost of services offered, including policies and procedures, and risk management and controls systems in operation in so far as they are relevant to the Company. Thereafter, the performance of the provider is subject to regular review and report to the Board. The Board monitors key persons as part of this oversight. The control of risks related to the Company's business areas is described in detail in the corporate governance report. The risk rating was increased due to organisational and personnel changes at the Company's company secretarial provider.		Increasing
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 policies to restrict the gathering, interaction or movement of people and take other measures as deemed appropriate to prevent its spread, causing disruption to markets generally, investee companies, the operations of the Company and its key service providers.		The Manager spreads the investment risk over a wide portfolio of investments. Risk analysis includes scenario analysis of possible negative market events. The Company's key service providers report periodically to the Board on their 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.	Neutral
Physical climate change risk While efforts to mitigate climate change continue, the physical impacts are already emerging in the form of changing weather patterns. Extreme weather events can result in flooding, drought, fires and storm damage, potentially impairing the operations of an investee company at a certain location, or impacting locations of companies within their supply chain.		Physical climate change risk is still an emerging topic for investors as well as for the management teams of investee companies. It has been a focus area of research and engagement by the Manager to identify companies particularly exposed to this risk and to open a dialogue with them on management options. 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.	Neutral
Investment management risks
Financial risks The Company's investment activities expose it to a variety of financial risks which include foreign currency risk, portfolio liquidity risk and interest rate risk. The Company invests in securities and has borrowings which are not denominated or quoted in sterling. Movements of exchange rates between sterling and other 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's main exposure is its floating-rate €20m seven-year Note and its €40m revolving credit facility, details of which are shown in Note 11.		The Manager does not actively hedge against foreign currency movements affecting the value of its investments, although the Manager takes account of this risk when making investment decisions. Non-sterling borrowings will effectively hedge non-sterling investments for matching currencies. The Company invests in range of global listed equities and the Manager monitors the foreign currency exposure and liquidity of holdings within the portfolio and reports on these to the Board at each meeting. 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 on any gains on the disposal of its investments. Breaches of the FCA's rules applicable to listed entities could result in financial penalties or suspension of trading of the Company's shares. Breaches of the Companies Act 2006 could result in financial penalties or legal proceedings against the Company or its Directors. Failure of the Manager to meet its regulatory obligations could have adverse consequences on the Company.		The Company has contracted out relevant services to appropriately qualified professionals, who monitor, and report to the Board on regulatory compliance. In addition, the Company's broker, auditor, Company Secretary and Manager provide the Board with regulatory updates on a regular basis. The Manager reports on regulatory matters to the Board on a quarterly basis. The assessment of regulatory risks forms part of the Board's risk assessment programme.

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 investments1	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 Net asset value attributable		2022 Net asset value 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
	%change1	%change1
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 factor1	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 factor1	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

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