IEM Impax Environmental Markets Plc

LEI: 213800RAR6ZDJLZDND86

IMPAX ENVIRONMENTAL MARKETS PLC HALF-YEARLY REPORT AND ACCOUNTS FOR THE SIX MONTHS ENDING 30 JUNE 2024

IMPAX ENVIRONMENTAL MARKETS PLC HALF-YEARLY FINANCIAL REPORT ANNOUNCEMENT FOR THE SIX MONTHS TO 30 JUNE 2024

London 12 August 2024. Impax Environmental Markets plc (LSE: IEM) (the "Company" or "IEM") the UK's largest environmental markets investment trust, today announced its half-yearly results for the six months to 30 June 2024.

·    Net asset value ("NAV") per ordinary share of 429.3p (31 Dec 2023: 434.9p)

·    Net assets at 30 June 2024 of £1,113m (31 Dec 2023: £1,221m)

·    Ordinary share price of 388.0p (31 Dec 2023: 400.0p)

·    Ordinary share price discount to NAV at 9.6% (31 Dec 2023: 7.9%)

·    259.3m shares in circulation (reflecting 21.8m bought back)

Glen Suarez, Chairman of Impax Environmental Markets comments:

"The first half of 2024 for IEM has been marked by material volatility. Following our recent full year report, there have been continued challenges and upheavals in the macroeconomic environment which have created an uncertain backdrop generating headwinds for the small- and mid-cap companies in which IEM invests. Consequently, while the Company's investment thesis remains strong, and valuations have become increasingly attractive, IEM has seen its portfolio fall very slightly in value.

"The investment trust sector at large has experienced challenges in the returns experienced by shareholders. As of 30 June, shares in IEM traded at a discount of 9.6%, a narrower margin than the market average of 14.6% and the Company's own AIC sector (c.25%). There are also signs that stronger performance for UK equities is tightening discounts across investment trusts. However, history shows that, in the long-term, what matters most for shareholder returns is growth in earnings of the portfolio's companies and the Manager strongly believes that there is significant potential for the Company to generate very attractive returns for shareholders in the future.

"With upcoming worldwide elections, changing trade policies, continuing conflicts and interest rate cut uncertainty, and the current trend of investor demand pushing investment trusts to discounts, the second half of 2024 will continue to present challenges and opportunities for IEM. I have great confidence that the hypothesis underpinning the Company's investment strategy - that sustainability pressures create opportunities for companies providing environmental solutions - remains well positioned to deliver financial outperformance over the long term. I am also confident in the skills and experience of the Manager in identifying strong companies with attractive valuations that are well-positioned to generate value from those opportunities."

-ENDS-

Contact:   

Montfort Communications                                       iem@montfort.london /07471475485

IEM at a Glance

IEM Overview

Impax Environmental Markets plc ("IEM" or the "Company") is founded on the belief that, with insatiable demand for higher living standards on a finite planet, companies enabling the cleaner and more efficient delivery of basic needs - such as power, water and food - or mitigating environmental risks like pollution and climate change, will grow earnings faster than the global economy over the long-term.

IEM provides its shareholders with exposure to this exciting growth story. The Company invests in a well-researched and diversified portfolio of fast-growing, globally-listed companies providing innovative solutions to environmental challenges or improving resource efficiency. IEM's investment opportunity set is also likely to expand rapidly as regulation, technological innovation, and consumer preferences accelerate demand for sustainable solutions. The Board believes this approach can deliver superior risk-adjusted returns over the long-term.

IEM has recently experienced a period of weaker performance as a result of sharply rising interest rates and economic uncertainty. However, the underlying earnings of IEM's portfolio companies remain robust with excellent prospects for growth. As the shift to a more sustainable economy accelerates, IEM should benefit from many positive trends, including requirements for countries to improve energy security, the drive by thousands of companies to achieve "net zero" targets, and regulations such as the US Inflation Reduction Act, which support US domestic manufacturing in emerging industries.

The Manager

The Manager of IEM, Impax Asset Management (AIFM) Limited (the "Manager", or "Impax"), uses a proprietary classification system to define these higher growth markets. This approach has been in place since IEM was founded in 2002 and is curated by a dedicated Impax team.

As of today, the system identifies six sectors: Energy, Clean and Efficient transport, Water, Circular economy, Smart environment and Sustainable food. The range of activities included has naturally grown as technologies advance and more industries look to address material environmental challenges.

To qualify for IEM's investable universe, a company must derive at least 50% of its revenues from these Environmental Markets. As a result, IEM's investments are predominantly in small and medium-sized companies, which tend to focus their business models on fewer activities.

The Manager then follows a rigorous, performance-focused process based on bottom-up research to invest in proven and profitable companies. The breadth of the Environmental Markets opportunity set enables Impax to create a diversified portfolio spanning traditional sector boundaries. Once a company is purchased, its share price is continually monitored within the context of a live 'valuation range' which incorporates worst- and best-case assumptions.

The Manager also maintains an active dialogue with executive management. Doing so is an important part of the investment process and helps promote greater transparency around ESG and sustainability issues. Engagement outcomes, company valuations, as well as portfolio risk metrics and the macro-outlook, all inform buy and sell decisions.

The Portfolio

The IEM portfolio is built with a focus on financial returns, and its long-term thesis remains compelling.

