These days, there isn’t a fund manager worth his salt that can’t talk at length about his commitment to ESG but few can stand up to Ian Simm.
The founder and chief executive of Impax Asset Manager celebrated in July the 20th anniversary of the creation of the firm that has emerged in recent years as the world’s largest green investment manager.
And the London-based manager received later that month an endorsement from St. James’s Place when the FTSE 100 wealth management giant said it will invest the best-part of £300 million in Impax’s new fund, a move that will likely attract other investors.
But Simm was in reflective mood when he met with Global Investor in August, preferring to focus on the underlying environmental and social challenges than his successes.
“The world population is set to increase over the coming years and more of these people are moving to cities so there are challenges around waste management, power and water for example,” he said.
As well as green issues, Impax is also looking at growing problems around social inclusion which are changing how people think about investing.
“In the past 20 years or so there has been an increasing focus on the shortcomings of the financial markets, highlighted by issues such as millennials not being able to buy a home or pension deficits. These have prompted questions around the role and design of financial markets and forced people to be more thoughtful about their investments,” said Simm.
The changing sentiments on environmental and social issues have, as far as the financial world is concerned, been bundled together under the banner of ESG.
“ESG is a touchpoint for many of these conversations and has been invoked over the years by those who want to point to incidents where investment risk has not been well managed. For other people, ESG is a more fundamental challenge to what capitalism is all about, which is more of a challenge to investment beliefs,” said Simm.
Impax published in June “Beyond ESG: investment risk through a lens”, a paper that highlighted failings by investors to spot “large-scale asset value destruction for individuals, institutions and society”.
The report argued established approaches to investment risk suffer from analysis that is inadequate, short term or too narrow in focus. Impax argued that ESG research is helpful but is not enough on its own, rather firms should use the Impax Risk Lens “which maps out the operating environment from which a company seeks to develop its business over the long term”.
For Simm, ESG is “a useful but incomplete framework”, the problems with which can be traced back to its origins.
“The term ESG first emerged around 2004. Since then issues around governance and, environmental and social factors have, for many, been glued together.
“Governance itself is fairly easy to define. There are financial reporting standards in place as well as compliance regimes and stock market oversight bodies. Environmental and social issues are more diverse. These are broad terms but lack exact definitions.”
Simm cited initiatives such as the Sustainability Accounting Standards Board and the Taskforce on Climate-Related Financial Disclosures set up by Mark Carney and Michael Bloomberg, but added: “No-one has set out to define ESG in a comprehensive fashion.”
Simm’s relationship with ESG is nuanced. “We don’t call ourselves an ESG manager though we do conduct ESG analysis,” he said.
Impax’s origins, by contrast, seem more deliberate.
“At the end of the 1990s, Impax defined a set of high growth sectors of the economy called Environmental Markets comprising four buckets: clean energy, renewables and energy efficient equipment; water and pollution control; waste and resource management; and sustainable food and agriculture.
Simm added: “Over time, we’ve seen the emergence of a broader opportunity arising from the transition to a more sustainable global economy, for example around healthcare, education and financial inclusion in developing countries.”
Impax launched in July its Global Opportunities fund and immediately secured a pledge of £286 million from St. James’s Place which renamed its St. James’s Place Ethical Fund the Sustainable and Responsible Equity Fund and promised to launch the fund “later this year”.
Impax and St. James’s Place said the new fund will be managed by Kirsteen Morrison and David Winborne of Impax.
Simm told Global Investor: “With St. James’s Place we are developing our Global Opportunities strategy which goes beyond the environmental markets, adding emerging markets healthcare companies for example.”
The Impax chief added: “St. James’s Place is our first major external client for the Global Opportunities strategy, and it is gratifying to receive their endorsement after many years seeding this fund. St. James’s Place is well known for adopting a rigorous process when selecting a fund manager, so this a real stamp of approval for Impax.”
The Global Opportunities strategy has a concentrated portfolio of 35 to 45 companies, invests over a five year horizon with a low turnover and has “broad geographic and sector exposure”.
The fund, which looks likely to significantly boost Impax’s $16.2bn under management, was made possible by Impax’s September 2017 acquisition of Pax World Management, a US environmental specialist.
Simm said: “The Pax acquisition is important because, before Pax, we were largely a European firm with only about 15% of our staff and clients in the US. We were also very much a global equity house with a significant focus on intermediated distribution whereas, after Pax, we are about 50/50 across Europe and the US in terms of clients and staff, and have added fixed income and smart-beta funds.”
Simm said a year after the acquisition Impax is looking to cross-sell its various strategies aggressively to its European and US customers.
“We’re currently reviewing opportunities to introduce additional capabilities to a broader range of clients. The Global Opportunities fund, which is managed in London and provides exposure to the full range of our investment ideas in listed equities, is one example of a strategy that we can introduce to US clients while we can also take investment strategies managed by the Pax team to our European clients.”
Pax may have been a big part of the Global Opportunities and St. James’s Place successes but Simm played down the likelihood of another acquisition.
“For now we are looking at an organic growth model and I think we have good capacity for future growth. The Pax acquisition was rather exceptional as we had known them for more than a decade and had a relationship with them established from the top down. Currently, we don’t have any aspiration to do something similar though we are hiring at the moment and have about a half a dozen positions to fill,” said Simm. Impax currently has about 145 staff of which about 55 were from Pax.
A challenge for Impax, like every financial firm, is the dynamic regulatory environment and the rules on climate change have been as fickle as any business sector in recent years.
Simm said: “We have been running our private equity capability since 2005 which has been largely focused on wind and solar farms though we have not invested in any UK projects. That is not because of bad regulation rather there are simpler structures in other European countries, which is a consequence of the way they’ve chosen to regulate these markets.”
He continued: “That said, the landscape is changing across Europe and other European countries have been introducing market risk to their regulations in this area. Germany used to offer these projects guaranteed fixed prices for years, whereas in the UK there were no guarantees of price levels.”
The 20th anniversary of a firm’s foundation is naturally a time for reflection: “I think, looking back, that we could have done more to communicate our vision more broadly. Although we’re currently the largest specialist environmental investment manager in the world, I think we could probably have been bigger if we’d hired more business development or communications people.”
But Simm is more focused on the challenges ahead and ensuring the company benefits from the changing sentiments to sustainable investing: “Over the next five to ten years, the challenge is to push ourselves to stay on the front foot to capitalise on these opportunities.”