Aquila En Regulatory News (AEET)

LEI Number: 213800AJ3TY3OJCQQC53Aquila Energy Efficiency Trust 

AQUILA ENERGY EFFICIENCY TRUST PLC

Aquila Energy Efficiency Trust Plc (the "Company" or "AEET") is pleased to announce its audited results for the year ended 31 December 2022.

Investment Objective

The Company seeks to generate attractive returns, principally in the form of income distributions by investing in a diversified portfolio of energy efficiency investments.

Highlights (Consolidated figures1)

1  During the year under review, as a result of the development of the portfolio of investments, the actual investments made and the structure of those investments, many of which were receivables purchase investments with fixed rates of return, the Committee determined that this required judgement and re-assessment of the Company's investment entity status for the year ended 31 December 2022. As a result of this re-assessment, which identified that fixed rate of return investments constituted a substantial proportion of the pipeline of investments and resultant actual investments, the Committee determined that as from 1 January 2022 the Company was no longer an investment entity. Accordingly, the Company consolidates its subsidiaries at 31 December 2022. For more information, please see note 2 of the financial statements. The Company and its subsidiaries are together referred to as the "Group" in this report.

2 These are Alternative Performance Measures (''APMs'') for the year ended 31 December 2022. Definitions of these APMs and other performance measures used, together with how these measures have been calculated can be found at the end of this announcement.

3 Dividends declared relating to the year under review. Two dividends were paid during 2022 and a third one was paid in 2023 (in respect of the period from 1 October 2022 to 31 December 2022) of 1.25 pence per Ordinary Share.

CHAIR'S STATEMENT

On behalf of the Board, I am pleased to present the annual report (the "Annual Report") for Aquila Energy Efficiency Trust plc for the year ended 31 December 2022.

Investment Performance

The Company's NAV as at 31 December 2022 was £95.23m (£97.38m as at 31 December 2021). The principal contributor to the decrease in NAV was the payment of £2.25m in respect of two dividends in the six months ended 31 December 2022. These payments were not fully covered by earnings and were partly paid out of distributable reserves. The Company's share price has recorded total returns of minus 23.5% in sterling terms. The disappointing share price performance has yet to reflect the increasing level of commitments that has been achieved. The Company's share price has been at a significant discount to NAV since January last year with the discount widening with the impact of a higher interest rate environment.

Changes following the investment strategy review

The Board instigated a number of actions, following the investment strategy review in April 2022, to provide additional assurance to investors that measures were in place to support an accelerated pace of commitments and deployment of capital. A greater focus was placed on a smaller number of geographies, larger transactions, the establishment of partner relationships with a number of Energy Service Companies ("ESCOs") and an increase in dedicated resources by the Investment Adviser.

As part of this strategic review, it was agreed that a continuation vote would be put to Shareholders at a general meeting of the Company. This was held on 28 February 2023 (as further detailed below).

The Investment Adviser also agreed, as a result of the strategy review, to amend the original Investment Advisory Agreement such that any advisory fees payable to the Investment Adviser would be calculated on committed capital (funds contractually committed for deployment) rather than on the Net Asset Value of the Company, in order to ensure greater alignment of incentives for deployment. This revised fee basis was applied to all fees charged by the Investment Adviser from the date of the Company's Initial Public Offering ("IPO") in June 2021. This has had the effect of lowering the investment advisory fees by £0.3 million for the period from IPO to 31 December 2022.

Update on Deployment

As at 31 May 2022, £19.7 million of the Company's IPO proceeds had been committed for investment and approximately £15.7 million had been deployed, as disclosed in the Company's annual report for the period ended 31 December 2021. As at 31 December 2022, the total amounts committed and deployed were £96.7 million and £61.2 million respectively. Additional commitments of £7.3 million were made in the period up to 28 February 2023. However, the total amount committed as at 31 March 2023 was £98.7 million, a net increase of £2.0 million because the Company was able to withdraw from certain commitments. Amounts deployed as at 31 March 2023 increased to £62.2 million1. Since the date of the Continuation Vote, the Company has not entered into any new commitments and its investing activity is solely in respect of funding legal commitments to existing investments, with the aim of protecting the future returns from those existing investments and realisations.

Dividends

The Company targeted and paid a dividend of 3.5 pence per Ordinary Share for the year to 31 December 2022. Following consultation with Shareholders undertaken in April 2022, it was decided to pay this dividend largely out of capital. For the year to 31 December 2023, the Board was targeting a dividend of 5.0 pence per Ordinary Share. However, following the failure of the Continuation Vote, the Board has reviewed the dividend policy of the Company and future dividends will only be paid from net income, and after reviewing cash flow forecasts, and only in respect of six month periods not quarterly periods. Therefore, the next dividend declaration will be in respect of the six month period ended 30 June 2023.

General Meeting held in February 2023

The consultation with Shareholders in April 2022 indicated that the majority of Shareholders were supportive of the continuation of the Company. However, in order to provide Shareholders with the opportunity to review performance on commitments and deployment, it was agreed to hold a Continuation Vote in February 2023. Although the IPO proceeds had been substantially committed at that point, the continuation resolution proposed at the meeting on 28 February 2023 failed to pass, primarily, the Board understands, because of the relatively small size of the Company (and consequential lack of liquidity in the shares) and the discount to Net Asset Value at which the Company's shares trade.

A special resolution had been proposed to amend the Company's articles of association (the "Articles"), to revise the date of the subsequent continuation vote, which otherwise was and is required to be held by 30 June 2023. This vote required the support of 75% of those voting but was also not approved by Shareholders. As such, and in accordance with the Company's Articles, a further continuation vote is required to be held at the Company's Annual General Meeting ("AGM") in June 2023.

In response to the failed Continuation Vote, the Board is also proposing, at the AGM, along with the subsequent continuation vote, an amendment to the Company's Investment Policy whereby the Company is placed into a managed run-off (the "Managed Run-Off"). This resolution (the "Continuation Managed Run-Off Resolution") seeks to acknowledge and reflect the views expressed by Shareholders in the February 2023 Continuation Vote, whilst the Board continues to consider strategic solutions in respect of the Company's assets to realise maximum value for Shareholders in the shortest possible time, recognising the inherent difficulties in the construct of the portfolio, including the number of individual investments, multiple geographies and long tenors. The Continuation Managed Run-Off Resolution is described in greater detail in the Notice of Annual General Meeting, which can be found on the Company's website.

As announced on 15 March 2023, the Board appointed Stifel Nicolaus Europe Limited ("Stifel") as sole financial adviser and sole corporate broker, with immediate effect.

Board changes

The Board is now at full strength with the appointments of David Fletcher and Janine Freeman. David Fletcher is a highly experienced Non-executive Director and Audit Chair and was appointed as our new Chair of the Audit and Risk Committee ("ARC") and as Chair of the Remuneration Committee in April 2022. Janine Freeman is an experienced, senior energy industry executive and Non-executive Director with over 20 years' of involvement in the energy industry. Janine was appointed as a member of the Company's Audit and Risk, Nomination, Remuneration and Management Engagement Committees in November 2022. Biographical summaries for all the Directors of the Company can be found in the Company's Annual Report. 

The need for Energy Efciency

The Board continues to believe that energy efficiency is the natural partner to renewable energy in achieving the European goal of net zero emissions by 2050. The more efficient use of energy is one of the main pillars of the energy transition away from fossil-based methods of energy production and consumption. The reduction of daily energy consumption is, conceptually, Europe's greatest energy resource. As part of the REPowerEU plan set out in May 2022, the energy efficiency target for 2030 was increased from 9% to 13% compared to 2020 reference levels. Energy efficiency must become part of our everyday lives, to consume less energy and consume it better. Efficiency protects businesses and consumers against increases in energy prices, is better for the environment and it improves the competitiveness of our economies. Increasing energy efficiency also ensures reduced dependence on energy imports, thereby improving energy security.

AEET was launched in recognition of the opportunities, both economic and social, that are available from investing in energy efficiency. In terms of implementation to date, energy efficiency thus far lacks the focus and attention that renewables have received. We believe this continues to be an area with significant growth potential and opportunities, both currently and for the foreseeable future.

Having explained why we believe investment in energy efficiency is important, I would like to express my thanks to my fellow Directors and the team who have supported the Company over what has been a challenging time since IPO in June 2021. This includes the Investment Adviser, the AIFM and our other advisors. I would be personally disappointed if the UK market sees the disappearance of an investment vehicle, which was established to provide funding to support the goal of reducing energy consumption and to play a part in the achievement of the goal of net zero.