Reflecting this, the investment managers are personally invested in the Company. Two of IEM's three co-portfolio managers - Bruce Jenkyn-Jones and Jon Forster - have worked together since its launch in 2002, while Fotis Chatzimichalakis has worked on IEM since 2015. IEM also benefits from competitive fees and a committed Board, which in 2023 authorised the Manager to increase gearing to reflect the high conviction and low valuations across the portfolio. Since IEM's shares began to trade at a discount in 2022, the Board has bought back shares at a steady rate. All buybacks were accretive to the Company.

Additionally, by focusing on Environmental Markets, the portfolio generates outcomes beyond financial returns. Annually, for each £1m invested, enough clean, renewable energy is generated to power 70 homes and the equivalent of 422 households' water consumption while 17 tonnes of domestic waste are saved. In addition, whilst the Manager does not target them in the investment process, 84% of revenues generated by portfolio companies were covered by United Nations Sustainable Development Goals in 2023.

Investment Objective

The investment objective of Impax Environmental Markets plc 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 SUMMARY

For the six months ended 30 June 2024

Alternative performance measures ("APMs")

The disclosures as indicated in footnote 1 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 in the Half-yearly Report.

1         These are alternative performance measures.

2         With debt at fair value.

3         Total returns in sterling for the 6 months to 30 June 2024.

4         Source: Bloomberg and FactSet.

Chairman's Statement

Glen Suarez

Chairman

"I have great confidence that the hypothesis underpinning the Company's investment strategy - that sustainability pressures create opportunities for companies providing environmental solutions - remains well positioned to deliver financial outperformance over the long-term."

The first half of 2024 (the "Period") for Impax Environmental Markets (the "Company", or "IEM") has been marked by material volatility. Following our full year report, there have been continued challenges and upheavals in the macroeconomic environment which have continued the headwinds for the small-and mid‑cap companies in which IEM invests. Consequently, while the Company's investment thesis remains strong, and valuations have become increasingly attractive, the portfolio fell slightly in value.

Short-term underperformance is not unusual given the nature of IEM's investment philosophy and approach, particularly in periods of interest rate uncertainty. This is discussed further in the Manager's Report.

It is also true to say that the investment trust sector at large has experienced challenges in the returns experienced by shareholders. Discounts on share prices to NAVs have widened, although IEM's at 9.6%¹ has been actively managed by the Board, causing it to fare better than the market average of 14.6% and the Company's AIC sector average of c.25%. However, history shows that, in the long-term what matters most for shareholder returns is growth in earnings of the portfolio's companies - and given the nature of portfolio companies' profitability and expected revenue growth, the Manager strongly believes that there is significant potential for the Company to generate very attractive returns for shareholders in the future.

It is worth re-stating the investment hypothesis that underpins the Company. There is a clear need for solutions to pressing environmental challenges, to promote resource efficiency and for infrastructure that enables basic needs to be more efficiently and cleanly met. We believe that investing globally in pure-play companies that provide these solutions across a diverse range of end-markets will generate long-term investment outperformance. The current combination of a strong underlying investment hypothesis and a de-rating of the portfolio compared with wider equity markets creates a compelling long-term valuation case.

Performance

During the Period, the share price total return of the Company was -2.3% and the NAV per share total return was
-0.5%. The MSCI All Country World Index ("MSCI ACWI"), the Company's global equities comparator index, meanwhile generated a total return of 12.2%, with the FTSE Environmental Technology 100 Index ("FTSE ET100") rising 7.4% over the Period.

Challenging macroeconomic conditions have impacted the Company's performance over the past two and half years, regrettably pulling the longer-term returns down. The Company has nevertheless delivered strong absolute returns over the longer-term, but it is fair to say that returns have fallen short of those of the wider market. Over five years to 30 June 2024, the annualised performance of the share price and NAV are 5.6% and 8.0% respectively, compared to 10.9% for MSCI ACWI and 19.5% for the FTSE ET100. Over ten years, the annualised returns are 10.7% for the share price and 10.6% for the NAV versus 11.8% for MSCI ACWI and 14.4% for the FTSE ET100.

1         With debt at fair value.

Although the MSCI ACWI shows the returns available across global equity markets generally, the FTSE ET100's purpose and coverage has changed over the years since the Manager first designed it. This was done via the Manager's environmental market taxonomy and approach to investing, in conjunction with FTSE. Since then, ownership and design has passed entirely to FTSE and the index has moved in a direction different to that of the strategy that IEM focusses on, including very large companies and technology companies which may not necessarily be providing environmental solutions to the proportion of their revenues we demand.

Notwithstanding the above and the disappointing comparison we see, we retain our belief in the long term potential of investing in environmental solutions and the Manager's ability to identify companies that are well-positioned to generate value from environmental opportunities.

Dividend

The Company's net revenue return for the Period was £8.6 million, compared with £9.1 million earned in the same period last year.

The second interim dividend for the 2023 financial year, of 2.9 pence per ordinary share, was declared on 2 February 2024 and paid on 15 March 2024. The aggregate dividend for 2023 was 4.6 pence, an increase of 15% from 4.0 pence for the previous year. 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.

On 6 August 2024, the Board announced a first interim dividend for this financial year of 1.8 pence per ordinary share (2023: 1.7p), payable on 5 September 2024 to shareholders who appear on the register at 16 August 2024, with an ex‑dividend date of 15 August 2024.

