This article is a version of one published in the Telegraph’s Questor column yesterday.

Sceptical investors have pulled money out of funds investing on environmental, social and governance (ESG) grounds, leaving shares in one specialist London Stock Exchange-listed fund trading at an appealing discount.

Impax Environmental Markets launched in 2002, years before the ESG bandwagon began in earnest, provoking fears about funds ‘greenwashing’ portfolios and prioritising social goals over financial returns.

Nevertheless, the backlash which saw investors withdraw almost £3.7bn from ESG funds in April-November last year has proved difficult for a £1bn global investment trust focused on companies contributing to a green, zero-carbon economy. 

More than half of its assets are invested in waste management, energy efficiency and water infrastructure, with the remainder split across alternative energy, sustainable agriculture, transport and digital technology providers. 

Its three top holdings, accounting for nearly 8% of assets, are Portuguese renewable energy developer EDP Renováveis, US water treatment firm Pentair, and Stericycle, a handler of hazardous waste listed on the US Nasdaq technology index. 

Impax Asset Management, the trust’s fund manager in London, calculates that 81% of its companies’ revenues were generated in areas covered by United Nations’ sustainable development goals in 2022.

It says that for each $10m (£7.9m) invested in the strategy, 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. 

Unfortunately, after two difficult years following the tech stock surge in the Covid pandemic, investors have not done well. The trust trails its benchmark, the FT Environmental Technology (ET) index, over all time periods, although since launch the gap is narrow with an average underlying investment return of 7.6% a year, just behind 7.8% from the index.

A big factor in the underperformance has been a decision not to hold Tesla, the pioneering electric car manufacturer that soared in the bull market up to 2021. Fund manager Jon Forster told me that his team had struggled with the expensive valuation and Tesla’s weak ESG scores. ‘To be fair, the strength of the brand and execution has been impressive,’ Forster admitted. 

Reflecting the trust’s disappointing performance, the shares have fallen to 9.5% below the net asset value (NAV) of its 63 investments, depressing the actual annual return to shareholders since launch to 7.6%.

That is in the past, however. The outlook is more positive, particularly as the discount is wider than the 5.5% average of the past year. That makes the shares in the 1.1% yielder cheap, in contrast to November 2021 when they peaked at 576p to trade above NAV.

This is appealing for anyone who wants to buy low and sell high, rather than lose money trading the other way round.

That the shares had tumbled to 371p on Thursday has less to do with ESG controversies and reflects the toll that rising interest rates took on its collection of medium-sized and smaller growth companies.

At its height, IEM’s portfolio was valued at more than 25 times forecast annual earnings. That price-earnings (P/E) multiple tumbled to about 16 times in September, which Forster (pictured above) said was so ‘compelling’ the investment trust’s board arranged a £35m overdraft to give his team more money to invest. That has lifted the trust’s borrowing, or gearing, from a low 3.1% to a still modest 6.2%.

After the pre-Christmas ‘Santa rally’, when markets were buoyed by hopes of early interest rate cuts, the portfolio’s P/E has risen to 20.6 times. That’s more expensive than the average global company in the MSCI All Country World index – a more mainstream benchmark than the FTSE ET – whose companies were valued at 16.4 times earnings at 31 December. 

Yet the valuation is not as rich as it appears. Firstly, the trust’s P/E is in line with its 10-year average and, secondly, the holdings are worth paying more for as they are growing faster. Analyst forecasts predict IEM companies’ profits will grow by 10.3% in the next year, almost double the 5.3% expected from MSCI index companies.

Forster, who runs the portfolio with Impax chief investment officer Bruce Jenkyn-Jones and co-manager Fotis Chatzimichalakis, says 2024 should be better for shareholders as the impact of huge policy initiatives in the US and Europe to support renewable energy comes through.

Any cut in interest rates will also reassure investors about the returns that solar and wind projects can make, while over-stocking pressures that have blighted the solar and natural ingredients sectors should ease, Forster says. 

With the trust buying back its shares and the fund managers recently making a ‘material’ increase in their personal stakes, it’s time for investors to follow suit and back a fund that is about to deliver on its good promises. 

Annual ongoing charges of 0.81% for the 2022 financial year are more than most global equities trusts but are in line with other funds with specialist mandates.