Annual General Meeting ("AGM")

The Company's AGM will be held on 14 June 2023 at 2.00pm at the offices of Apex Listed Companies Services (UK) Limited located at 6th Floor, 125 London Wall, London, England, EC2Y 5AS. Further details can be found at the AGM Notice. Shareholders are encouraged to attend the AGM. Proxy voting figures will be made available shortly after the AGM on the Company's website where Shareholders can also find the Company's AGM Notice, Annual Report, factsheets and other relevant information.

Miriam Greenwood OBE DLChair of the Board30 April 2023

[1] Reflecting 31 December 2022 valuation in local currency (Euro), with investments at cost since then, translated into £, where relevant, at €0.8853: £1.00. The Company's next NAV per share will be published in respect of 30 June 2023.

INVESTMENT ADVISER'S REPORT

Investment Adviser's Background

The Company's AIFM, FundRock Management Company (Guernsey) Limited (formerly Sanne Fund Management (Guernsey) Limited), has appointed Aquila Capital Investmentgesellschaft mbH as the Investment Adviser to the AIFM in respect of the Company.

The Investment Adviser offers advice on potential energy efficiency investments in line with the Company's Investment Policy. Aquila Capital Investmentgesellschaft mbH is part of Aquila Group, an experienced and long-term investor in real asset investments. Founded in 2001 by Dieter Rentsch and Roman Rosslenbroich, Aquila Group currently manages and/or advises assets worth around €14.7 billion on behalf of institutional investors worldwide (as at 31 December 2022). Daiwa, one of Asia's largest investors, is a minority shareholder in the Group.

By investing in clean energy and sustainable infrastructure, Aquila Capital contributes to the global energy transition and strengthens the world's infrastructure backbone. Aquila Capital initiates, develops, and manages these essential assets along their entire value chain and lifetime. Aquila Capital's primary objective is to generate performance for its clients by managing the complexity of essential assets.

Currently, Aquila Capital manages wind energy, solar photovoltaics ("PV") and hydropower assets with a generating capacity of more than 17 Gigawatts ("GWs"). Additionally, 2.0 million square metres of real estate and green logistics projects have been completed or are under development. Aquila Capital also invests in energy efficiency, carbon forestry and data centres. Aquila Capital has been carbon neutral since 2006. Sustainability has always been part of the company's value system and is an integral part of its investment strategies, processes and the general management of its assets. The company has around 700 employees from 56 nations, operating in 17 offices in 16 countries worldwide.

Investment Advisory Team

Alex Betts - Senior Investment Manager: Alex Betts has over 30 years' experience in private equity and 15 years in resource efficiency and has invested in a range of industries, geographies and stages. Based in London, he joined Aquila Capital from Adaxia Capital Partners ("Adaxia"). Prior to Adaxia Alex was a member of the private equity team at Climate Change Capital ("CCC"), which span out into Adaxia. Prior to CCC he was Head of Royal Dutch Shell's corporate venture capital unit and a former partner of Montagu Private Equity. He is British and graduated in Classics from Oxford University.

Bruno Derungs - Senior Investment Manager: Bruno Derungs has over 25 years' experience in private equity and 21 years in resource efficiency and has invested in a range of industries, geographies and stages. Based in Zurich, he joined Aquila Capital from Adaxia. Bruno is a former member of the private equity team at CCC, principal at SAM Private Equity, managing director of ATV, a Swiss-based venture capital fund and consultant with Bain & Company. He holds a master's degree in electrical engineering from the ETH in Zurich and an MBA from Columbia Business School in New York. He is Swiss and speaks English, German, Italian and French.

Franco Hauri - Senior Investment Manager: Franco Hauri has over 20 years' of experience in private equity with 15 years in resource efficiency of which the last five years have been focused on investing in energy efficiency projects. Based in Zurich, he joined Aquila Capital from Adaxia. Franco is a former member of the private equity team at CCC, an Investment Adviser at NanoDimension, a venture capital firm investing in nanotechnology, and a consultant with Bain & Company. Franco holds an MBA from Harvard Business School and a master's degree in finance, accounting & controlling from the University of St. Gallen (HSG). He is Swiss and speaks English, German, Italian, Spanish and French.

Investment Activity

During 2022, the Company made substantial progress in executing its strategy to invest in energy efficiency projects. As at the year-end, the Company had entered into commitments to invest £96.7 million of which the total deployed in investments were £61.2 million. As at 31 March 2023, the total commitments had increased to £98.7 million and the income generating capital deployed since IPO increased to £62.2 million.

The Company's portfolio is characterised by projects with (i) a low technology risk through the use of proven technologies; (ii) medium to long term contracts providing for predictable cash flows; and (iii) counterparties with good creditworthiness. As at 31 March 2023, the portfolio of 38 investments was diversified across geographies (Italy, Spain, Germany and the United Kingdom), technologies, counterparties and ESCO partnerships.

The majority of the Company's forecast project cash flows, approximately 69%, are investment grade, as assessed by using both the Investment Adviser's credit analysis and external agencies. In projects which are non-investment grade, there are typically additional protections; these include the ability to export power to a grid and to extend the maturity of a contract with the ESCOs in question and the underlying counterparty to recover missed payments. The latter is possible because the Company's financing agreements are of a shorter duration than the useful life of equipment installed and, in many cases, of a shorter duration than the contract between the ESCO and the counterparty.

The Company's portfolio also benefits from a combination of fixed and variable return payments. While approximately 67% of the total investment value provides a fixed rate of return from contractual cash flows, approximately 33% by investment value has variable cash flows linked to power production and power prices, or inflation indexation. In many cases, these variable return investments have downside protections, for example, minimum contractual returns, which reduce the risk of lower than forecast cash flows.

This portfolio of investments is forecast to achieve an unleveraged, average yield of 8% per annum, which the Board believes is attractive given the credit quality of the portfolio.

The Company's investments provide funding to third parties to enable capital expenditure for energy efficiency projects. Rather than owning the assets installed in these projects, the Company has structured its investments as purchases of receivables, largely from contracted cash flows. The Investment Adviser has recommended this approach to reduce the costs of managing numerous special purpose vehicle ("SPVs") companies. Accordingly, the assets are owned by SPVs of the ESCOs that develop the projects. These SPVs contract to provide energy efficiency services to clients and receivables from these contracts are transferred to the Company, which takes a security interest in the assets together with undertakings and performance guarantees from the ESCOs themselves. 

In Italy and Germany, the Company and its subsidiary, Attika Holdings Limited ("AHL" or "Attika"), purchases notes, which entitle the noteholders to the receivables, while in Spain and the United Kingdom, Attika purchases receivables from the projects direct. The use of notes is driven by the respective legal and regulatory frameworks in Italy and Germany.

All of the investments in Italy have been made by the Company through purchasing notes issued by an Italian special purpose vehicle ("SPV") established under securitisation laws in Italy. This SPV has made the respective capital investments in energy efficiency projects in consideration return for which receivables have been transferred to it. The receivables are the payments due from the purchase of tax credits in the case of the Superbonus investments and from operating leases and energy services agreements in the case of the investments developed by Noleggio Energia and CO-VER. The notes issued by the SPV entitle the Company to the economic return from the receivables and are structured to provide a fixed interest rate amounting to a 3% p.a. return on capital and variable interest to capture the return above 3% p.a.

In Germany, Attika has purchased notes issued by special purpose subsidiaries of the four ESCOs with which Attika has invested. These notes provide for a fixed rate of interest, repayment of capital and, in certain cases, a variable rate of interest, which provides the economic return from the receivables. 

Investments in Italy

Investments in Italian "Superbonus" projects

In December 2021, the Company entered into commitments to finance two clusters of "Superbonus" energy efficiency projects for apartments and other residential buildings in Italy amounting to £16.8 million. "Superbonus" is an incentive measure introduced by the Italian government through Decree "Rilancio Nr. 34" on 19 May 2020, which aims to make residential buildings (condominiums and single houses) more energy efficient through improvements to thermal insulation and heating systems. When qualifying measures are completed, ESCOs delivering the measures are awarded a tax credit equal to 110% of the cost of the measures. These tax credits can then be sold to banks, insurance companies and other corporations and, thus, projects can be financed without the need for a financial contribution from landlords.

The projects which the Company committed to finance in 2021 are being managed by two ESCOs, Enerstreet and Enerqos Energy Solutions, and entail commitments of £10.7 million and £6.1 million respectively. The projects involve a range of energy efficiency measures including insulation, the replacement of heating systems with more efficient solutions, and energy efficient windows.