Gearing

The Board and Manager believe that gearing, or the ability to borrow capital to invest, is an attractive feature of investment trusts and can enhance long-term performance.

The Company has used gearing for a number of years and in 2023 the Board, in consultation with the Manager, put in place a combination of fixed and floating rate debt with a mix of maturity dates and interest rates.

At the Period end the aggregate of Company's borrowings was £85.2 million, giving net gearing of 7.5% (31 December 2023: £87.1 million and 6.2% respectively). A breakdown of the Company's borrowings at 30 June 2024 follows.

The Company has €60 million of privately placed notes ("Notes"), as set out in the table below.

The Company also has a two-year £80 million multicurrency revolving credit facility which has a floating interest rate priced at reference rate +1.6%. An amount of €40.9 million (equivalent to £34.5 million) was drawn down at the Period end.

At the period end, the weighted maturity of the Company's borrowings was 5.6% and the mix of fixed to floating was 40%:60% (31 December 2023: 6.4% and 40%:60%, respectively).

Discount Control

The discount at which the shares trade to the underlying net asset value ("NAV") is actively monitored by the Board and the Company's brokers. As referred to earlier, discounts have widened for investment companies and the Company's ordinary shares traded a discount to NAV of 9.6% on 30 June 2024 - slightly wider than the discount of 7.9% on 31 December 2023.

This is a disappointing result given the Company has bought back 21,774,810 shares in the Period, equivalent to 7.7% of the Company's issued share capital at the start of the year. A positive side effect of a wider discount is the greater accretion to NAV from share buybacks. So far this year buybacks have enhanced NAV by 0.7%

In the first half of 2024 the investment trust sector trailed behind the broader equity markets, experiencing diminished returns and more pronounced discounts. This trend has coincided with a wave of buybacks, tender offers and redemptions.

There were 281.1 million ordinary shares in circulation at the start of the year, falling to 259.3 million by the end of the Period, reflecting the 21.8 million shares bought back, of which 46,283,310 shares were held in treasury at 30 June 2024. The Board will continue to exercise its authority to buy back or issue shares depending on the circumstances and when in the interests of shareholders.

Change of Broker

The Board undertakes reviews of all of its service providers on a regular basis. As part of this the Board undertook a review of its broker. This included written submissions, presentation of proposals, and follow up questions. Consequently, the Company appointed Winterflood Securities Limited as its sole corporate broker on 28 May 2024. The Board, and I personally, take this opportunity to thank Investec for its much-valued services over the years.

Sustainability Disclosure Regulations and Sustainability Label

At the end of 2023, the Financial and Conduct Authority (the "FCA") announced the finalised rules and introduction of new Sustainability labels under the new Sustainability Disclosure Regulations. These labels became available to use with effect from 31 July 2024. The Board is actively working with the Manager to assess the appropriateness of any label for the Company and will in due course announce its plans. The regulations also incorporate a new set of "anti‑greenwashing" rules, which seek to ensure consumers receive accurate information about unit trusts, open‑ended investment companies and investment trusts which claim to offer access to sustainable and related investment themes. the Company and the Manager met all greenwashing requirements and will continue to do so.

Outlook

Political momentum for decarbonisation is gaining traction globally, with several key regions embracing ambitious climate goals. In the US, UK and EU, policies are increasingly aligned with green initiatives, reflecting a strong commitment to reducing carbon emissions. Notably, China's third plenum has, for the first time, pledged to pursue decarbonisation, signalling a significant policy shift for the world's largest emitter.¹ Meanwhile, Australia is making strides in renewable energy investment and policy frameworks.

With ongoing cost reductions and favourable policies, renewable energy's economic appeal is growing, accelerating the shift to sustainable energy. Recent examples include Indian energy production offering ongoing (rather than intermittent) solar power at lower rates, reflecting the sector's increasing cost-competitiveness, while in the U.S., Texas stands out for having the largest renewable market share without state subsidies, highlighting the sector's market viability. The cost reductions in renewables are driven by economies of scale, improved supply chains and technological advancements.

It is encouraging to learn that according to Bloomberg NEF, the world may have hit a pivotal milestone by reaching peak carbon emissions last year. This suggests that emissions from energy and industry in particular have likely topped out, setting a precedent for a downward trend. This peak is a significant marker in the fight against climate change, indicating a shift towards greener energy sources and more sustainable practices. It reflects the cumulative impact of worldwide efforts in renewable energy adoption, energy efficiency improvements and stringent environmental policies.

With worldwide elections, changing trade policies, continuing conflicts and the current trend of investor demand pushing investment trusts to discounts, the second half of 2024 will continue to present challenges and opportunities. I have great confidence that the hypothesis underpinning the Company's investment strategy - that sustainability pressures create opportunities for companies providing environmental solutions - remains well positioned to deliver financial outperformance over the long-term. I am also confident in the skills and experience of the Manager in identifying strong companies with attractive valuations that are well-positioned to generate value from those opportunities. To echo the 2023 Annual Report, as Chairman, I will maintain a relentless focus on that performance, and challenge the Manager to ensure we generate positive investment returns for our shareholders over the long‑term.

Glen Suarez, Chairman

9 August 2024

1         Five Trends in Decarbonisation That Are Shaping Global Politics - Carnegie Endowment for International Peace.

Manager's Report

Jon Forster                           Fotis Chatzimichalakis                          Bruce Jenkyn-Jones

Performance Summary

In the first half of 2024, IEM's NAV fell 0.5%. By contrast, global equities as measured by the MSCI All Country World Index ("MSCI ACWI") rose 12.2%.

