The word ‘pioneer’ sees a lot of use these days in the context of sustainable investing. Still, if you set up a business specialising in it almost 25 years ago, you merit the description more than most. And if you were investing in opportunities arising from the transition to a more sustainable global economy six years before anyone had even heard the term ‘ESG’, you are allowed to raise an eyebrow about its hold over asset managers.
Not that Impax Asset Management chief executive Ian Simm is remotely suggesting investors ignore ESG matters – he is just very clear about where his firm sits in relation to an acronym that first appeared in 2004 in a UN-backed report, Who Cares Wins, which contained “recommendations by the financial industry to better integrate environmental, social and governance issues in analysis, asset management and securities brokerage”.
Discussing the origins of Impax, Simm explains it was while he was studying physics at university that he first became fascinated by another term the United Nations had a hand in coining.
“When I graduated in the late 1980s, however, there was no such thing as a career in ‘sustainable development’ so I spent 10 years trying to work out what one might look like,” he adds.
“In that period, I worked at McKinsey as a management consultant and tried to set up a business in South Africa selling solar lighting systems, but I also spent a couple of years in corporate finance. It was at a very small company – just four people – called Impax Capital, which had been set up in 1994. I joined two years later and, by 1998, it was clear the corporate finance element was not really working.
“I did, however, pick up a mandate from the World Bank to help it design and run a solar energy fund on an asset management contract, and that is how Impax Asset Management got started – but it very much began from the perspective there was money to be made from investing in renewable energy, water supply and technology-based businesses that were helping to solve an environmental problem.”
To put it another way, Simm declined to stick a label – ‘socially responsible investing’ was, for example, much in vogue at the time – on what he was doing. “There was no values or ethical dimension per se – I just had a strong personal interest in this space. I suppose I had a bit of a vocation to work in the environmental sector but I was not, for example, knocking on the door of church pension funds.
“To be honest, when ‘ESG’ came along – almost as a clever gimmick consultants had designed to spark a conversation at a conference, I did not even notice! And, in fact, it has only been in the past 10 or 12 years that ESG has come to dominate the conversation in areas where we are quite often active as a business.
“And again, if I am honest, we find the idea can get in the way a bit – insofar as it can obscure the fact there are some fabulous returns to be made from investing in certain sectoral transformations, such as the switch towards zero-emission vehicles, the ramp-up of conservation, food and water efficiency, smart materials, the move to clean power and so on.”
Different starting point
Like it or not, though, Impax’s focus on opportunities arising from these sectoral transformations will, in the eyes of many investors, bear a strong resemblance to what they currently recognise as ESG. That being so, how does the company seek to communicate its broader aims of sustainable investing in a space where – possibly because that can mean different things to different people – it is so hard pin down a common vocabulary?
“We start from a different place in that we talk about investing in the opportunities arising from ‘the transition to a more sustainable economy’,” Simm replies. “What that means is we live on a constrained and finite planet and there are certain technological evolutions, changes in consumer preference and government responses to that fact which means the sectoral transformations I just mentioned are accelerated.
“That can in turn be positioned as a pretty mainstream values-laden idea around industrial revolutions or business evolution, which then creates investment opportunities plus growth. So, we can talk about that in inordinate detail without getting wrapped up in values, ethics or the ‘ESG’ label. Where you are right, though, is in inferring we actually get into ESG-type conversations the whole time – so how do we navigate that?
“The answer, really, is just by looking to put ESG into an appropriate context. As I said, the idea came out of a conference almost as a gimmick – it is not based on robust, academic analysis. It was dormant until the financial crisis of 2008, when suddenly it became an easy way to explain what had gone wrong with ‘the system’ – the idea being everything was in such a mess because we had not had enough of ‘that ESG stuff’.
“It really took off around the time of the Paris Climate Conference in 2015, when it just became the dominant theme – OK, so what has your business been doing to contribute to climate change? Along the way, though, nobody has really called out the reality it does not have a robust foundation. And it doesn’t – there is no inherent logic about why these three factors – environmental, social and governance – should be grouped together.
“The people who invented the idea in 2004 wanted to have a conversation about governance issues, which had become very topical in the wake of the Enron and Worldcom scandals, alongside the debate about ethical and environmental questions in the context of capitalism, which was going on in countries such as the Netherlands. It is understandable people wanted to talk about the idea – I just question it being put on a pedestal.
“It is not a bad concept, but the way we see it is ESG is best thought of as a metaphor – a reminder to do a better job in what we are already supposed to be doing in investment management. That, arguably, is three things, the first of which is agreeing investment beliefs with stakeholders – so active versus passive, whether you want to pay fees, whether you want any non-financial benefits to come out of your investing – those sorts of things.
“The second step is to look for opportunities and the third step is to manage risk. If we are using ESG as a sort of prompt to go around the track one more time and do a broader radar sweep, then it becomes a nudge to do a better job – rather than taking it literally as meaning you have to do three pieces of analysis and do that all separately from mainstream investment.”