During 2022 the Company entered into three other commitments, totalling £16.7 million, to finance Superbonus projects, another £8.71 million project with Enerqos Energy Solutions and two projects, totalling £7.95 million, with Sol Lucet, an Italian ESCO. These investments are structured in a very similar way to the first Superbonus investments, using almost identical documentation, to provide for a contractual return of 8% p.a. These projects are being managed by Sol Lucet S.r.l., an energy services company which, since 2013, has successfully installed renewable energy plants with a generating capacity of 17.0 Megawatts peak ("MWp") as well as Combined Heat and Power ("CHP") plants producing 3.2 Megawatts electric (" MWe"). Sol Lucet is currently managing solar PV plants with a generating capacity of 14.0 MWp. The tax credits, which these projects are designed to generate, will be acquired by Credit Agricole, which has a short-term rating of A+ from S&P ("Standard & Poor's").

As at 31 December 2022, £32.95 million had been committed to Superbonus projects and were earning a contracted rate of return. Of this, £24.28 million had been deployed in cash. The balance of the commitments is forecast to be deployed before the end of October 2023. These projects, which are being delivered in a series of stages, generate tax credits which exceed the cost of the Company's investments. Six companies have agreed to purchase these tax credits, including four banks: BNP Paribas, Credit Agricole, Intesa Sanpaolo and Monte dei Paschi di Siena along with Assicurazioni Generali, one of the largest global insurance companies and Enel X, a subsidiary of Enel, Italy's largest utility company. The purchasers of the tax credits have S&P credit ratings of A+, AA-, BBB, B+, A+ and BBB+ respectively, with the lower rated bank being majority owned by the Italian state. The proceeds from the sale of the tax credits are forecast to redeem these investments before the end of January 2024. The investments are structured to deliver contracted returns of 8-9% per annum from the expected project start dates. This means that the investment commitments become income generating from the dates set out in the investment documentation and not from the date of cash deployment.

Solar PV Investments for self-consumption in Italy

The Company has committed £3.6 million to six rooftop Solar PV projects in Italy with an aggregate capacity of 3.6MWp. As at 31 December 2022, £2.5m had been deployed into four operational projects. The balance of the commitment will be deployed when the two other plants have become operational, which is expected to be achieved by the end of May 2023. These projects enable companies to reduce their energy expenses and CO2 emissions and avoid grid losses through the self-consumption of the electricity produced.

Projects with Noleggio Energia

Five projects in which the Company has invested have been developed by the ESCO, Noleggio Energia, which was established in 2017 and is an Italian company that specialises in providing operating leases for energy efficiency and renewable energy projects for commercial and industrial clients in Italy. These projects are all structured as the purchase of receivables from operating leases with maturities of seven or ten years and all use very similar documentation. Noleggio Energia has transferred to SPV the monthly receivables from these operating lease agreements, which provide for fixed rates of return ranging between 7.2% p.a. and 9.4% p.a.

The first investment of £0.31 million which the Company made in Italy was completed at the end of June 2021 to finance a rooftop solar PV project with a capacity of 238 kilowatt peak ("kWp") located in Lombardy for the Italian food product manufacturer Galletti di Galletti Aurelio e C. snc ("Acetificio Galletti"). Acetificio Galletti is a family-owned business founded in 1871 and is a renowned producer of vinegars, dressings, pickles, and other food products. It has an investment grade credit rating (B1.2/BBB) from the credit ratings agency Cerved.

The second investment of £0.12 million was completed at the end of December 2021 to finance a rooftop solar PV project with a capacity of 127 kWp in Veneto for Enofrigo SpA. Enofrigo SpA, founded in 1978, is an Italian designer and manufacturer of wine cabinets and both hot and cold food display units for bars, restaurants, small supermarkets, and larger retail chain stores. Enofrigo SpA now serves more than 5,000 clients in more than 100 countries. Its Cerved credit rating is B2.1, equivalent to BB+.

The third investment of £1.32 million was committed to at the end of March 2022 to finance a 1MWp rooftop solar PV project in Lombardy for the engineering company, Tecnocryo SpA. The project, which included the refurbishment of the roof, was completed in August 2022 and is operational. Tecnocryo has been trading since 1992 and focuses on the design and realisation of machines for handling cryogenic fluids. The company has a Cerved credit rating of B2.1, equivalent to BB+, which is just below investment grade.

The other two projects with Noleggio Energia are under construction. In September 2022, the Company committed £0.35 million to a 443 kWp rooftop Solar PV project installed on the production facilities of Ali Group, a foodservice equipment manufacturer in Veneto, Northern Italy. Ali Group is an Italian corporation that was founded in 1963, it is one of the largest and most diversified global leaders in the food service equipment industry.  The company has a Cerved credit rating of A2.1, equivalent to A+. In December 2022 the Company committed £0.82 million to an 876 kWp rooftop Solar PV project installed on the production facilities of Orlandi, a nonwovens manufacturer in Lombardy, Northern Italy. Since its establishment, the company has expanded its product offering, which now includes applications for a wide variety of sectors including medical, hygiene, home furnishing, industrial/household wipes and more. The company has a Cerved credit rating of B1.1, equivalent to BBB+/BBB-.

Project with CO-VER Power Technologies  

In January 2022, the Company refinanced the acquisition of an existing rooftop solar PV plant in Ascoli Piceno (Central Italy) with a generating capacity of 902 kWp. The investment is based on the purchase of receivables generated by an energy service contract between the leading Italian engineering firm CO-VER Power Technologies ("CO-VER") and its subsidiary Futura APV S.r.l. ("Futura"). The contract governs the management of an operating roof-mounted solar PV plant until April 2028. Thereafter, the investment is based on a feed-in-tariff for an additional six years, aggregating to a 12-year tenor. The investment is forecast to generate a return ranging between 7.0% and 7.3% p.a.

CO-VER has a successful 20-year history in developing industrial projects in the areas of energy storage systems, co/tri-generation plants and renewable energies. Futura, which was established in 1981, specialises in the design and construction of overhead and floor conveyors and is the owner of the PV plant, which benefits from feed in tariffs payable by Gestore dei Servizi Energetici ("GSE"). GSE is a joint stock company managed by the Italian government which is responsible for promoting and developing the growth of renewable assets in Italy. GSE has a credit rating of BBB+ from the Italian government.

Investments in Spain

In line with its pan-European investment strategy, the Company, through its wholly owned subsidiary, Attika, had as at 31 December 2022 committed £32.6 million across ten Spanish projects, nine of which are Solar PV projects and one of which is a buildings energy efficiency project. The capital deployed as at 31 December 2022 was £4.9 million. Since 31 December 2022, the Company has committed to a further three projects with three new project developers. Due to various changes, including a withdrawal from one commitment, the Company's total commitments to investments in Spain as at 31 March 2023 were £31.5 million of which £6.0 million had been deployed. The balance of the commitments is expected to be largely deployed during 2023 at construction completion of relevant projects.

Solar PV investments in Spain

The market in Spain presents continuing and favourable prospects, particularly in the solar photovoltaic sector. The Company has committed capital to finance the development of ten solar PV installation projects throughout Spain with eleven project developers. Most of these projects have been structured under Power Purchase Agreements ("PPA") with maturities of up to 18 years and have variable revenues, which are often subject to production risk, power price fluctuation or inflation. In addition, excess production beyond the on-site demand may be injected into the grid. These variable revenue risks are mitigated by conducting technical due diligence prior to making commitments and by contracted prices within the PPAs.

Notable investments include:

· £9.6m commitment for a group of five Solar PV installations with a total capacity of 12MWp, three of which are ground mounted, for a major battery manufacturer and other industrial businesses, which have a blended S&P equivalent rating of BBB+/ BBB-;

· £6.2m commitment to finance an 8MWp ground-mounted solar PV project, with revenues generated through off-site Power Purchase Agreements to commercial clients around Borja (Zaragoza), which have a blended S&P equivalent rating of BB-;

· £2.9m for a 3.83MWp roof mounted solar PV plant for an insulation material manufacturer located near Tarragona, which has a S&P equivalent rating of BBB+/ BBB-;

· £1.7m commitment to finance Solar PV plant and battery projects developed by a major European technology manufacturer and to be deployed at sites of the leading owner and operator of wellness centres in Spain, which has a S&P equivalent rating of BBB+/ BBB-; and

· £0.9m commitment to fund a Solar PV project for self-consumption, developed by a Valencia based ESCO, for a leading Spanish ceramic tiles manufacturer, which has a S&P equivalent rating of BBB+/ BBB-.