Despite robust global equity returns, the underlying dynamics were more complex. Resilient economic data and company earnings vied with softer US employment data and weaker consumer spending. As a result, markets readjusted fitfully to "higher-for-longer" interest rates. Geopolitical tensions have created an additional layer of volatility.

 Against this backdrop, IEM's market cap bias proved a headwind. IEM invests in companies which generate at least 50% of their revenues from Environmental Markets. These tend to be mid and small-caps that are less accessible to IEM's shareholders and in which the Manager believes it has an information advantage. However small and mid cap companies¹ have suffered disproportionately from the "higher and for longer" interest rate environment, underperforming their large cap counterparts by over 8% over the Period.

This is reflected in IEM's relative valuation, which derated over the six months to 30 June 2024. At the end of last year, the portfolio traded on price to next twelve-month earnings ("PE") multiple of 20.7x, a 26% premium to the MSCI ACWI. That multiple has seen little change, but the premium has fallen to c.16%, as MSCI ACWI PE has risen faster. While the market has become more expensive, the Company's portfolio has not, even as its forward-looking earnings growth data remain higher.

The effect is exacerbated by the market's willingness to pay up for a handful of mega-cap technology names outside of IEM's investable universe. Weakness from Tesla has reduced returns from the wider 'Magnificent Seven' group. Despite this, not holding AI chip-designer Nvidia, along with Apple, Microsoft, Amazon, Meta and Alphabet, accounts for a -5.7% drag on relative performance. Performance of the FTSE ET100, which we also consider against portfolio returns, was similarly dominated by names such as Schneider Electric, Tokyo Electron and TSMC, all of which are many times larger than IEM's biggest holdings.

Yet performance within the portfolio has been encouraging. Earnings growth has been above that of the broader market, with notable positives from natural ingredients companies which weakened performance last year. At the same time, areas of the portfolio which have delivered consistently strong returns - such as US construction, digital infrastructure and electrical grids - continued to do so.

IEM is also starting to see the benefits of M&A as market participants acknowledge the disconnect between holdings' long-term growth prospects and their low valuations. Stericycle and Terna Energy have both been subject to takeover bids at double digit premiums during the period.

Pockets of weakness continue to be driven by temporary headwinds such as inventory destocking in solar, bioprocessing and some select industrial stocks. At the time of writing, Independent Power Producers ("IPPs") are demonstrating how swiftly these can reverse. With purchasing manager indices ("PMIs") now in expansion territory, and industrial companies' managements increasingly confident of improving demand, there are reasons for cautious optimism across the portfolio.

Key Developments and Drivers of Environmental Markets

The US Presidential Election

The US presidential election will undoubtedly affect global trends in Environmental Markets. The composition of Congress will also be paramount, with the next President presiding over a potentially divided or united House. Given the unreliable nature of polling this far in advance, Impax is modelling for all four of these potential scenarios.

The fate of the US Inflation Reduction Act ("IRA") is a key question for investors. Impax maintains the view that the chances of an outright repeal are extremely low, even under full Republican control. This is because many measures have Republican support. The Rocky Mountain Institute estimates that Republican-leaning states will receive over US$600bn in IRA investments between now and 2030, roughly double the amount for Democrat states.²

1         As measured by the MSCI ACWI Mid and Small Cap indices.

2         Climate Power, 2024: The state of the clean energy boom.

However, there are real prospects for some IRA cutbacks regardless of who is in office. Partly this is because the IRA has been more successful than anticipated, with a higher than forecast uptake of tax credits by project developers. The most vulnerable elements relate to tax credits on electric vehicles ("EVs"), clean electricity, and energy efficiency. While eliminating this funding would remove a potential tailwind, IEM's investment managers target companies whose success is determined by their operational advantages, not their ability to collect subsidies.

It is also important to note that there can be a meaningful gap between what politicians say on the campaign trail and ultimately enact. During Donald Trump's term in office, Environmental Markets performed strongly and pledges to repeal Obamacare went unfulfilled. Furthermore, with many renewables now at cost parity with fossil fuel equivalents,¹ no political party controls the advance of key technologies. These structural growth drivers will continue to underpin Environmental Markets for the next four years and beyond.

Resurgent M&A

There is a long history of mergers and acquisitions ("M&A") in Environmental Markets. Like the investment managers of IEM, large corporates and private equity are drawn to the structural growth potential that these companies offer. Activity typically picks up when a sector is viewed as ripe for consolidation or valuations become particularly attractive.

Notwithstanding the longer-term cyclical trend, there have been fewer takeovers in Environmental Markets over the past decade. Maturing companies have instead focused on consolidating existing business and growing their own franchises. However, in the last six months, with valuations materially lower following higher rates, M&A activity has meaningfully stepped up.

This is most evident in IPPs - where valuations have been compressed by higher rates, supply chain issues and - most recently - weak European power prices. Valuations for listed companies have dislocated from much higher multiples in private assets, with Canadian investment group Brookfield acquiring France's Neoen and private equity group KKR buying Germany's ENCAVIS.

