Impax Environmental Markets : Annual Report and Accounts 2021

Impax Environmental Markets plc Annual Report and Accounts 2021

Celebrating

twenty years

Impax Environmental Markets plc

Annual Report & Accounts

For the year ended 31 December 2021

ANNUAL REPORT 2021

CONTENTS

STRATEGIC REPORT

Investment Objective 1

Financial Information 1

Performance Summary 1

Chairman's Statement 2

Manager's Report 6

Environmental Impact Report 10

Climate Disclosure 13

Structure of the Portfolio 16

Environmental Markets Classification 17

Ten Largest Investments 19

Details of Individual Holdings 21

Investment Policy, Results and Other Information 23

Engaging with our Stakeholders 30

Sustainability and Stewardship 33

GOVERNANCE

Board of Directors 38

Directors' Report 40

Corporate Governance 45

Directors' Remuneration Policy 49

Directors' Remuneration Implementation Report 50

Report of the Audit Committee 53

Statement of Directors' Responsibilities 55

Independent Auditor's Report 56

FINANCIALS

Income Statement 60

Balance Sheet 61

Statement of Changes in Equity 62

Statement of Cash Flows 63

Notes to the Financial Statements 64

INVESTOR INFORMATION

10 Year Financial Record 78

Alternative Performance Measures 79

Glossary 81

Directors, Manager and Advisers 82

Notice of Annual General Meeting 83

Investment objective

The investment objective of Impax Environmental Markets plc (the "Company") 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

PERFORMANCE SUMMARY2

At 31 December 2021

For the year ended 31 December 2021

% Change

496.4p

21.3%

Net asset value ("NAV") per Ordinary Share

NAV total return per Ordinary Share1

2021

496.4p

2021

21.3%

2020

411.2p

2020

31.0%

547.0p

30.1%

Ordinary Share price

Share price total return per Ordinary Share1

2021

547.0p

2021

30.1%

2020

422.5p

2020 28.9%

10.2%

19.6%

Ordinary Share price premium to NAV1

MSCI AC World Index3

2021

10.2%

2021 19.6%

• 2020 2.7%

2020

12.7%

£1,480m

13.1%

Net assets

FTSE ET100 Index3

2021

£1,480m

• 2021 13.1%

2020

£1,093m

2020

90.3%

• 1. These are alternative performance measures.

  0.85%

• 2. Total returns in sterling for the year to 31 December 2021.

• 3. Source: Bloomberg and FactSet.

Ongoing charges1 2021

0.85%

2020

0.95%

ALTERNATIVE PERFORMANCE MEASURES ("APMs")

The disclosures as indicated in footnote 1 above 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 79 and 80.

Chairman's Statement

For the year ended 31 December 2021, the performance of Impax Environmental Markets plc (the "Company", or "IEM") remained ahead of its broad equity market comparator index, and materially outpaced its environmental markets comparator index. The successes of 2021 have, however, been overshadowed by what we have witnessed since January 1st. The first quarter of 2022 has seen extreme market volatility, linked to a large extent to fears of a Russian invasion of Ukraine and the horrors which have followed since the war started. Our share price has fallen significantly, before staging a modest recovery, with buyers of IEM reappearing and our shares once again trading at a premium.

It is nonetheless pleasing to report that IEM has recorded another successful year, both on a relative and an absolute basis. Whilst the emergence in November and December of the Omicron variant had a negative effect on our portfolio at the time of writing in early 2022, the likely medium-term impact of this latest manifestation of COVID-19 is still uncertain; but it is clear that the variant causes less severe illness than earlier COVID-19 variants.

Rising inflation also created headwinds for the performance of many of the sectors in which IEM invests. Somewhat to the surprise of central banks, inflation - originally described by the Bank of England as 'transitory' - is proving to be higher and longer lasting than most analysts expected, aggravated by persisting supply chain challenges and labour shortages. To these pressures have been added soaring energy costs towards the end of the year.

These inflationary pressures are encouraging the US Federal Reserve to accelerate the tapering of its quantitative easing measures, reducing an important support for asset prices, and contributing to expectations of further interest rate increases. Whilst neither the advent of inflation nor the prospect of higher interest rates is benign for the Company - since in this environment share prices of smaller companies and those of higher valued

'growth' companies tend to come under pressure - the need to find solutions for climate change and resource management is unabated. One prominent example is the significantly higher cost of fossil fuels which should stimulate further investment in renewable energy, from which IEM should ultimately be a beneficiary.

PERFORMANCE

A strong start to 2021 saw the Company outperform both its global equity comparator index (the MSCI All Countries World Index or "MSCI ACWI"), and its environmental markets comparator index, the FTSE Environmental Technology 100 index ("FTSE ET100") in the first half. Despite the material underperformance during the final quarter of small- and mid-caps, which form the majority of IEM's holdings, performance for the year remained ahead of both comparator indices. During 2021, the total return of the net asset value ("NAV") per share of the Company was 21.3% and the share price total return was 30.1%, compared to a total return of the MSCI ACWI of 19.6% and the FTSE ET100 of 13.1%.

THE INVESTMENT CASE

The Company's investment thesis is that companies offering solutions to environmental challenges will outperform the broader market as we transition towards a more sustainable global economy. While to many this may have seemed fanciful just ten years ago, the thesis today not only occupies the centre of the stage, it is one which is now pursued by many others who have latterly entered a sector which, not long ago, IEM had largely to itself. During 2021, the run-up to the high-profile UN COP26 climate talks brought unprecedented focus on the global effort to address climate change, despite the year ending with something of a mixed result from the Glasgow Conference, and climate policy disappointments elsewhere, notably in the US.