Since 31 December 2022, the Company has successfully completed a £3.5 million commitment to invest in ground mounted solar PV plants for self-consumption for four farms operated by a Spanish agricultural company with a capacity of approximately 4MWp. In addition, two smaller commitments of £0.7 million and £0.6 million were completed to finance groups of projects across Spain. Both transactions mark the start of new relationships with the respective project developers. 

The credit ratings of the counterparties of the Spanish Solar PV investments have been rated as the S&P equivalent of between BB and BBB+/BBB-. These investments also have, in many cases, the benefit of being able to generate revenues from selling power to the grid if there are payment issues with the counterparty.

Buildings Energy Efficiency investments in Spain

The Spanish Government has established incentive schemes to promote buildings energy efficiency measures, including the "Programa de Rehabilitacion Energetica de Edificios" ("PREE"). PREE is a EUR402.5 million incentive scheme across the Spanish jurisdiction and is designated to promote and reward energy efficiency improvements for condominiums and buildings improving their energy rating by at least one energy class. Under this scheme the Company has committed £4.2 million to fund the refurbishment of condominiums, which is being managed by a leading ESCO specialised in designing and implementing energy efficiency and renewable energy projects in Spain. The investment cash flows are based on the purchase of receivables generated by the underlying energy saving contracts between the ESCO and the so-called "Comunidad de Proprietarios", the legal entities which represent each of the owners of the apartments in a residential building. The receivables have been rated as the S&P equivalent of A+/A.

Investments in Germany

As at 31 December 2022 the Company, through Attika, had made four investments in Germany through note subscriptions for a total commitment of £23.4 million of which £19.4 million had been deployed, across a variety of four technologies including smart metering technologies, water management solutions, heat pumps and Bio-LNG.

£1.8 million Investment in Comgy GmbH & Co KG ("Comgy")

In April 2022, the Company purchased a note for £1.8 million with a tenor of ten years issued by Comgy. The note is structured to provide a fixed return of in excess of 10% p.a. through a fixed interest rate of 6.5% p.a., repayments and a variable interest component, which takes account of the contracted cash flows through to the maturity of the investment. Comgy is a wholly owned subsidiary of Comgy GmbH, active in the German sub-metering market. Comgy provides metering equipment, billing and Operations and Maintenance ("O&M") services mainly to housing companies with an average rating comparable to an S&P rating of BBB+/BBB. The note is secured on sub-metering contracts, including equipment rental and billing as well O&M services with tenors of between five and ten years.

£8.3 million for the purchase and upgrade of a biogas plant in Northern Germany

In October 2022, the Company made an £8.3 million commitment to fund the acquisition of a biogas plant and an investment into liquefaction equipment by one of Germany's leading biogas development companies with more than 20 years' experience in the sector. The investment is structured as a note purchase. The terms of the note provide for the payment of interest at a fixed rate of 5% p.a. plus a variable return, which is equivalent to 8% of revenue generated by the asset company, capped at EUR1.3 million across eight years. Liquefaction of the biogas produced makes the resulting Bio-LNG eligible for greenhouse gas certificates under German energy law. These certificates are frequently resold on the secondary market to companies within carbon-intense industries under pressure to comply with emission regulations and as a result Bio-LNG is gaining popularity in the transportation market. The structure of this investment benefits from an extensive security package including a pledge over the assets and land, a parent company guarantee and step-in rights. The parent company was deemed to have an S&P rating of BB-. However, once the plant becomes operational, scheduled in September 2023, the underlying credit risk will shift to the counterparties purchasing the Bio-LNG and associated carbon credits, which are likely to be more highly rated businesses.

£11.0 million investment for water management solutions

In December 2022, the Company invested £11.0 million to acquire receivables due under water management service agreements for condominiums and multi-family homes in Germany, mainly managed by large property managers. As with the Company's other German investments, the investment is structured through a note purchase which provides for a fixed interest rate of 8% p.a., to be paid out on a quarterly basis over a ten year period. The developer's water management solutions consist of hardware and software detecting user behaviour and optimizing the temperature management of the house or condominium's waterflow, resulting in significant energy cost reductions for tenants. The counterparties comprise a large number of property management companies and have been evaluated with a weighted average S&P equivalent rating of BBB+.

£2.2 million junior loan purchase

The Company has purchased a subordinated note from a SPV set up by one of Germany's fast-growing heat pump companies. The note investment was purchased in December 2022 for a total price of £2.2 million, and is structured to pay a fixed annual interest rate of 7.5% p.a. The proceeds from this investment are being applied by the developer in its roll out of heat pumps across Germany. The note is subordinated to a loan from a large German Bank and consists of approximately 11% of the total loans issued by the SPV. The investment has a planned maturity of 15 years and benefits from a first rank guarantee from the SPV's parent company up to the nominal amount of the loan and includes covenants related to the minimum cash balance of the SPV as an additional security buffer. The cash flows due to the SPV are from German households, who are deemed to have an S&P equivalent rating of A+/A.

Investments in the United Kingdom

As at 31 December 2022 the Company, through Attika, had committed and deployed £4.1 million and £3.6 million respectively into investments in the United Kingdom comprising investments in CHP, Lighting and Wind Power projects. These investments were made with five different ESCOs. 

CHP Investments

The Company has invested in CHP projects in the UK for a total investment value of £1.9 million developed by three separate ESCOs. The CHP projects are with a major convention centre, a hotel and a food producer, Vale of Mowbray. The convention centre and hotel have credit ratings of S&P equivalents of BBB+/BBB- and BB+/BB respectively. The Vale of Mowbray project is on hold because the company has entered into administration. The amount of £0.9 million has been invested in the project with the majority of the capital applied to acquire the CHP equipment, which is not yet onsite. The result of the administration is that the site was acquired in March 2023 by a cold storage logistics business with whom discussions are due to be held regarding utilisation of CHP at the site. Ega Energy, the ESCO developing the Vale of Mowbray project, has identified other clients who may use the CHP equipment. The Investment Adviser believes that its contractual arrangements with Ega Energy protect the value of the investment made to date.

Wind Power Investments

The Company has invested £2.0 million (£1.6 million at 31 December 2022) in five operational small wind farms in the UK, managed by a UK ESCO, which benefit from feed-in and export tariffs and provide onsite power for self-consumption. The Company's investments are structured to receive an agreed share of net revenues from these projects, which have remaining lives of approximately 10 years. The Company's investment income is dependent on the levels of power production, feed in tariff rates, which benefit from Retail Price Index ("RPI") indexation, and export tariff rates which are typically renegotiated annually, less direct operating costs such as rent, insurance and operational & maintenance costs, which are managed by the ESCO. The weighted average credit rating of the revenue streams for these projects are S&P equivalent ratings of BBB+/BBB- with the feed in tariff revenues being deemed to be UK Government risk, rated AA, and export tariffs payable by the utilities currently contracted being deemed to be sub-investment grade. However, it would be possible to replace the current utilities should they fail to pay amounts due.

Lighting Investments

Following an investment of £0.3 million in December 2021, the Company has invested an additional £0.1 million in operational lighting projects developed by a Northern Ireland based lighting services company, Lumenstream Limited. The Company's investments are structured as purchases of receivables under five-year lighting contracts with industrial companies and a leisure business. The weighted average credit rating of the receivables in this portfolio of projects is rated at an S&P equivalent of BBB+/BBB-.

Since 31 December 2022, the Company has committed and invested £0.9 million across two projects with two additional ESCOs providing lighting as a service for a variety of counterparties with contract maturities of up to ten years. These counterparties have a weighted average credit rating of an S&P equivalent of BBB+/BBB-.

Investments completed after 31 December 2022

A summary of the investments the Company has made since the year-end is set out below:

Summary of all Investments that have Committed Capital as at 31 March 2023 

1 Bio-LNG is a highly sustainable version of liquefied natural gas (LNG), with almost the exact same chemical makeup. It is produced during the anaerobic digestion (AD) process, which breaks down organic matter (such as food or animal waste) in an oxygen-free tank to produce methane-rich biogas.

MARKET OUTLOOK

Electricity prices for industrial and residential customers across Europe have increased significantly since the Company's IPO in June 2021. Given this strong upward pressure on energy prices, we have seen a noticeable increase in investment opportunities. From our discussions with ESCOs and other market participants, it is clear that higher power prices compared with those seen prior to the Russia /Ukraine conflict, notwithstanding power prices since retreating to pre-conflict levels are accelerating investments in energy efficiency projects, and the Company is well positioned to benefit from this increased demand for funding of such projects.