The IEM portfolio is starting to benefit as a result. In June, Terna Energy announced that it was being taken private by Masdar, an Abu Dhabi owned renewables developer. At an EV/EBITDA multiple of c.15x 2024 earnings, the takeout price is almost double where the Manager initially started its position four years ago. By comparison EDPR, a Portuguese IPP also held in the portfolio, trades at 12.5x EV/EBITDA on 2024 earnings.

The same month also saw Waste Management (not held) announce its intention to acquire long-standing IEM holding Stericycle for USD 7.2 billion, a c.38% premium to where shares traded before rumours of the deal emerged. Stericycle is the leading medical waste management player in the US with >40% market share.

Battery Technology

Demand for batteries is structurally growing. This is driven by rising EV sales and renewables' increasing proportion of the global energy mix.

EV sales continue to grow strongly despite moderating growth ex-China, increasing from 4% of all global vehicle sales in 2020 to 18% in 2023.² Similarly, the International Energy Agency ("IEA") predicts that by 2028, renewables will account for over 42% of global electricity generation.³ Backing up renewables with storage solves intermittency - by which energies like wind or solar are produced at different times from when required - such that battery attachment is expected to grow from 2% to 9% by 2030.⁴

This combination has incentivised manufacturers to invest in developing ever-more powerful batteries. Lithium iron phosphate ("LFP") has emerged as the dominant technology, with scaled-up manufacturing meaning that a typical LFP battery costs around 85% less than it did a decade ago.⁵ Continued investment in raw material supply chains means prices are expected to ease further in 2024, further boosting potential demand.

These structural growth prospects informed IEM's new position in CATL, a Chinese battery producer. The company is a global market share leader thanks to a history of technological innovation across battery chemistries and its competitive cost structure. Recently, the company unveiled a battery it claims can deliver 400km of range on a ten‑minute charge.⁶ At the time of purchase, the shares were overly discounted due to anaemic EV sales growth, China's lacklustre rebound post-Covid and the potential impact of US tariffs. However, with a robust balance sheet, the shares offer significant upside on the basis of sales to Asia and Europe alone.

1         BNEF Levelised Cost of Electricity, December 2023 - 2H 2023 LCOE Update: An Uneven Recovery | Full Report | BloombergNEF (bnef.com).

2         Electric vehicles - International Energy Agency ("IEA").

3         Executive summary - Renewables 2023 - Analysis - IEA.

4         Bernstein 'Global Energy Storage' - June 2024.

5         2023 Lithium-Ion Battery Price Survey | BloombergNEF (bnef.com).

6         CATL unveils EV battery enabling a 400 km driving range on a 10 minute charge - pv magazine International (pv-magazine.com).

Absolute Performance Contributors and Detractors

Contributors

A structural increase in grid spending has helped Prysmian, a manufacturer of cables and fibre optics, deliver the portfolio's largest positive contribution year to date. A similarly sustained rise in both commercial and residential construction - particularly in the US - means related holdings have also boosted returns. Top contributors with impressive earnings included water infrastructure company Advanced Drainage, as well as sustainable decking producer AZEK and the Dutch industrial specialist Aalberts.

The portfolio's technology holdings also continue to boost returns. While IEM has no direct exposure to AI, Monolithic Power Systems is a leading supplier of energy efficient power semiconductors to chip-designer Nvidia, resulting in strong data centre growth. Other positive contributors included Trimble - a maker of geolocation software - and Descartes - a logistics software company.

Natural ingredients companies, have started to reverse much of last year's losses. The likes of DSM-Firmenich, Borregaard and Corbion have all posted encouraging results. Earnings indicate inventory destocking in key consumer and healthcare markets is easing, with profitability rising as a result.

Lastly, IEM's waste management holdings Clean Harbors and Stericycle have also made significant positive contributions. In addition to Stericycle's previously mentioned takeover bid, Clean Harbors has been able to lift prices especially in the core industrial hazardous waste business, driving upgrades to full-year guidance.

Detractors

EDPR made the largest negative contribution to performance. As mentioned, deferred rate cuts and weaker European power prices provoked a sharp pullback in IPPs (including Northland Power and Ormat) at the start of the year.

Yet rising M&A is forcing the market to acknowledge mismatched valuations between public assets and those in private hands. The sector is also benefiting from soaring electricity demand from data centres. With EDPR also focussing on its higher returning projects, the market's view on temporary headwinds is evolving, demonstrating the appeal of companies supported by long-term trends and robust operational performance.

Performance in the portfolio's solar holdings - another source of weakness in 2023 - was more split. Xinyi Solar, a Chinese producer of solar glass, initially boosted returns as input prices became more favourable, but retraced these as volume expectations softened. By contrast SolarEdge, the US-listed producer of optimisers and inverters, continues to face inventory destocking challenges. However, at these levels, the investment team is comfortable holding a small position until sales recover.

Destocking also remains a challenge for the portfolio's bioprocessing holdings and some select industrial names. Bioprocessing entails manufacturing chemical compounds from living organisms, typically cells or their components. The long-term efficiency gains which make the sector attractive have been offset by softer near-term demand, with weak results from industry bellwether Sartorius (not held) as well as holdings Repligen and Cryoport.

Similarly, cautious earnings guidance driven by uncertain end demand saw LEM, NIBE and Signify all detracting from returns. The three companies produce electronic components, specialising in measurement, diversified industrials and lighting respectively. While they are all focusing on operational improvements, a meaningful rally in the shares will require a clear sign that destocking is coming to an end.

