BP’s decision to take a write-off of up to $17billion (£14billion) on some of its exploration assets underlines the direction of travel among both the fossil fuel industry and investors currently.
The oil major’s decision follows a revision of its long-term price forecasts and were a reality check that many of these projects won’t be developed due to the way the world is moving.
It was framed as part of the oil giant’s transition towards a greener more sustainable energy company, but it is also an acknowledgment of the growing importance everywhere of environmental, social and government (ESG) issues.
Research by Imperial College London in partnership with the International Energy Agency published recently suggested renewable power stocks have outperformed fossil fuels in US and European markets for the past two years.
The challenge for investors is to find a way to adapt portfolios for this changing landscape, and one way is to back a company that been investing in the area for years.
Impax Environmental Markets is an investment trust that has been at the forefront of sustainability and green projects ever since it was established almost two decades ago.
On the periphery then, its philosophy is now at the front and centre of investment thinking.
Jon Forster, the investment trust’s manager, believes the coronavirus outbreak has exacerbated the trend towards sustainability and made it more visible.
‘The crisis has reminded the world of the importance of sustainability… Covid-19 has provided us with real-life insight into the potential risks facing us as we transition to a more sustainable economy.
‘The current pandemic has served to highlight many of the existential issues that Impax has highlighted over the years, such as the breakdown in the food supply change and strain on digital/technology,’ he notes.
Bruce Jenkyn-Jones, co-head of listed equities and executive director at Impax, adds that lockdowns worldwide have reduced pollution and driving, making many people appreciate the value of a cleaner environment.
Investors have also realised that the theoretical risks mentioned in business strategies can and do occur and the impact can be devastating.
‘What governments, policymakers, investment managers and companies will recognise coming out of this [crisis] is that climate change is potentially the next big risk that needs to be dealt with,’ Jenkyn-Jones says.
Impax invests in ‘pure-play’ companies, which derive at least half of their revenue from environmental products or services in green markets.
Although sustainable and ESG stocks have done well during the crisis, like most investment companies Impax Environmental was initially affected by a market-wide sell-off.
Even then, the FTSE 250-listed fund outperformed its mid-cap peers. By mid-March, Impax had dropped by 32 per cent compared to January levels while the wider index was down 42 per cent. Since then, Impax has recouped nearly all the decline while the FTSE 250 is still down 22 per cent.
Impax Environmental, though is dealing with long-term trends and as an investment should be looked at in this light.
The trust’s manager, Impax has been focusing on opportunities in the sustainable economy space since 1998 and the strong track record is reflected in the trust’s valuation.
Impax Environmental assets were valued at £714million at the end of May and currently trade at a premium of around 6 per cent with the shares at 311p.
The current top two investees are software developer PTC and forestry investment trust Rayonier, which are each around 2.8 per cent of the portfolio.
During the pandemic, Impax managers have been sifting through the portfolio to understand whether companies have the resources to get through the crisis.
They have noted that smaller companies, especially those with exposure in cyclical markets such as automotive and construction, have suffered from market disruption and uncertainty.
Essential services, renewables and business producing recurring revenues have held up done better and Impax has been looking at opportunities here, adding investments in water filtration and electric bicycle companies.
‘As we see stimulus programmes coming out around the world, many of them may well have a focus on the sort of markets we are interested in, particularly in the EU where they have already announced €500billion grants for the green market,’ Jenkyn-Jones notes.
‘The combination of fiscal and monetary initiatives by the governments has drawn a line under the market… We feel it is well supported.’