Market Commentary

Introduction

The energy market crisis in 2022, caused by the Russia/Ukraine conflict brought critical issues of energy supply security to the fore. The European region's gas supply remains uncertain, even if the prices are no longer at the same elevated levels. Against this backdrop, the European Commission is deliberating on market reforms to devise better long-term incentives to help manage price and supply volatility. Incentives are also needed for the demand side, essential in balancing the system. Experience shows that investment in energy efficiency infrastructure is essential to delivering on climate-neutral goals.

The interaction between renewable energy and energy efficiency follows a complex relationship. The rising levels of distributed renewable energy penetration in most of the European region effectively displaces a proportional share of primary energy consumption. This assumes that primary energy consumption is measured net of distributed (or behind the meter) energy generation. Conversely carbon-saving measures (including electrification) enhance the scope for renewable energy. The inverse relation is most robust in countries with a high renewable energy share in the total energy mix. The historical trend in primary and renewable energy consumption shows this relationship. In this regard, the step-up in renewable energy projects establishes a strong case for energy efficiency.

There are steeper targets to build upon the progress in rationalising primary energy consumption. The active policy involvement in addressing immediate energy sector challenges will extend to hastening energy efficiency activities. Energy demand segments such as buildings and space heating/cooling are now attracting maximum attention for investments by public authorities and the private sector.

Policy and Regulatory Developments

Progressively, the European region has coordinated policy and regulatory measures for energy efficiency. Renewable energy targets are part of this framework for the overarching goal of a climate-neutral area by 2050. In September 2022, the European Parliament voted on Energy Efficiency and Renewable Energy Directives. Renewable energy-based sources are part of an envisaged integrated system in which energy efficiency standards are supposed to operate. The guiding principle of 'Energy Efficiency First' reinforced its place with the recent energy sourcing and pricing challenges. In March 2023, the European Commission approved the provisional agreement for setting higher energy efficiency targets. With this agreement, which requires 1.4% average annual energy savings by member countries during 2024-2030, there is legislative backing for reaching beyond the 'Fit for 55' plan. The annual targets are almost twice those in the original scheme.

While the end-use sectors continue to be buildings, industry and transportation, the focal points include the public sector (regional and local levels) and the companies (energy-intensive large entities). Also significant is the emphasis on energy efficiency financing to enable investment mobilization - the provisions require the promotion of financing schemes and lending products and involve a reporting structure.

The recent developments in the European Union's policy narrative on energy efficiency come after the collective action taken in 2022 to counter supply shocks (through price caps and windfall taxation). The measures also involved voluntary curtailment, most of which was borne by the energy-intensive industrial consumers. While the market intervention measures implemented to achieve these one-off actions may not be required further, there is still a strong case for continuing to reduce primary energy consumption.

The persistent geopolitical challenges and the uncertainty around energy security make it difficult to draw any visible signs of stability. For this reason, in March 2023, the EU Council agreed to a one-year extension of member states' voluntary 15% gas demand reduction. Thus, based on the average consumption between April 2017 and March 2022, member states should reduce their annual natural gas consumption by 15% between April 2023 and March 2024 (compared with the prior year).

Key Measures Introduced for Energy Efficiency

Measures introduced across these countries have varied. For most countries, energy efficiency was an urgent requirement in the aftermath of the Russia/Ukraine armed conflict. As a result, both renewable energy and efficiency, in tandem, took the highest priority. The measures so far have been a mix of incentives and related voluntary measures for reducing demand. Progressively, the need is for binding targets along the lines of the European Union's recent step.

Concrete policy measures with binding targets may take more work to implement, although efforts are underway to reach that goal. The German example is one case in point. The country's upcoming energy efficiency law is challenging (such as requiring new residential heating systems to be renewable-based from 2024 onwards) and subject to significant delays. The investor interest is high due to the potential opportunity. In January 2021, The Canadian infrastructure fund Brookfield acquired a majority stake in Thermondo, a German start-up specialised in technology-enabled space heating systems. Similar scope is observed in other markets. In the UK, a Parliamentary report (House of Commons Committee report) pointed out energy efficiency in buildings as among the glaring gaps in policy implementation. Similar issues exist across European countries regarding energy efficiency objectives against actual implementation through policy measures.

The policy paradigm is an evolving one given the short-term switching costs for households and businesses, e.g. to replace gas boilers with heat pumps. The policy response in the prevailing energy scenario is different from the one the same countries faced earlier as the case of Italy illustrates.

In 2020, during the COVID pandemic, the Italian government implemented the Decreto Rilancio, which introduced the Superbonus 110% scheme. This initiative aimed to stimulate the Italian economy by encouraging property owners, tenants, and others with a legal right to use a property to carry out anti-seismic renovations and energy efficiency improvements on Italian properties. Qualifying work for the Superbonus included the installation of photovoltaic systems and electric vehicle charging stations inside a property, among others.

The Italian Superbonus scheme provided a tax credit of up to 110% of the installation expenses for eligible renovation work. The Legislative Decree Aiuti quater, which is set to become law soon, reduces the Superbonus tax credit from 110% to 90% in 2023, but extends the possibility of applying the discount to invoices or assigning the tax credit in 10 instalments instead of 5. The Superbonus scheme will continue into 2024 and 2025, but the tax credit will decrease to 75% in 2024 and 65% in 2025.

However, the Italian Budget Law 2023 allows condominiums that submitted a CILA (Comunicazione di Inizio Asseverata) before 31 December 2022, to remain eligible for the full 110% Superbonus tax credit. Additionally, single-family properties can also qualify for the full Superbonus tax credit if at least 30% of the renovation work was completed by 30 September 2022, and all of the work was finished by 31 March 2023. None of our projects should be impacted by the change in the regulatory framework since (i) the development of the projects is significantly prior to said change and ii) all the projects should be completed and revised by the various advisors (asseverazione) before the end of the current year.

As a tool, overall2 the Italian Superbonus programme had an important impact on the construction sector overall which in turn stimulated GDP growth and job creation. Italy's economic output is estimated to have grown by 3.9% in 2022, driven by domestic demand, in particular housing investment. After contracting by 5.5% in 2020 due to the impact of COVID, investment in construction in the country grew rapidly by 24.6% in 2021. In 2022, the industry continued to expand by approximately 15.4%, with a significant boost from a 25.7% increase in the home renovation sector. According to ANCE, Italy's national builders' association, construction investment reached an estimated €172bn in 2022. This surge in activity marks a reversal of the industry's decade-long decline, which saw a drop of almost a quarter in total construction revenues and almost a third of workers losing their jobs between 2010 and 2020, according to the European Commission.

Investment environment

Private sector financing has yet to play a more significant role in facilitating energy efficiency projects. Part of the reason is the impact potential of such projects with social implications and the return potential but the constraints to more capital allocation remain with market fragmentation, scalability and scarcity of dedicated players. Energy efficiency in the residential housing segment is one such area.

There is significant scope for the deployment of private capital in the emerging energy efficiency space. The need is to develop innovative financing models to help adoption. There has been a rise in funding activity in the overall Climate and Sustainability space, with about $37 billion1 in dry powder understood to be available for deployment as of March 2023. Of the various investment subsectors, an important one is the buildings sector. A combination of distributed energy resources (such as solar) and energy efficiency (space heating/cooling) systems present an effective means of mitigating emissions in the buildings sector. The investment upside is significant for the near-untapped potential in most of the markets.

1 The data point of $37 billion was sourced from a BCG article dated 30 March 30 2023. BCG's article attributed this data to the Center for Climate-Aligned Finance. https://www.bcg.com/publications/2023/private-capital-and-climate-opportunity-europe

As of November 2022, the energy efficiency sector had seen investment in 280 deals backed by private equity and venture capital worth $31.79 billion. Comparatively, the total transaction volume for 2021 stood at $16.36 billion across 307 transactions involving companies in the energy efficiency, energy management, innovative energy, and carbon emission sectors. Investments in this field defied the general downward trend of private equity and venture capital deployment in 2022, reflecting nations and companies racing to meet carbon emission reduction targets through sustainable energy management strategies. As VC and PE capital continues to flow into the sector, it is critical to support this with dedicated lending solutions for asset and working capital finance as banks often face internal organisational issues that limit their capacity to follow the market or increase the costs of energy efficiency funding. These issues include the availability of resources, the need to build capacity among loan officers and develop innovative solutions for energy efficiency financing. 

The emergence of dedicated energy efficiency funds in recent years has been notable, but their number and with that competition for projects remains small compared to the market size. This allows them to access a complexity premium for their capital deployed and they also play a significant role in certain markets due to their in-depth understanding of energy efficiency risk characteristics.

