Impax's Joe Keefe on ESG challenges and opportunities

Joe Keefe, president of Impax Asset Management, the North American division of Impax Asset Management Group, says sustainable investing is about anticipating the next economy rather than the last one. Keefe recently talked with ESG Clarity about the rebranding of the Pax World Funds and the challenging environment for sustainable investing this year.

Emile Hallez: The company recently announced that it is renaming the Pax World Funds under the Impax brand. Was there a reason for the similarity in names? Or was that a factor in Impax acquiring Pax?

Joe Keefe: It’s actually a total coincidence. When Impax bought Pax four years ago, the names were very close.

Pax actually launched the first mutual fund in the U.S. to incorporate social and environmental factors in addition to traditional financial factors back in 1971. We decided at first it might be a little too much for the marketplace to change everything.

We continued running the mutual funds in the U.S. as 'Pax,' and we were Impax, the company, and in all of our other strategies globally. But then we started seeing the situation where we would have, say, our large-cap strategy — the mutual fund — on a platform, and we'd have an SMA up on the same platform — and one would be called 'Pax' and the other 'Impax.'

We started to get to the point where we thought we might be introducing some confusion to the marketplace. It also took us also maybe three years to sort of build globally for the unified investment process, to become one global company.

It seemed like the right time to complete the name change and just offer one brand. We invest the same way everywhere. We’re a specialist manager. We only invest in the transition to a more sustainable economy and in sectors and companies we think are better prepared for that. And we wanted to convey that unified process and that unified global approach.

We also wanted to pay some homage to the Pax name and history, having launched the first fund in the U.S. that incorporated environmental and social factors 51 years ago. We created an annual scholarship, the Pax scholarship. And it goes to three organizations working on sustainable investing.

'Pax' means 'peace.' We were started by people who wanted to invest in companies that didn't involve weapons manufactured during the Vietnam War. We're trying to, certainly locally, with New Hampshire nonprofits, in the place where the Pax business was launched.

We wanted to do something to honor the legacy and maintain the name. Impax will annually fund scholarships to three organizations working on issues of peace, gender equality and sustainability.

EH: Having gone through that process, what’s unique about M&A and incorporating in the sustainable investing world? Any special considerations?

JK: Well, it's interesting. You’re seeing some different [acquisitions]. You saw Calvert get purchased by Eaton Vance, which got purchased by Morgan Stanley. You saw Parnassus get purchased by AMG. You're definitely seeing some M&A activity in the space, and I think you'll probably see more.

We feel very fortunate in that when Impax bought Pax, we have already worked together for 10 years. They had been a subadviser on our global environmental markets fund, which was a strategy that they launched in England that we started offering over here in the U.S.

We knew each other well. We were two firms that we thought, 'If we combine, it would be a kind of a one-plus-one-equals-three type of transaction.'

There's an authenticity globally throughout the firm. And we're independent — we're not owned by a parent company or big global one. We’re one firm with about 250 employees and about $40 billion-plus in assets under management.

We focus on investing in this transition. We think this transition is going to be the great economic event of the next decade or two. And investors need to account for it and need to avail themselves of the opportunities, and if they can, mitigate or avoid the risks associated with that transition by investing in sectors and companies that are better prepared for it.

A lot of firms integrate ESG factors — we do that. We integrate ESG data and ESG factors into all of our bottom-up fundamental company research and into our portfolios. But ESG data is a little bit backward-looking. It tells you what a company has done on E issues, on S issues and on G issues.

What I think really identifies what we do — before we even start to integrate ESG, we look at the entire global economy through this sustainability lens. And we look at all 158 global subsectors, and we rate each subsector — is it a high-opportunity, neutral or low-opportunity subsector. Is it a high-risk, neutral or low-risk subsector? And then we try to build portfolios tilted toward opportunity and away from risks through this prism of sustainability.

And combining that with fundamental stock analysis or bond analysis that includes ESG, we think frankly it's a smarter way to invest. It's the way we try to invest in the next economy rather than the last economy, and all successful investing is fundamentally about that, right?

EH: That seems like a good segue into performance. It's no secret that it has been a challenge this year for a lot of sustainable funds, especially those without the energy holdings. How has that affected flows on the U.S. fund side? And what is the message to fund shareholders beyond just being long-term investors?

JK: Notwithstanding the difficult year, particularly with energy running and most of our strategies fossil-fuel free, we held up very well. We were net inflows for the year, not quite as good as the year before. But we were net inflows.

Most of our clients and shareholders understand that the way we invest isn't going to always outperform in every single market, that there's going to be ebbs and flows, and it depends on what's running and what's not.

It wasn’t just energy. And some of the tech sector [was] hit fairly hard, and we're pretty well represented there. Quality stocks got hit kind of hard. We tend to be a higher-quality shop in the way we invest.

There's really a group of factors that played out over the last six to 12 months. That said, six to 12 months is not long-term investing. We think over the next three to five to 10 years, investing in a sustainability transition is going to be a smart way to invest.

Electric vehicles are going to be a better investment than the internal combustion engine.

You're not going to perform well in all markets under all circumstances. But we still think it’s a long-term approach to investing. This is a really smart way to invest because, as I said, it's really a way to try to see where the global economy is going and invest in the next economy, not the last one, by anticipating and investing into real mega trends that are going to define that economy over the next decade or two.