Perhaps the most significant outcomes of COP26 were achieved before the delegates arrived. By the time the talks began in November, more than 130 countries had set or were considering net-zero goals, mostly with a 2050 target date. During the negotiations, India became the latest large economy to do so, and although its 2070 deadline is probably realistic, this disappointed many environmentalists. By the end of 2021, 136 countries, representing around 90% of global GDP, had committed to net-zero emissions. The COP also catalysed broader involvement by companies and financial institutions alongside governments. Significant coalitions were formed to commit to the phasing out of coal, cutting methane emissions, ending the sale of internal combustion engine vehicles and addressing deforestation.

2 | Impax Environmental Markets plc | Annual Report and Accounts 2021

John Scott

Chairman

"The role of the asset management sector in the transition to net zero is significant; financial institutions managing US$130 trillion of assets committed, through the Glasgow Financial Alliance for Net Zero, to achieve net-zero emissions by 2050."

The role of the asset management sector in the transition to net zero is significant; financial institutions managing US$130 trillion of assets committed, through the Glasgow Financial Alliance for Net Zero (GFANZ), to achieve net-zero emissions by 2050. As a signatory of the Net Zero Asset Managers Initiative, Impax Asset Management ("IAM" or the "Manager") supports the goal of net-zero emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5°C. It is also encouraging to note that during COP26 the Manager became a signatory to additional climate-focused initiatives - the Natural Capital Investment Alliance and the Principles for Responsible Investment's Deforestation Commitment (more information on page 36).

On a less encouraging note, many countries failed to tighten their emissions targets in line with the growing urgency indicated by the climate science. Modelling by Climate Action Tracker suggests that countries' existing 2030 targets would lead to 2.4˚C of warming this century, well above the 1.5˚C aimed for by the Paris Agreement. More policy action to drive accelerated mitigation of emissions will be needed, as will greater investment in adaptation to the impacts of a changing climate. IEM portfolio companies are providing solutions to both mitigation and adaptation, as is discussed in more detail in the Manager's Report.

The path of climate policy development will be an uneven one, as demonstrated by the failure of the Biden administration in the US to pass its Build Back Better legislation through the Senate by the end of 2021. The version passed by the House of Representatives in November contained US$555 billion of spending on clean energy, alongside funding for childcare and health, but for now this remains in limbo.

Despite these setbacks, climate change and other sustainability challenges remain important policy priorities in many countries and have become a major concern to consumers and most electorates. Notwithstanding the huge disruption caused by a pandemic which is already two years old, there is no evidence that the COVID-19 pandemic has pushed sustainability issues down the political agenda.

DIVIDEND

The Company's net revenue return for the year was £9.4 million, compared with £5.3 million earned in 2020. The increase in net revenue is attributable to the growing size of the Company and also reminds us of the impact on portfolio company earnings in 2020 due to the pandemic. There were 265.9 million Ordinary Shares in issue at the start of the year, growing to 298.1 million by the end of 2021, reflecting the issuance of 32 million new shares.

As previously outlined, the Board recognises that the steady expansion of the Company's capital base has the effect of diluting earnings per share if a single annual dividend is paid irrespective of when the new shares are issued; the problem is exacerbated the longer the periodbetween the end of the financial year and the dividend record date. The Company's dividend policy, as approved by shareholders at the May 2021 AGM, is to declare two dividends each year and, while the Company's capital base is growing, to pay both of these by way of interim dividends in order to make the distribution earlier and thereby reduce the dilutive effect.

Accordingly, the Board announced a first interim dividend for the 2021 financial year of 1.3 pence per Ordinary Share (2020: 1.3 pence), paid on 27 August 2021 to shareholders on the register at 6 August 2021, with an ex-dividend date of 5 August 2021.

The second interim dividend for the 2021 financial year, of 1.5 pence per Ordinary Share, was declared on 29 December 2021, for shareholders on the register on 7 January 2022, with an ex-dividend date of 6 January 2022. The dividend was paid on

28 January 2022. This equates to a total dividend for the 2021 financial year of 2.8 pence per Ordinary Share (2020: 2.3 pence). 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. Revenue earnings for the year were 3.29 pence per share. The Board has retained 0.4 pence per share of these earnings to replenish the revenue reserves, having drawn upon them to pay the 2020 dividends.

GEARING

The Board considers gearing to be a positive feature of investment trusts, and the Company's existing debt facilities, totalling £50 million, remain in place. However, utilisation of the Company's financing remains low, with gearing of 1.6% at year end as the extent of borrowing is dwarfed by the recent growth of the Company's NAV as explained below (this compares with net gearing of 2.2% at the end of 2020).

Whilst our Manager continues to advise of capacity constraints with our investment bias towards the smaller end of the market, any increase in our capital by way of borrowings results in a concomitant reduction in our ability to issue equity, so we are giving priority to the latter, not least to try and prevent an excessive premium developing. Should demand for the Company's shares reduce on a sustained basis, then expanding the investment capacity via increased gearing remains an option.

PREMIUM/DISCOUNT

The Company's Ordinary Shares traded at an average premium to NAV of 6.0% over the year to

31 December 2021. This is higher than the average 4.6% over the course of 2020. COP26 and the broader focus on sustainability throughout society contributed towards demand for IEM shares in Q4, with the premium reaching