While several funds have also reported initial difficulties in deploying their capital, many have crossed this hurdle and have now established proven models to successfully deploy capital across and expanding the range of energy efficiency sectors such as building retrofit, Building Management System improvements, heating as a service, and storage, among others. These funds are in fact specialised financial players with a strong knowledge of the market, creating a reliable source of capital for such projects and support the development of dedicated service providers.

In the larger global context, the European region's funding commitments towards energy would need to rise by a significant margin. A recent and notable example for comparison comes from the US legislation, the Inflation Reduction Act ("IRA"). The latter has been in focus for its generous incentives to attract projects. Under the Recovery and Resilience Facility ("RRF"), the European funding devotes a proportionate amount towards energy efficiency projects. In absolute terms, though, there is a stark difference. The US IRA allocates about $96 billion in energy efficiency, which is 33% higher than the $73 billion allocated by the EU RRF.

Energy Price/Cost Summary View

The steadily rising wholesale power price through 2021, and its unprecedented spike in 2022, triggered a rush towards prioritising energy efficiency at enterprise and policy levels. A significant impact of the price rise was in terms of reduced demand. International Energy Agency ("IEA") estimates show a 13% decline in the European Union's gas demand in 2022. It was the steepest fall in the region's history and was primarily led by the energy-intensive industrial sectors.

At a policy level, some of the most severe austerity measures were implemented to manage the crisis. The primary energy demand in this context varied across the sectors. The power sector had a net rise in the total demand (additional gas and coal) due to the lack of compensating supply sources (renewable, hydro and nuclear energy). Other sectors, such as process-based energy-intensive industries (such as steel) and households, bore the brunt of energy austerity measures.

Market Intervention by European Countries during 2022

Prices have moderated since their peaks of 2022. By February 2023, European gas prices had declined by about 85% since August 2022. Prices are still higher than historically, but the corresponding demand rationalization by industries has helped. Additional factors, such as the abatement in winter demand and a rise in gas storage levels, reinforce the price trend. But the phase of price rises may be far from over. Higher futures contract prices for 2023/2024 indicate persistent supply uncertainties (IEA).

Development in Focus: Energy communities

Energy communities consist of various entities such as municipalities, households, public institutions, private businesses, and cooperatives. A significant increase in the number of energy communities is expected to occur in the near future. According to a study conducted by the Politecnico di Milano (Electricity Market Report), it is estimated that by 2025, there will be approximately 40,000 energy communities in Italy, involving 1.2 million households, 200,000 offices, and 10,000 SMEs. In Europe, a federation of energy cooperatives has been established, which includes more than 1.2 million citizens from around 1,900 cooperatives. The European Union's Joint Research Center conducted a study in 2020 that found Germany to have the highest number of energy communities (1,750), followed by Denmark (700) and the Netherlands (500). Energy communities, as per EU legislation, can be structured as an association, cooperative, partnership, non-profit organization, or limited liability company, among others. Participation is voluntary, and the primary goal is to provide environmental, economic, or social benefits to members and the local areas they serve. These communities are considered legal entities and should have equal access to energy markets as other market actors. Due to their strict participation and governance criteria, they receive additional benefits, such as access to financing, support schemes, capacity building, and information.

As the concept of energy communities has emerged from the ground up, EU countries have implemented national policies to support them and related business models. For example, the Netherlands offers regulatory exemptions in licensing requirements for new business models, while Germany applies special rules in auction schemes for renewable energy source support.

Energy communities can engage in a range of activities, including energy production, distribution, supply, consumption, aggregation, storage, energy efficiency services, electromobility, and other energy services for their members or shareholders.

The most common business models for energy communities today include generation and supply, where they supply electricity and gas sourced from local producers is supplied through power purchase agreements or community-owned production capacity to their customers. Another model is collective investments in production installations, where consumers pay a fixed membership fee or variable stake to become members of an energy community that acts as an energy producer. Power purchase agreements are often used in cooperative investments to cover the produced energy and related financial products like green certifications or guarantees of origin. Collective self-consumption is another model where energy consumers and producers in the same area are linked. However, the ability of members to sell their electricity to other community members and use the off-setting mechanisms of electricity meters may vary based on national regulations.

These models can be combined and are not exhaustive; they are likely linked to the continued growth of C&I and residential solar. As part of the Rooftop Solar Initiative, the European Commission has proposed a solar rooftop mandate for all commercial and public buildings by 2027, and for new residential buildings by 2029. In 2022, the German state of Baden-Wurttemberg implemented its first rooftop solar mandate. With solar mandates becoming a standard for new buildings, architects will now integrate solar PV into their building practices. The industry association SolarPower Europe sees that rooftop solar is primarily limited by installers' capacities, while permitting issues, which affect much more the large-scale systems, are yet to be fixed in most member states and on local levels, as government market interventions are starting to cause insecurity among investors and lending institutions.

Evidence1 increasingly suggests that energy community projects have a positive impact on the local economy and job creation, although the magnitude and nature of these effects vary depending on the specific community. As part of the trend towards decentralization of the energy system, energy communities are expected to have significant impacts on the distribution network, but more research is needed to determine the exact positive and negative effects.

On the other hand, research has shown that community projects can increase local acceptance of renewable energy and support for climate action. Additionally, participation in community projects is linked to more energy-efficient behavior, increased knowledge and skills, and stronger social trust and capital to some extent.

Outlook

Global energy supply security remains uncertain for a mix of macroeconomic and geopolitical factors but has worked to act as a headwind for the energy efficiency sector. The stress on the demand-supply balance in natural gas, Europe's critical primary energy resource, could also be accentuated as the region's winter demand is unlikely to be as unseasonably mild as in 2022. The urgency for energy efficiency thus continues. IEA's study indicates a €95 billion funding requirement to bridge the projected gas demand-supply deficit in 2023 through incentivizing faster improvements in energy efficiency, renewable energy integration, electrification of heat sources, and behavioural changes in energy consumption.

The investment requirement for energy efficiency for 2023 and beyond is far less than the resources expended to counter the energy crisis. EU region's countries are estimated to have allocated about €681 billion so far (since September 2021) in energy crisis spending. The UK and Norway added to this with another €103 billion and €8 billion, respectively. It is unsustainable for public finances and largely mistargeted as fossil fuel consumption was subsidised. A realignment in budgets is overdue. In the UK, for instance, about a third of the allocated funding for energy-efficient buildings in 2020-2025 was unspent as of February 2023.

With timely investments, the region's built environment could be vital in transforming the landscape. The existing buildings' stock significantly contributes to decarbonisation (35% of energy-related emissions) and rationalisation of primary energy consumption (32% of natural gas consumption). Despite the challenges involved, some major areas of interventions with maximum impact include rooftop solar, replacement of gas boilers with heat pumps, insulation, smart thermostats, and district heating.

McKinsey's projections indicate that to adhere to the 'Fit for 55' and RePowerEU targets, the buildings' renovation rates need to be 15 times the current level of 0.2% per year. The corresponding investment requirements are enormous, translating to an attractive market opportunity if followed through with an actionable plan.

The projected energy efficiency investment and the resulting market size are simply quantified reiterations of the low-hanging untapped opportunity. The ambitious objectives of climate neutrality require a cohesive approach, incorporating multiple lines of action. The measures related to energy efficiency offer the most optimum and cost-effective solutions to address immediate and long-run targets for carbon reduction in businesses and society at large.

1 Source: https://cadmus.eui.eu/bitstream/handle/1814/68383/QM-04-20-447-EN-N.pdf?sequence=1

Acronyms used for Power Market Price Trend

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")

Introduction

The Company's goal is to generate attractive returns for investors by reducing Primary Energy Consumption ("PEC"). AEET seeks to achieve this through investing principally in a diversified portfolio of energy efficiency projects with high-quality counterparties. AEET's investments positively impact the environment by reducing the amount of carbon dioxide produced, by decreasing PEC and by increasing the amount of renewable energy used. The synergies generated by the reduction of PEC and simultaneously using renewable energy sources further decrease CO2 emissions.

This is reflected across the investment philosophy and approach, including the Company's investment adviser, Aquila Capital Investmentgesellschaft mbH, which is dedicated to the green energy transition. The Company is committed to being a responsible investor, ensuring that environmental, social and governance criteria are incorporated into day-to-day investment decisions as well as generating a positive impact for society. By reducing PEC, the Company often improves life standards for end users, for example, better lights, easier maintenance, reduced danger, security of supply and very importantly, the reduction of emissions like Nitrogen Oxides ("NOX").

