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(Bloomberg Markets) — For more than 25 years, Impax Asset Management has been betting that an inexorable shift to a cleaner, greener global economy can also deliver strong investment returns.

The wager has paid off well enough to turn Impax into the world’s largest publicly traded fund manager focused on sustainability, with assets under management now totaling about £37 billion ($48 billion). Ian Simm, its chief executive officer and founder, has amassed a net worth of at least £40 million. A glass cabinet at the firm’s London headquarters showcases a clutch of honors for its environmental, social and governance-focused investing.

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But some of that shine has worn off. Impax’s fee revenue has fallen, and many of the clean energy companies in the firm’s portfolio have taken a beating in the market. Fund outflows, meanwhile, are higher, partly because of weaker demand from customers of BNP Paribas Asset Management, which markets Impax-managed funds under its own label and is also its largest shareholder. “Before the pandemic, the market saw strong demand for equity products marketed as ESG,” says Jens Ehrenberg, an analyst at Investec Bank. “But the hype around that buzzword has died down somewhat.”

The latest evidence of tough times for ESG comes from a World Economic Forum report that assessed 120 countries and concluded that the transition from carbon to clean energy had “lost momentum” over the past three years. That’s fed through to Impax’s investment performance. The firm’s largest US-domiciled fund, Global Environmental Markets, had more than $2.4 billion in assets as of July 18. Its 11.2% return over the prior 12-month period fell well short of the 18.6% return of its benchmark, as assigned by Morningstar Direct. Returns for that fund over three and five years are weaker, too. Impax’s second-largest US fund, Sustainable Allocation Fund, and the next ­largest, a large-cap fund, also returned less than their Morningstar benchmarks. Similar underperformance can be seen in Impax’s three largest Europe-domiciled funds, according to Morningstar.

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The company, which derives nearly half its business from Europe and a quarter from the US, has also taken a hit to its own stock price. Since peaking in late 2021, shares have plunged more than 70% even as the S&P 500 and FTSE 100 have achieved new highs. In the first half of its current financial year, Impax reported lower revenue and net outflows of £2.7 billion—the biggest in its history.

“Energy transition funds have had a pretty miserable time,” says Robert Fullerton, senior fund analyst at Hawksmoor Investment Management, a shareholder in Impax Environmental Markets Trust, a publicly traded trust run by Impax. “A lot of people have almost lost faith in the climate transition as an investment.”

Simm says he isn’t one of them. He pins the firm’s recent bad run on a series of tough breaks—high interest rates, inflation and an investor preference for the tech-driven growth stocks known as the Magnificent Seven. But the long-term investment thesis hasn’t changed, he says. “Oil consumption hasn’t come down, plastic pollution has gone up, and there’s more pressure on land resources and biodiversity,” Simm says. “That’s creating more opportunity for businesses that solve these problems.”

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Simm’s interest was sparked in the late 1980s when, as a physics undergraduate at University of Cambridge, he came across a United Nations report by Gro Harlem Brundtland, former prime minister of Norway. In addition to popularizing the phrase “sustainable development,” the dry, 247-page tome sounded a warning.

“It explained that the future of the planet [was at risk] if we didn’t change the course of economic activity,” Simm says. The argument appealed to his love for the natural world and his penchant for problem-solving. For his final-year university project, Simm used satellite images to measure Arctic sea ice, then went to West Africa to use the same techniques to measure vegetation growth near the Sahara. After receiving a graduate degree from Harvard University, he worked briefly for the consulting company McKinsey & Co., set up a solar energy business in South Africa and then joined a little-­known London outfit called Impax Capital.

The tiny firm—Simm was employee No. 5—had been created to arrange financing for a new breed of renewable energy companies. In 1998, Simm set up Impax Asset Management alongside the original firm to help him run a solar energy fund backed by the World Bank. A Danish client asked the asset manager to help it set up a fund consisting of companies that got most of their revenue from fixing environmental problems. A Dutch bank later made a similar request.

