It would be putting it mildly to describe as ‘unhelpful’ the backdrop of the past few years for sustainable investing – that is, investing focused on companies providing solutions to the 21st century’s environmental challenges.
From late 2021, markets focused foursquare on the risk of inflation, a fixation that lasted throughout the interest rate tightening cycle that followed. These steep rate increases were deeply unhelpful for any company that had benefitted from cheap money and whose cashflows stretched far into the distance.
Adding to the headwinds was the investor obsession with the US mega-cap technology stocks, most notably the ‘Magnificent Seven’ that are a world away from the sector.
Although the inflation monster has largely been tamed, and interest rates have been coming down (though they remain well above their 2021 level), more recently political and policy developments have caused their own significant turmoil.
Most obvious has been the return of Donald Trump to the White House. The new president has unleashed general havoc with his tariff agenda, proudly boasts of his intention to “drill baby, drill” and appointed as energy secretary Chris Wright, who has been openly sceptical of mainstream climate science.
Closer to home, Nigel Farage’s Reform UK – now the favourites with bookmakers to win the most seats at the next general election – has pledged to scrap both the UK’s commitment to net zero (reducing net greenhouse gas emissions by 100%, compared to 1990 levels, by 2050) and all renewable subsidies. Similar rhetoric is audible across much of the rest of the world.
One trust that has struggled against these headwinds is Impax Environmental Markets (IEM). From its peak to trough (November 2021 to October 2023), IEM’s share price fell some 43% (NAV return of -29%) versus a fall of only 12% for the S&P 500.
And from that point to the time of writing, in a generally much more risk-on environment, IEM’s shares have risen just 10% (NAV return of 12%) versus the S&P 500 40%. In addition, it is now the only trust in the AIC’s environmental sector, with both Jupiter Green and Menhaden Resource Efficiency opting to wind up at the end of 2024.
So, does sustainable investing of the type exemplified by IEM have a future? Looking beyond the headlines suggests that it just might.
Firstly, when it comes to Trump’s anti-environmentalism, the inconvenient truth for the president is that much of the action is driven by individual US states with the power to pursue their own climate policies – there are therefore still plenty of opportunities out there.
And in the particular case of IEM, only 9% of the portfolio is specifically invested in alternative energy (data as at 30 April 2025) with much more exposure to, for example, energy management & efficiency (23%) and resource efficiency & waste management (21%). In terms of tariffs, the managers have reduced exposure to the likes of the construction industry where the risk is highest, while its underlying companies often benefit from localised manufacturing and supply chains, which blunt the impact of trade barriers.
Most fundamental to any analysis of the prospects for IEM and its ilk is to consider the history of the underlying companies and themes in which they invest. Here the data are encouraging. A 2021 study by the University of Sussex Business School and Birkbeck, University of London found that a portfolio with the best-performing stocks on an environmental basis has up to a 7% better return than one with the worst, with 30% less risk.
This broad conclusion is supported by a separate study in the same year in the International Review of Financial Analysis, which found that firms with better environmental performance have a higher equity valuation and both lower systemic and idiosyncratic risks.
We should not conflate a sustainable investing approach with ESG. Indeed, Impax Group chief executive Ian Simm recently made clear that the firm’s focus was as a thematic investor in what he termed “an industrial revolution” towards cleaner goods and services, rather than the increasingly politically-charged ESG label.
Therefore, fundamentally investors must believe in the theme in question. Specifically, that the need and opportunities for solutions to current and future environmental challenges are such that they dwarf short-term market conditions and political turmoil. And IEM has certainly proven that the concept can deliver for investors. In the 18 months leading up to that high point at the end of 2021 the shares returned 95% (with a NAV return of 75%) versus the S&P 500 58%.
We can therefore tentatively conclude that, to mis-quote Mark Twain, reports of the death of sustainable investing are greatly exaggerated. There is strong evidence that the types of companies invested in by IEM and its peers are well positioned to see stronger share price growth than the competition over the long term, despite recent setbacks. Nonetheless, these funds need to reward investor patience and prove they can deliver.
David Batchelor is senior fund analyst at QuotedData. The views expressed above should not be taken as investment advice.