Investment Approach and ESG Approach

AEET's investment approach is focused on investments in energy efficiency projects located primarily in Europe. These assets are predominantly proven operational projects that deliver energy savings for commercial, industrial, and public sector buildings. AEET seeks to invest in projects for the long term with a focus on optimizing and improving the assets' PEC.

Technologies typically include:

§ LED Lighting Systems: significant reduction of consumed energy (up to 70%) and other positive outcomes: reduced heat emission and therefore less need for ventilation and cooling; better light for workplaces; less maintenance work; reduction in the use of glass (particularly beneficial in food production).

§ LED Street Light Systems: significant reduction of consumed energy, increased safety (better light, light where needed, choice of light colour); integration of other technologies such as sensing (traffic control), mobile communication systems etc.

§ Solar PV: increases the level of efficient and locally produced renewable energy. Lower transportation costs, free energy source.

§ Biomass Boilers: locally consumed; generate energy (heat, cooling and electricity) from renewable sources, very often contributing to local job creation. The exhaust dust needs to be managed and fulfil strict environmental regulations.

§ Combined Heat and Power plants (CHP): Highly efficient generation of combined energy outputs like electricity and heat or cooling.

§ Electrification of transportation vehicles (batteries) such as trains, trams, buses, ferries, boats etc; replacement or hybridization of large fossil fuel engines; significant reduction of fossil fuel consumption, other emissions, NOX and Sulphur Oxides ("SOX"); often create a greener and healthier local environment e.g. by electrification of inner-city buses.

§ HVAC/buildings: Highly efficient heating, ventilation and air conditioning systems. Often a combination of more efficient use of energy while simultaneously increasing wellbeing, effectiveness, and controllability of systems e.g., avoid overheating/cooling of workspace by taking weather conditions into consideration.

§ Smart Metering/Submetering: Often providing real-time or timely information about personal consumption volume, patterns and costs of energy (heating, electricity, water or gas) to enable energy consumers to manage usage and costs. Pre-requisite to change consumer behaviour which in itself could reduce energy consumption by up to 20% (e.g. avoiding standby electricity consumption).

Environmental Impact

The Company's investment approach is focused on reducing PEC, which should lead to significant reductions in carbon dioxide emissions. In addition, local production of energy (CHP, Biomass Boilers, Solar PV) reduces transportation energy losses and grid over-utilisation. Smart Meters and other control technologies enable a better visibility and management of energy and therefore represent a basis for energy savings.

All projects are managed within the guidelines of local, regional, and national environmental laws in order to adhere to the Do No Significant Harm ("DNSH") principles. Aquila Capital ensures all required regulations and corresponding approvals are completed prior to the acquisition of the assets (for example, any required planning permissions).

Social Impact

Energy efficiency measures not only reduce PEC but typically also increase the life quality and health aspects for stakeholders, employees, users of public facilities and/or private individuals. This is mainly achieved through advanced solutions for lighting, heating, cooling and ventilation and the associated control units.

All project developers are required to adhere to local, regional, and national health & safety laws, to train and educate employees accordingly to ensure casualties and injuries are avoided.

We incorporate Aquila Capital's ESG policy, which excludes suppliers and manufacturers that do not meet Aquila Capital's criteria (exclusion of sectors/subsectors, companies that use unfavourable labour conditions etc).

For all counterparties a rating exercise is performed (in collaboration with a third-party rating agency) assessing creditworthiness of the client as well as a Know Your Client check being undertaken for the relevant parties involved.

Governmental Impact

All our business partners are required to adhere to the requirements of the national social security and tax authorities.

Where required by local, regional and/or national authorities our business partners need to provide evidence that they adhere to anti bribery and corruption laws.

Due Diligence

The Investment Adviser performs detailed ESG due diligence for each asset prior to investment. The investment management team follows a structured screening, due diligence and investment process which is designed to ensure that investments are reviewed and compared on a consistent basis. Execution of this process is facilitated by the team's deep experience in energy efficiency project investing. As part of this process, the Investment Adviser will, as relevant for each investment, consider:

· total PEC reduction, and implied greenhouse gas emissions reduced and/or avoided; and/or

· total energy production from renewable and non-renewable sources.

As part of this due diligence, various risks are assessed and documented including risk of climate change, risk of harm to local biodiversity and other environmental risks. These risks are evaluated as part of the technical, legal and insurance due diligence as applicable. The independent risk management team evaluates the initial evaluation of the investment management team in assessing each asset for acquisition. The Investment Adviser considers the ability for the acquisition to contribute to the UN Sustainable Development Goals and whether it fits within the Principles for Responsible Investment ("PRI").

Governance Framework

AEET benefits from an independent Board of Directors, as well as FundRock Management Company (Guernsey) Limited (part of Apex Group, previously known as Sanne Fund Services UK Limited) as the Alternative Investment Fund Manager ("AIFM"). The Board of Directors supervises the AIFM, which is responsible for making recommendations in relation to investment proposals put forward by the Investment Adviser. The Investment Adviser is fully regulated and supervised by BaFin in Germany.

The Company has established procedures to deal with any potential conflicts of interest in circumstances where Aquila Capital (or any affiliate) is advising both the AIFM (for the Company) and other Aquila Capital managed funds who are counterparties to the Company. In the context of an investment decision, these procedures may include a fairness opinion in relation to the valuation of an investment, which is obtained from an independent expert.

Monitoring of Environmental, Social & Governance Characteristics

After an investment has been made, ongoing monitoring commences at both the portfolio and asset levels by the Investment Adviser. The aim of this ongoing monitoring is to monitor and calculate the energy consumption/reduction and derive the CO2 reduction from that.

The environmental characteristics of the Company are monitored throughout the lifecycle of investments, including:

· ongoing monitoring of the PEC based on the energy consumption and derive from that the CO2 savings, where appropriate, monitoring additional environment and ESG relevant developments both at the portfolio and asset level; and

· annual reporting, including ESG aspects, to relevant stakeholders including ad-hoc reporting of any material. and urgent issues identied in the monitoring process.

AEET has been awarded the Green Economy Mark from the London Stock Exchange. The Green Economy Mark identifies London-listed companies and funds that generate between 50% and 100% of total annual revenues from products and services that contribute to the global green economy.

INVESTMENT POLICY

As at the date of this Annual Report, the Company's investment policy (including defined terms) is as set out in its IPO prospectus dated 10 May 2021.

The Company will seek to achieve its investment objective through investment in a diversified portfolio of Energy Efficiency Investments (as defined below) located in Europe, with private and public sector counterparties. The Company will predominantly invest in (i) energy efficiency investments including the installation, in the built environment, transportation industry and other sectors of the economy, of proven technologies and solutions such as energy efficient lighting, smart building and metering services, cogeneration plants, heating, ventilation and air conditioning (HVAC) systems, efficient boilers, solar photo voltaic plants, batteries, other energy storage solutions, electric vehicles and associated charging infrastructure as well as (ii) in the acquisition of majority or minority shareholdings in companies with a strategy that aligns with the Company's investment objective, such as developers, operators or managers of energy efficiency projects ("Equity Investments") ("Energy Efficiency Investments"). These investments seek to reduce primary energy consumption, reduce CO2 emissions and in many cases deliver economic savings and other benefits to the counterparties including improved air quality. The Company will not invest in fossil fuel extraction or mineral extraction projects. The capital value of the investment portfolio will be supplemented and supported through reinvestment of excess cash flows, asset management initiatives and the use of leverage.

The Energy Efficiency Investments will typically include long term contracts, which entitle the Company or its subsidiaries to receive stable, predictable cash flows payable by the counterparties, who will benefit from the use of the installed equipment during a contractual period typically ranging from five to fifteen years.

The Company will make Energy Efficiency Investments in operational, ready-to-build or under construction assets. The Company may, when making Equity Investments, through such investments, indirectly hold investments that are in the development phase.

In respect of each type of investment, the Company will seek to diversify its commercial exposure by contracting, where practicable, with a range of different equipment manufacturers, project developers and other service providers, as well as off-takers.

Whilst the Company will seek to diversify its commercial exposure by investing in a diversified mix of technologies, the assets of the Company may be predominantly concentrated in a small number of proven technologies.

Investments may be acquired from a single or a range of vendors and the Company may also enter into joint venture or co-investment arrangements alongside one or more co-investors, including Aquila Managed Funds.

The Company will acquire controlling and, opportunistically, non-controlling interests in Energy Efficiency Investments and may use a range of investment instruments in the pursuit of its investment objective, including but not limited to equity, mezzanine or debt investments.