Relative Performance Analysis

Portfolio Positioning and Trades

As of 30 June 2024, the Company held a diversified portfolio of 62 listed companies. These are balanced between cyclicals and defensives, although the Manager has moderately increased cyclical exposure to reflect more attractive valuations. Additional activity has focused on increasing weights where the Manager has most conviction, while exiting positions with less visible upside.

The Manager initiated two positions. CATL, as discussed above and Cognex, a US-listed company specialising in machine vision systems. These play a critical role in factory automation, improving energy efficiency and reducing waste. Ageing workforces, the repatriation of industrial activity and corporate efficiency provide long-term structural growth drivers. Cognex also continues to find new applications for its technology.

The Manager exited its positions in Indraprastha Gas, an Indian provider of natural gas, and Dialight, a maker of energy efficient lighting for a range of industrial end markets. Regulatory changes are increasingly pushing for electrification of IPG's key transportation end-market, fundamentally changing the investment thesis. Similarly, poor operational performance weakened Dialight's investment case, with the Manager reallocating to higher conviction opportunities.

The Manager sold its position in Eurofins, an environmental testing company listed in France. Due to a changing business mix, company revenues fell below Impax's 50% environmental markets revenue threshold.

It is IEM's investment thesis that companies operating in Environmental Markets should be able to deliver superior earnings growth over the long-term. Recent performance has called this into question, particularly given the operational challenges in some high conviction sectors such as IPPs (as referenced previously). However, the companies held in the IEM portfolio have delivered earnings growth over 2% p.a. higher than broader global equities as represented by the MSCI All Country World Index, calculated on a bottom-up basis.

The main driver of performance weakness therefore has been a compression in price to earnings ("PE") multiples. In other words, how much the market is willing to pay for a stream of future cash flows. Higher interest rates and the prospect of economic weakness have driven investors to exit both higher growth environmental markets and smaller companies in general, regardless of their underlying fundamentals. Since 2021, the IEM portfolio's PE multiple has contracted far beyond that of the MSCI ACWI.

As a result, IEM's portfolio is now more attractively priced relative to the MSCI ACWI than it was before the pandemic. With expected earnings growth still well above the index, IEM's relative PE premium has fallen to 16%, well below its ten-year average as illustrated in the chart on page 10 of the Half-yearly Report. At the same time, the broader market has become more expensive. This is despite the longer term growth story for many holdings becoming stronger thanks to technological innovation, regulation and consumer preferences.

Outlook

Equity markets are paying close attention to politics in the second half of 2024. The UK's Labour party has won its first election since 2005. The EU and France are grappling with the consequence of electoral gains by far-right parties. In the US, President Biden has withdrawn his candidacy. While the team is alert to these developments and reviews exposure accordingly, the importance of short-term political events should not be overstated relative to technology, regulation and consumer demand - all long-term drivers which continue to favour Environmental Markets.

In the meantime, the market now expects two US rate cuts by the end of the year, even if long-term rate expectations have in fact risen to reflect a possible Trump victory. Earnings growth within the portfolio remains above that of the broader market. Even in areas like solar and bioprocessing, where destocking headwinds have taken longer than expected to abate, conversations with management are pointing to more positive trends by the end of the year. In short, both the fundamentals and macro backdrop for IEM remains supportive.

Lastly, the portfolio's valuation premium relative to global equity markets has fallen to below its ten-year average. With suppressed valuations in small and mid-caps, the portfolio's forward PE has fallen to 20.3x, while its premium has moved sharply from 22% to 16%. This market divergence is driving up M&A activity within the portfolio and across Environmental Markets more broadly. IEM offers shareholders meaningfully diversified and differentiated exposure to the broader market in a vehicle which continues to trade at a discount to NAV. Given these potential catalysts, the Manager remains optimistic.

Impax Asset Management (AIFM) Limited

9 August 2024

 Ten Largest Holdings

As at 30 June 2024 (31 December 2023)

Top Thirty Portfolio Investments

All investment is in equity securities unless otherwise stated.

The full portfolio is published each month, quarterly in arrears on the Company's website

www.impaxenvironmantalmarkets.co.uk

Interim Management Report

The Directors are required to provide an Interim Management Report in accordance with the Financial Conduct Authority ("FCA") Disclosure Guidance and Transparency Rules ("DTR"). The Directors consider that the Chairman's Statement and the Manager's Report of this Half-yearly Financial Report, provide details of the important events which have occurred during the six months ended 30 June 2024 ("Period") and their impact on the financial statements. The statement on related party transactions and the Directors' Statement of Responsibility (below), the Chairman's Statement and the Manager's Report together constitute the Interim Management Report of the Company for the Period. The outlook for the Company for the remaining six months of the year ending 31 December 2024 is discussed in the Chairman's Statement and the Manager's Report.

Details of the largest ten investments held at the Period end are provided on pages 12 and 13 of the Half-yearly Report and the structure of the portfolio at the Period end is analysed on page 15 of the Half-yearly Report.