Amid the catalogue of horrors that have resulted from Russia’s invasion of Ukraine, a different kind of consequence has been a growing realisation there are few quick or easy answers when it comes to cleaner energy and other environmental questions. Has Impax spotted any change in investor attitudes towards such matters in recent months?
“For over 20 years, those of us in this area of investment have been saying that, if taxation on fossil fuels were sufficiently high, there would be a massive incentive to invest in renewable energy and improve energy efficiency. And so, for a long time, there have been calls for carbon taxes and cap-and-trade permit schemes and so on – with limited success.
“Almost overnight, however, we saw a big rise in energy prices, which has effectively produced a similar result – not quite the same, but almost – and, in particular, an enormous incentive to conserve energy. So that has really shone a spotlight on both energy efficiency and renewable energy as these significant growth areas, which has been positive.
“In the near term, though, the headwinds have been much fiercer than the tailwinds – those headwinds, of course, being economic shock, a drop in consumer confidence and high prices for those using energy – so it has been a mixed picture from a mutual investment perspective. Still, the medium-term idea that fossil fuel supply is subject to geopolitical risk and can produce an extraordinarily damaging retail price is now well established.”
And what about the latest iteration of the UN Climate Change Conference, COP27, which had wrapped up in Sharm El-Sheikh a few days before we spoke – and with rather less fanfare than its predecessor in Glasgow 12 months earlier? Does Simm believe these events are still achieving what they are meant to be? “Well, seven-odd years ago, the average person would never have heard of the COP series,” he points out.
“The 2015 Paris Agreement put the climate change conferences on the map and so there has been a focus every year since then – particularly with COP26 last year. And while there is a bit of a tendency for the more cynical parts of the media to suggest not much has been achieved, I would argue the fact these events keep climate change in the media spotlight once a year is vitally important to keep the general public engaged.
“Even though COP27’s results may look a bit of a mixed scorecard, it has forced policymakers to think hard about what they can do to move forward their previous commitments in order to avoid the embarrassment of saying they have got nowhere. They even addressed the thorny question of how the developed world might compensate the developing world for damage caused by climate change.
“The so-called ‘loss and damage’ issue has moved off the starting blocks during this conference, at least with an agreement to create a fund – albeit no fund type or size was specified and all the other details need to be worked out. So, yes, given the type of weather-related problems emerging around the world on an almost weekly basis, I would say the COPs are really important now.”
Matters of trust
Does Impax’s ownership structure – it has been listed on AIM since 2001 – bring any benefits, relative to its competitors? “I would not say it is the optimal structure that will floor the competition, but it works for us,” is Simm’s typically matter-of-fact response. “The listing brought some working capital, which we needed at the time.
“Furthermore, both the transparency around governance our investors and clients receive and the ability to create equity ownership, which has a market value and is tradable, are very helpful. Today, management owns about 20% of the business and BNP Paribas Asset Management, our largest distribution partner, owns 14%. The remaining two-thirds is owned by small-cap funds and the public.”
And how important are brand and culture to asset management in general and Impax in particular?
“Brand is essential,” Simm believes. “Our industry is really about trust and brand is a key component to trust – so, if you have no brand association as a business, there is no trust and you are nowhere. It is not a negative, it is just zero. As for culture, that is absolutely at the heart of what we do.
“We spend a huge amount of time at our board and senior management team meetings talking about how it is going and how we can improve it and I would say Impax’s culture is best described as ‘collegial’. We try and avoid star managers and big egos and we are very objective and problem-solving – indeed, identifying a solution to a problem sits at the heart of our work.
“We take a long-term view to both relationships and investment management. I started the business almost 25 years ago and the senior members of my investment team have been with me for more than 20 years. We have had very little, if anything, in the way of senior or mid-level departures from our investment team so it is a stable culture – and it is also international.
“Some 40% of the business work overseas – including a large team in the US, following our acquisition of Pax World Management in 2018 – so we do put a lot of effort into building an international culture and sticking the different bits together. That ‘glue’ of the organisation has taken quite a long time to prepare to ensure it flows – if that is the right word to use with glue! – through the company internationally.”
Finally, what sort of businesses does Simm see as the likely winners and losers of UK asset management over the coming decade? “There is definitely a trend towards consumers having better and more easily accessible information,” he replies. “That is super-helpful because not only does it mean quality will be better perceived, it also means those who are perceiving it will have a better idea of what they are looking at.
“As such, the dangerous place to be in asset management now is to have a long-established brand but consistently weak performance – because the brand is likely to be tarnished and ultimately undermined by weak performance that is better observed. The flipside, of course, is the huge opportunity for emerging brands, like Impax, to establish more brand comfort and loyalty and demonstrate quality through the same mechanisms.”
Q. What is the best piece of advice you have ever been given?
If I could suggest two, the first would be: “This is a long game so you’d better get fit.” The second, which I heard recently is: “If you were the size of an atom, the science of the human world would look bizarre.” Apologies – that appeals to the physicist in me. But the science of the atom is basically quantum physics, which is bizarre from our vantage point. The point being, if you are going to be a successful asset manager, you have to look at things from different perspectives.
