Impax Environmental Markets | ESG

Investments are selected on an individual basis, but each investment is categorised according to the three above mentioned primary environmental markets that are the focus of the IEM’s investment policy: (i) alternative energy and energy efficiency; (ii) waste technologies and resource management; (iii) water treatment and pollution control. 

IEM invests in companies where at least 50% of the underlying revenues are generated by sales of systems, products or services that provide solutions in the environmental markets as specified in the sustainability goal above. To identify and determine the sustainability characteristics of the investee companies the Investment Manager uses a clearly defined and proprietary classification system or in-house taxonomy, (the “Environmental Markets Taxonomy”). The exposure of a stock to revenue resulting from relevant activities is assessed pre-investment (and on an on-going basis) and is confirmed and documented by the Investment Manager. As the environmental markets have expanded, there have been new universe entrants as well as companies leaving the universe due to both merger and acquisition activity, and due to the de-emphasis of environmental activity within businesses’ product portfolios. In addition, the revenue screen process is rerun periodically, currently annually. 

IEM will invest a minimum of 70% of its gross asset value in accordance with the sustainability goal. Where a company passes the 50% revenue test the whole value of the holding in the company will count towards this 70% test (i.e., the 70% test is calculated on a “pass/fail” basis).

Compliance with global norms is an investment requirement. The Investment Manager uses a Global Standards Screening which assesses the investee companies’ impact on stakeholders and the extent to which an investee company causes, contributes or is linked to violations of international norms and standards. The underlying research provides assessments covering the OECD Guidelines for Multinational Enterprises and the UN’s Global Compact Principles, as well as International Labour Organization’s Conventions, and the UN Guiding Principles on Business and Human Rights. In addition, the Investment Manager seeks to exclude all companies with any involvement in controversial weapons from investment. In using screens, the Investment Manager may (but is not obliged to) interrogate the screen information and override it if there is a reasonable basis in its judgement for doing so.

The Investment Manager has a fossil fuel policy in place. In an effort to mitigate or eliminate risks, the Investment Manager will only invest in energy and utility companies where it has determined that the companies have credible plans to attain the goal of net zero greenhouse gas emissions by 2050 or sooner, and in line with the Investment Manager’s fossil fuel policy, details of which are available here (Fossil Fuel Policy - Impax Asset Management (impaxam.com)).
 

The Investment Manager uses proprietary, fundamental ESG analysis to assess an investee company’s eligibility for investment. The ESG analysis aims to identify the quality of governance structures, the most material environmental harms for a company and assesses how well these harms are addressed and managed, as well as the management of human capital and climate risks. Additionally, the Investment Manager assesses any past controversies identified. A proprietary aggregate ESG score is then assigned for each company, based on a tiering system. The highest rated will be those assessed as managing the risks identified as part of the ESG analysis most effectively. The lowest rated will be assessed as not managing ESG risks to a standard acceptable enough to warrant investment and will be excluded from eligibility for IEM investment. Companies managing such risks at a lower, but still acceptable, standard and which are not deemed to cause significant harm will be subject to a weighting cap within the portfolio for risk management purposes. The Investment Manager considers it important to engage with companies and to analyse company disclosures and reports. The ESG process is proprietary to the Investment Manager, although the Investment Manager uses external ESG-research as an input. Fundamental ESG analysis continues post investment with periodic evaluations and updates of the overall ESG scoring of companies, with a peer review approach in place. 

While the Investment Manager seeks to manage sustainability risks via the above processes, there is still a risk of a negative effect on social and/or environmental outcomes. For example, the Investment Manager’s potential investment in a company that produces solar panels might have a negative effect on the environment by way of polluting. By way of an additional example, the Investment Manager’s potential investment in an industrials company that provides solutions to waste management might, as part of its business operations, result in the production of GHG emissions.

The Investment Manager, a UK Stewardship Code signatory, is an active shareholder with a longer-term investment horizon. Engagement is used in the context of gaining investment insights, mitigating risk, enhancing value and investment opportunities as well as contributing to positive outcomes (see further below under section “Investor Stewardship” and “Theory of Change”). The investment team is involved in monitoring IEM’s investee companies and the Investment Manager has policies in place on how to escalate issues, if and when concerns arise. 

With respect to proxy voting, the Investment Manager’s engagement is predominantly related to governance issues such as the election of directors, board structures and management remuneration. When practicable, the Investment Manager seeks to engage with the investee company before voting against management’s recommendation on an AGM resolution. The Investment Manager is also in dialogue Sustainability Disclosure Requirements (SDR) – Pre-Contractual Disclosure | 4 with the investee companies throughout the year to discuss and comment on proposed governance structures and material sustainability issues and processes.