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Simm figured it was possible to make strong, risk-adjusted returns by betting on companies that build solar panels, wind turbines and EV batteries for a futuristic, climate-resilient society that, he believed, was bound to unfold. “We always had the idea that this was going to be a capitalist revolution,” Simm says. “You need to put money behind saving the world.”

Impax’s assets jumped from £15 million at inception to £1.1 billion a decade later. They totaled £37 billion in 2023. Virtually all of it has been organic growth. “Ian Simm is a very down-to-earth, cautious manager,” says Investec’s Ehrenberg. “In all their years, they’ve hardly made any acquisitions.”

Nonetheless, there have been some hard lessons and course corrections. A decade ago, when Impax pitched pure thematic strategies to would-be investors—everything from solar and wind power to clean water—it found little interest. “Three times out of four we were being shown the door,” Simm recalls. “They said: ‘We like the idea in principle, but it doesn’t fit with what we do.’ ”

The main reason was that pension funds and insurers had to hew closely to internal allocation rules to cover their liabilities. “If you can’t explain how your idea fits their asset allocation, you don’t get anywhere,” Simm says. “Or you constrain yourself to their ethical [investing] bucket, which is usually very small.”

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Impax cast its net wider. Today the fund manager’s top three holdings are Microsoft Corp., Linde Plc (a supplier of industrial gases) and American Water Works Co. (a utility). None are pure-play sustainability investments. Some appear to be moving in the opposite direction: Microsoft’s emissions rose 30% from 2020 to 2023, spurred by an energy-hungry push into artificial intelligence.

Ronald van Genderen, an equity fund analyst at Morningstar, says the software giant should be credited for some of its green initiatives, such as its effort to power cloud computing with renewable energy. But the expanding carbon footprint muddies the picture. “You can have a discussion whether Microsoft should be in a sustainable fund,” he says. This points to an emerging challenge for ESG funds, which often have large holdings in tech, because it’s not a traditional smokestack industry. The AI boom threatens that approach.

Simm declined to comment on Microsoft. The focus for Impax, he maintains, is to achieve shareholder returns, and some undesirable outcomes are simply the cost of doing business. “A manufacturer of solar panels produces hazardous waste which needs to be cleaned up,” he says. “Wind turbine producers require huge amounts of steel, which has an environmental footprint. It’s not really possible for almost any business to operate without any sort of environmental risk.”

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Other ESG-focused firms have also faced questions about their sustainability credentials. One is Impax’s nearest rival in terms of size—Generation Investment Management, co-founded and chaired by Al Gore, the former US vice president who shared the Nobel Peace Prize for work on climate change. Almost half the holdings of Generation’s largest fund have increased their emissions in recent years, according to a Bloomberg analysis published in February 2023.

For Impax, the more immediate challenge is to reduce client outflows. That depends partly on BNP Paribas Asset Management, the source of about a quarter of Impax’s annual revenue. The French firm markets “white label” versions of Impax funds and has seen lower demand from some retail investors in Europe.

Simm says that while some European wealth managers are bullish about global equities, others are more fretful and have sought shelter in fixed-income and money-market funds. “Our understanding is that at the BNP Paribas camp there is more of the latter sentiment,” he says. “It’s not due to [a lack of interest in] the sustainability theme.” BNP Paribas declined to comment.

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To keep a lid on costs, Impax has tightened employee travel and frozen its head count. And it’s seeking more fixed-income exposure. In July it acquired a Danish manager overseeing about £355 million in fixed-income assets. What could revive Impax’s fortunes? Analysts say it’s a waiting game: waiting for interest rates to fall, for inflation to be properly subdued and for investors to regain their interest in ESG themes.

Impax shares, in the meantime, have gotten so cheap that Ehrenberg of Investec raised the stock to a “buy” from a “hold” in early April. Fullerton of Hawksmoor says he’s banking on a recovery but expects it to be slow. “Despite the recent underperformance, Impax has a relatively strong track record since 2015,” says Van ­Genderen of Morningstar. “The transition will happen, but you can have a bumpy ride along the way.”

Naik is an ESG editor at Bloomberg News in London.

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