Q. What would be your ‘top tip’ to PA readers to help them run a better business?
Any list of top tips would have to start with ‘Do more homework’. There are some tired asset management brands out there that are not delivering for clients so looking under the bonnet to see what is really going on is essential.
Q. What single issue should most concern professional investors at present?
Energy prices and their link to inflation.
Q. Does anything about your job keep you awake at night?
With 80% of our clients coming from outside the UK, the real opportunity for Impax now lies in our international footprint. That idea sits at the core of our business, but it is quite challenging to be managing teams in the US, Hong Kong and continental Europe, with opportunities to build elsewhere.
Q. And what most excites you about your job?
The opportunity for Impax is just enormous – even after 24 years, it feels as if we are only now in the foothills of what the business could achieve.
Q. If you were head of the FCA, what would be your priority?
To avoid ‘green’ red tape.
Q. What advice would you give to someone starting out in investment today?
Find an area of investment you are passionate about. It is a long journey ahead and, if you want to stay the course, you can’t just go through the motions – you must be excited about what you are doing.
LINE OF DUTY
Impax Asset Management operates with a professional licence rather than a retail one, which means the business only talks to professional investors and any contact with private individuals goes through intermediaries. “In fact, something like 60% of our assets under management come from the intermediary channel,” says Ian Simm. “That is from all around the world, not just the UK.”
Indeed, as well as the UK, Impax has regulated positions in Hong Kong, Ireland and the US – so how would Simm say the domestic watchdog is doing, relative to its overseas peers, when it comes to balancing the protection of end-investors with allowing asset managers to do the best job they can? “All four are different, which does create some complexity and inefficiency to ensure what we are doing is optimised for them,” he begins.
“In the UK, I would say the regulator is working hard and putting a lot of thought into designing initiatives to improve outcomes for end-customers. Since we are not dealing with end-customers directly, we are not really seeing the full force of that but we do have a couple of areas where we are concerned there might be too much effort being put in or things are perhaps going too far.”
One relates to so-called ‘green labels’. “Until the EU created its taxonomy a few years back, the European market had labels for, say, environmental or ethical quality and these were transparent and effectively competed with each other,” Simm explains. “Since the EU set up its green taxonomy, regulators have been stepping into the space of private fund-label outfits.
“The end-result is they have crowded them out – because, when it comes to quality and kitemarks, people are always going to look to the government over a private sector group. It is not clear to me, therefore, that the UK is in need of a detailed sustainability disclosure regime of its own, which could also create unintended consequences or crowd out innovation pipelines.
“The other worry is Consumer Duty, where it is not clear the regulator is being sufficiently nuanced in thinking about the obligations for asset managers versus banks and insurance firms. The idea of financial businesses creating ‘good outcomes’ for investors is quite hard to map onto how this sector works because, while asset managers could promise ‘fair’, ‘transparent’ or ‘value for money’ outcomes, we cannot promise ‘good’ ones.”
Impax Asset Management predominantly manages equities but to what degree does it seek out opportunities in the private market – and, indeed, is it finding more innovative businesses in that space?
“We have been investing in private businesses since the early 2000s – for example, we did some growth-capital investing through our investment trust, Impax Environmental Markets,” says Ian Simm.
“The bulk of our private markets investing, however, has been into projects in the renewable energy space, where we are funding the construction of wind farms and solar projects and so on. There is both a structural need for capital here and a real opportunity for an experienced, knowledgeable manager to provide that capital in a private context.
“The developers of these sorts of projects usually have relatively small balance sheets, are operating in rural areas all around Europe, which is a big focus for us, and – because the regulations keep evolving – they are facing significant time pressure. So, we are meeting a clear need for capital and, given we are now on our fourth fund, this approach has been very successful.”
It is also very different, Simm points out, from the many investors who prefer to target assets that have already been built. “Literally tens of billions of pounds have been raised and invested in portfolios of these projects,” he continues. “The trouble with this type of investing, however, is there is only a limited amount management skill can do to deliver the cashflow.
“That is because the project is already built and operating – and backed by engineering contracts – so those sorts of assets tend to trade as a kind of alternative fixed income. They are a strong function of the interest rate at the time and, when interest rates are rising, then values are typically heading in the opposite direction and future cashflows get discounted.
“I would push back quite strongly on the idea private markets are where you find the ‘innovative’ stuff – though you could certainly argue growth-capital private markets are where you find the risky stuff. The problem with the energy and infrastructure space is there is usually a huge element of systemic risk around government regulation and potential factor risk, like the oil price, which is hard to diversify away from.
“In contrast, with more broadly-based growth capital you can diversify away from consumer demand and you are much less exposed to government regulation. Furthermore, the small-cap and mid-cap sector is typically where you find businesses that now need help rolling out proven technologies around the world. And, with proven technologies, there is much less in the way of efficacy or delivery risk while the opportunity to scale those businesses through distribution and supply and service platforms is enormous.”
This article first appeared in the January edition of Portfolio Adviser Magazine