Principal risks and uncertainties

The principal risks and uncertainties facing the Company are summarised below:

(i)      economic and market risks - price movements of the Company's investments are highly correlated to market movements and general economic conditions. This is even more so for investee companies with small market capitalisation;

(ii)     environmental markets - the Company invests in companies operating in environmental markets. There is a risk in such markets that change to governmental support, technology costs or customer demand may have an adverse effect;

(iii)     share price trades at excessive discount to net asset value - returns to shareholders may be affected by the level of discount at which the Company's shares might trade;

(iv)    financing risk - the Company may borrow money for investment purposes and should investment markets fall in value, any borrowing will enhance the level of loss. Capacity constraints on the availability of desirable companies for investment may mean the Company is unable to achieve the level of gearing wanted. Higher interest rates will increase the cost of borrowing for the Company and borrowings may not be available of acceptable types, amounts and/or interest rates;

(v)     under performance of the investment manager - Consistent long-term underperformance by the investment manager may lead to poor performance of the Company compared to its benchmark comparators and peers, a widening of discount to NAV, a reduction in capital and dissatisfied shareholders;

(vi)    failure or breach of information security (IT) - including cyber-security and physical security risks - failure of IT or physical security could potentially lead to breaches of confidentiality, data records being compromised and the inability to make investment decisions. In addition, unauthorized physical access to buildings could lead to damage or lose of equipment; and

(vii)    operational risk - the management of the investment portfolio and other key services have been delegated to third party service providers. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company's performance or prevent the accurate reporting and monitoring of the Company's financial position.

Emerging risks are considered by the Board at its quarterly meetings and by the Audit Committee as part of its risk management and internal control review. Failure to identify emerging risks may cause reactive actions rather than being proactive and the Company could be forced to change its structure, objective or strategy and, in worst case, could cause the Company to become unviable or otherwise fail.

Specifically, the risks posed by global economic conditions including higher inflation and interest rates and disruption to supply chains as a result of the wars in Ukraine and the Middle East continue to be monitored by the Board. The Manager and other key service providers provide periodic reports to the Board on market impact and operational resilience to these events. The Board is satisfied that the key service providers have the ability to continue their operations efficiently in a remote or virtual working environment.

The Company's Annual Report for the year ended 31 December 2023 contains more detail on the Company's principal risks and uncertainties, including the Board's ongoing process to identify, and where possible mitigate, emerging risks (pages 42 to 46). Detail is also provided on other risks that, whilst not being identified as principal risks after mitigation controls are applied, are relevant risks to the Company. The Annual Report can be found on the Company's website at www.impaxenvironmentalmarkets.co.uk.

In the view of the board the principal risks and uncertainties facing the business are broadly the same as those in the published annual report and financial statements for the year ended 31 December 2023 and these risks and uncertainties remain applicable to the remaining six months of the year.

Related party transactions

Details of the investment management arrangements are provided in the Annual Report. There have been no changes to the related party transactions described in the Annual Report that could have a material effect on the financial position or performance of the Company.

Going concern

This Half-yearly Financial Report has been prepared on a going concern basis. The Directors consider this the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of this report. In reaching this conclusion, the Directors considered the liquidity of the Company's portfolio of investments, as well as its cash position, income and expense flows. The Company's net assets as at 30 June 2024 were £1,113.4 million, of which £1,187.5 million was in quoted investments and cash totalled £11.1 million. The main liability of the Company is its borrowings of £85.2 million which is covered 13 times by the adjusted assets, well in excess of the level of cover required by the borrowing covenants of four times. The total expenses (excluding finance costs and taxation) for the six months ended 30 June 2024 were £5.7 million, while income was £12.7 million.

The Directors have considered the potential effect of continuing geopolitical tensions and economic uncertainties on the Company's portfolio of investments and that any future prolonged and deep market decline would likely lead to falling values in the Company's investments and/or reduced dividend receipts. However, as explained above, the Company has more than sufficient liquidity available to meet its expected future obligations.

Board of Directors

9 August 2024

Directors' Statement of Responsibility

The Directors confirm to the best of their knowledge that:

·          the condensed set of financial statements contained within the Half-yearly Financial Report has been prepared in accordance with FRS 104 Interim Financial Reporting and gives a true and fair view of the assets, liabilities, financial position and return of the Company; and

·          the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Glen Suarez, Chairman of the Board of Directors

9 August 2024

Condensed Income Statement

Unaudited

The total column of the Income Statement is the profit and loss account of the Company.

The supplementary revenue and capital columns are provided for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

Return on ordinary activities after taxation is also the "Total comprehensive income for the period".

The accompanying notes form part of these financial statements.

Condensed Balance Sheet

Unaudited

*          Audited

Approved by the Board of Directors and authorised for issue on 9 August 2024.

Impax Environmental Market plc incorporated in England with registered number 4348393.

The accompanying notes form part of these financial statements.

Condensed Statement of Changes in Equity

Unaudited

The accompanying notes form part of these financial statements.

Condensed Statement of Cash Flows

Unaudited

*          Cash inflow includes dividend income received during the six months to 30 June 2024 of £19,285,000 (30 June 2023: £10,467,000) and bank interest of £272,000 (six months to 30 June 2023: £369,000).

Changes in net debt

The accompanying notes form part of these financial statements.

Notes to the Financial Statements

1 Accounting policies

The Half-yearly Condensed Financial Statements have been prepared in accordance with FRS 104 Interim Financial Reporting issued by the Financial Reporting Council ('FRC') and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies in July 2022.

