We believe global sustainability challenges, particularly climate change, pollution, inadequate infrastructure, resource scarcity and rising inequality, will shape markets profoundly. We believe these factors, which we see progressively driving the transition toward a more sustainable global economy, will lead to outperformance for well-positioned companies.
The Impax Sustainability Lens (Impax Lens) is a tool that facilitates systematic review of the economic opportunities and risks associated with the transition to a more sustainable economy. This tool highlights areas of the market with transition tailwinds and headwinds, enabling our investment teams to identify those with higher opportunity and lower risk.
Beyond environmental markets
Impax’s legacy includes a focus on environmental markets, and we continue to manage a large volume of capital in the area. In 2014 we recognized that the same forces that were creating tailwinds in environmental markets were also shaping in other areas of the broader market. In order to help us navigate a more complex economic landscape, we developed the Impax Lens.
The Impax Lens provides a framework for thinking about the risks and opportunities associated with this transition in every corner of the investable universe and is used by our investment teams across Impax’s range of equity and fixed income strategies.
A dynamic tool
The Impax Lens analyzes opportunities in eight categories and risks in nine categories across all MSCI GICS1 subindustries.
The transition to a more sustainable economy is not static; risks and opportunities are always evolving. Therefore, we regularly review the focus and ratings of the Impax Lens across different economic subsectors in light of current risks and opportunities. This means that any adjustment to our perspective on an emerging sustainability theme is swiftly reflected in the tool.
A versatile view for both equities and bonds
The Impax Lens is used primarily to direct our analysts toward potentially attractive areas for investment. An additional benefit is the Lens steering us away from companies with fragile business models that may be undermined as the transition to a more sustainable economy accelerates.
In a simplified sense, the Impax Lens helps our investment teams find areas of the market where the opportunities outweigh the risks.
Seek to minimize risk
The data behind the Impax Lens clearly show that risks are prevalent across all subindustries, but it is the magnitude of these risks and the opportunities for risk mitigation that vary. Our investment teams avoid areas of high risk and look for areas where the risks can be contained.
Companies that understand their key material risks and have appropriate policies and procedures in place tend to be more resilient. They are likely to be more strategic in their thinking, incur fewer regulatory challenges and fines and, overall, are better prepared in the face of change.
While all subindustries are exposed to risk, not all have opportunities. And some areas of the economy provide many more opportunities than others.
The Impax Lens helps investment teams find the areas where there are compelling opportunities and can signal where opportunities are not well understood by the market. The teams also try to focus on areas where the opportunities are likely to build over time and where the valuation of companies may re-rate as the market becomes more aware of their potential.
The Impax Lens complements bottom up analysis
Although it is not a stock-picking tool, the Impax Lens complements company-level ESG analysis.
The Impax Lens provides perspective about the generic, medium- to long-term opportunities and risks that a company may have in a particular industry. Through a more in-depth evaluation at the company level, we can determine whether the company is taking advantage of the opportunities and properly managing risks.
Supporting the search for alpha
We believe the transition to a more sustainable global economy provides an attractive backdrop for investment, as well-positioned companies should outperform their higher risk peers. The combination of the Impax Lens, our fundamental investment process, and integrated ESG analysis is key to directing us toward issuers with long-term opportunities in sectors that are less exposed to disruption and risk. It is this combination that is also key to delivering excess risk-adjusted returns.
1The Global Industry Classification Standard (GICS) is a widely recognized industry standard for assigning a public company to the economic sector and industry group that best defines its business. It was jointly developed by MSCI and Standard & Poor’s and is used by the MSCI indexes.
Alpha is a coefficient measuring risk adjusted performance, considering the risk due to the specific security, rather than the overall market. A positive alpha reflects relative risk adjusted performance of the Fund versus its benchmark.