This Half-yearly Financial Report is unaudited and does not include all of the information required for a full set of annual financial statements. The Half-yearly Financial Report should be read in conjunction with the Annual Report and Accounts of the Company for the year ended 31 December 2023. The Annual Report and Accounts for the year ended 31 December 2023 were prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' ('FRS 102') and received an unqualified audit report. The financial information for the year ended 31 December 2023 in this Half-yearly Financial Report has been extracted from the audited Annual Report and Accounts for the year ended 31 December 2023. The accounting policies in this Half-yearly Financial Report are consistent with those applied in the Annual Report for the year ended 31 December 2023.

2 Going concern

The Directors have adopted the going concern basis in preparing the accounts. Details of the Directors' assessment of the going concern status of the Company, which considered the adequacy of the Company's resources and took account of continued geopolitical and economic uncertainties, are given in the Interim Management Report.

3 Investments at fair value through profit or loss

Classification of financial instruments

Securities of companies quoted on regulated stock exchanges and any holdings in unquoted companies are classified as 'at fair value through profit or loss' and are initially recognised on the trade date and measured at fair value in accordance with sections 11 and 12 of FRS 102. Investments are measured at subsequent reporting dates at fair value by reference to their market bid prices. Any unquoted investments are measured at fair value, which is determined by the Directors in accordance with the International Private Equity and Venture Capital guidelines.

Changes in fair value are included in the Condensed Income Statement as a capital item.

The classifications and their descriptions are below:

FRS 102 requires classification of financial instruments within the fair value hierarchy be determined by reference to the source of inputs used to derive the fair value and the lowest level input that is significant to the fair value measurement as a whole. The classifications and their descriptions are below:

Level 1

The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2

Holdings in companies with no quoted prices. Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3

Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

The classification of the Company's investments held at fair value is detailed in the table below:

At the period end the Company had no unlisted holding (2023: none).

4 Income

Dividends from overseas listed investments includes special dividends classified as revenue of £382,000 (2023: £75,000).

5 Finance costs

The Notes and revolving credit facility arrangement costs amounted to £252,000 and £217,000 respectively. The direct finance costs are amortised over the life of each of the Notes and the RCF.

6 Taxation

Analysis of charge in the period

The capital gains tax provision represents an estimate of the amount of tax provisionally payable by the Company on direct investment in Indian equities. It is calculated based on the long-term or short-term nature of the investments and the unrealised gain thereon at the applicable tax rate at the period end.

Movements on the capital gains tax provision for the period

7 Return per share

The return per ordinary share is based on the above totals of revenue and capital and the weighted average number of ordinary shares in issue during each period.

There is no dilution to return per share as the Company has only ordinary shares in issue.

8 Notes and revolving credit facilities

The Company has €60 million of privately placed notes ("Notes").

The Notes consist of three tranches as follows:

·          €20m maturing on 1 September 2030 with a floating coupon of Euribor + 1.35%

·          €30m maturing on 1 September 2033 with a fixed coupon of 4.48%; and

·          €10m maturing on 1 September 2035 with a fixed coupon of 4.63%.

The Company has a two-year £80m multi-currency revolving credit facility ("RCF") with The Bank of Nova Scotia, expiring on 6 September 2025. An amount equivalent to £35m was drawn down in Euro under the RCF with a floating interest rate priced at the relevant reference rate plus a margin of 1.6%. The RCF is secured by a floating charge over the assets of the Company and this floating charge has been extended to the Notes, so that the two lenders rank pari passu.

A summary of the Company's borrowings follows.

The maturity profile of the Notes and Revolving Credit Facility as follows:

9 Share capital

During the period, 21,774,810 ordinary shares (30 June 2023: 4,835,000) have been bought back and held in treasury at a total cost of £85,285,000 after purchase costs of £577,000 (30 June 2023: £20,029,000 and £83,000, respectively).

Since the period end and up to 7 August 2024, the latest practicable date before publication of this report, a further 2,022,368 ordinary shares have been bought back and held in treasury at a total cost of £7,892,000 after purchase costs of £47,000.

10 Net asset value per ordinary share

A reconciliation of shareholders' funds using debt at fair value is shown in the Alternative Performance Measures in the Half-yearly Report.

11 Dividends

(a) Dividends paid in the period

(b) Dividends payable in respect of the period, which is the basis on which the requirements of s1158-1159 of the Corporation Tax Act 2010 are considered

1 The first interim dividend payable is based upon 257,317,861 ordinary shares, which is the number of shares in issue on the 7 August 2024, being the latest practical date before the publication of this Half-yearly Financial Report.

12 Transactions with the Manager and related party transactions

The Company's transactions with related parties in the period were with the Directors. There have been no material transactions between the Company and its Directors during the half year other than amounts paid to them in respect of expenses and remuneration for which there are no outstanding amounts payable at the half year period end.

Fees payable to the Manager are shown in the Income Statement. At 30 June 2024 the fee outstanding to the Manager was £2,196,000 (31 December 2023: £2,225,000; 30 June 2023: £2,397,000).

13 Status of this report

These financial statements are not the Company's statutory accounts for the purposes of section 434 of the Companies Act 2006. They are unaudited. The Half-yearly Financial Report will be made available to the public at the registered office of the Company. The report will be available in electronic format on the Manager's website (www.impaxam.com) and the Company's website, (www.impaxenvironmentalmarkets.co.uk).

The information for the year ended 31 December 2023 has been extracted from the last published audited financial statements, unless otherwise stated. The audited financial statement has been delivered to the Registrar of Companies. BDO LLP reported on those accounts and their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

The Half-yearly Financial Report was approved by the Board on 9 August 2024.

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