In circumstances where the Company does not hold a controlling interest in the relevant investments, the Company will secure its rights through contractual and other arrangements, to, inter alia, ensure that the Energy Efficiency Investment is operated and managed in a manner that is consistent with the Company's Investment Policy.

Investment restrictions

The Company aims to achieve diversification principally through investing in a range of portfolio assets across a number of distinct geographies and a mix of technologies. The Company will observe the following investment restrictions when making investments:

· no more than 20 per cent. of its Gross Asset Value will be invested in any single asset;

· no more than 20 per cent. of its Gross Asset Value will be invested in Energy Efciency Investments with the same Counterparty;

· following full investment of the Net Issue Proceeds, the Company's portfolio will comprise no fewer than ten Energy Efciency Investments;

· no investments will be made outside of Europe; and

· no more than 7.5 per cent. of its Gross Asset Value, in aggregate, will be invested in Equity Investments, and at all times such investments will only be made with appropriate share holder protections in place.

The Company will hold its investments directly or through one or more SPVs and the investment restrictions will be applied on a look-through basis.

The Company complies with the investment restrictions set out below and will continue to do so for so long as they remain a requirement of the FCA:

" neither the Company nor any of its subsidiaries will conduct any trading activity which is signicant in the context of the Group as a whole;

" the Company must at all times, invest and manage its assets in a way which is consistent with its object of spreading investment risk and in accordance with the published investment policy; and

" not more than 15 per cent. of the Gross Asset Value at the time an investment is made will be invested in other closed- ended investment funds which are listed on the Ofcial List.

Currency and hedging

The Company does not intend to use hedging or derivatives for investment purposes. The functional currency of the Company is sterling. With many of its investment assets in euros the Company uses a series of regular forward foreign exchange contracts to provide protection against movements in the sterling exchange rate. Under these arrangements the Company is required to provide £5 million in cash as collateral for these forward foreign exchange contracts. Following the failure of the Continuation vote the Company is currently reviewing the strategic options for realising value for shareholders. The Board will consider the appropriateness of the current hedging arrangements and the cash collateral as part of the review of strategic options and In light of the cash requirements of the Company.

Borrowing policy

The Company may make use of long-term debt on both a limited recourse and full recourse basis to finance the acquisition or construction of Energy Efficiency Investments and for working capital purposes. Gearing will be employed at the level of the Company, at the level of any intermediate wholly owned subsidiary of the Company or at the level of the relevant SPV, and any limits set out in this document shall apply on a look-through basis. In addition, the Company may make use of short-term debt, such as a revolving credit facility, to assist with the acquisition of or investment in suitable opportunities as and when they become available. Aggregate gearing, whether via long-term or short-term debt, will not exceed 50 per cent. of Gross Asset Value, calculated at the time of drawdown. The Company will target aggregate gearing, whether via long term or short-term debt, of 35 between 40 per cent. of Gross Asset Value, but in any event will not exceed 50 per cent. of Gross Asset Value, in each case calculated at the time of drawdown.

Debt may be secured with or without a charge over some or all of the Group's assets depending on the optimal structure for the Group and having consideration to key metrics including lender diversity, cost of debt, debt type and maturity profiles. Intra-group debt between the Company and subsidiaries will not be included in the definition of borrowings for these purposes.

In circumstances where the above limits are exceeded as a result of gearing of one or more Energy Efficiency Investments in which the Company has a non-controlling interest, the borrowing restrictions will not be deemed to be breached. However, in such circumstances, the matter will be brought to the attention of the Board who will determine the appropriate course of action.

Cash management

Cash held pending investment in Energy Efficiency Investments or for working capital purposes will either be held in cash or invested in cash, cash equivalents, near cash instruments, bearer bonds and/or money market instruments ("Cash and Cash Equivalents"). There is no restriction on the amount of Cash and Cash Equivalents that the Company may hold and there may be times when it is appropriate for the Company to have a significant Cash and Cash Equivalents position. For the avoidance of doubt, the restrictions set out above in relation to investing in UK listed closed-ended investment companies do not apply to money market type funds.

Changes to and compliance with the Investment Policy

As required by the Listing Rules, any material changes to the Company's Investment Policy as set out above will require the approval of Shareholders by way of an ordinary resolution at a general meeting and the approval of the FCA.

Compliance with the above restrictions will be measured at the time of investment and non-compliance resulting from changes in the price or value of assets following investment will not be considered as a breach of the investment restrictions.

In the event of a breach of the investment guidelines and the investment restrictions set out above, the AIFM shall inform the Board upon becoming aware of the same and if the Board considers the breach to be material, notification will be made to a Regulatory Information Service.

Following the unsuccessful Continuation Vote, the Directors are proposing amendments to the Company's Investment Policy in a resolution at the Annual General Meeting of Shareholders on 14 June 2023. For more information, please see the Chair's Statement.

KEY PERFORMANCE INDICATORS

The Board measures the Company's success in achieving its investment objective by reference to the Key Performance Indicators ("KPIs") described below:

Deployment of IPO proceeds

In the Company's IPO prospectus published on 10 May 2021, it was stated that the proceeds would be significantly deployed or committed to acquire suitable assets within twelve months from IPO (2 June 2022). As announced on 21 April 2022, the Investment Adviser revised this target to the end of December 2022.

The Company achieved its revised target to substantially commit the gross proceeds raised through its IPO by the end of 2022. As at 31 May 2022, £19.7 million of the Company's IPO proceeds had been committed for investment and approximately £15.7 million had been deployed. As at 31 December 2022, the total amounts committed and deployed were £96.7 million and £61.2 million, respectively. Commitments continued to increase at a steady pace in 2023 until the continuation vote on 28 February 2023 ("Continuation Vote"). The total amounts committed and deployed as at 31 March 2023 were £98.7 million and £62.2 million, respectively, taking into account the timing of the realisation of funds from the Italian Superbonus investments.

To meet its target total dividend in each nancial year

As disclosed in the Company's IPO prospectus published on 10 May 2021, the Company was targeting a dividend of a minimum of 3.5 pence per Ordinary Share in relation to the financial year ended 31 December 2022, and a minimum of 5 pence per Ordinary Share in relation to the financial year ending 31 December 2023, with the aim of increasing this dividend progressively over the medium term. The Company did not intend to pay a dividend in the first financial period to 31 December 2021, whilst it was deploying the IPO Proceeds.

As previously announced on 21 April 2022 and in subsequent dividend declaration announcements, the Board did not expect that this stated dividend target would be fully covered by earnings, due to slower than anticipated deployment. However, the Board decided that it would retain the 2022 dividend target and meet any earnings shortfall through paying out of distributable reserves. Accordingly, the Board declared three interim dividends totalling 3.5 pence during the financial year ended 31 December 2022 (for the period ended 31 December 2021: Nil).

Following the failure of the Continuation Vote on 28 February 2023, the Board has reviewed the dividend policy of the Company and future dividends will be paid from net income after taking into account cash flow forecasts, and only in respect of 6 monthly periods, rather than quarterly periods. Further details are set out in the Chair's Statement.

Discount of share price to NAV

The Board monitors the price of the Company's shares in relation to their NAV and the premium or discount at which they trade. The share price closed at a 25.6% discount to the NAV as at 31 December 2022.

Between 31 January 2022 and 21 April 2022, the Board performed an Investment Strategy Review and throughout the year 2022 was engaging very closely with the Company's major Shareholders. On 28 February 2023 the Company held a General Meeting when the Continuation Vote did not pass. For more details, please see the Chair's Statement. The Company has shareholder authority to buy back shares, if appropriate.

Maintenance of a reasonable level of ongoing charges

The expenses of managing the Group are carefully monitored by the Board. The Board receives and reviews management accounts which contain an analysis of expenditure which are reviewed at quarterly Board meetings. The Board reviews the ongoing charges on a quarterly basis and considers these to be reasonable in comparison to its peer group of investment trust corporates.

Based on the Group's average net assets during the year ended 31 December 2022, the Group's ongoing charges figure calculated in accordance with the AIC methodology was 2.6% (Period from IPO to 31 December 2021: 0.9%).

RISK MANAGEMENT

Principal risks and uncertainties

During the year under review, the Company has carried out a robust assessment of its principal and emerging risks and the procedures in place to identify any emerging risks are described below.

Procedures to identify principal or emerging risks:

The Board regularly reviews the Company's risk matrix, with a focus on ensuring that the appropriate controls are in place to mitigate each risk. The experience and knowledge of the Board is important, as is advice received from the Board's service providers, specifically the AIFM, which is responsible for the risk and portfolio management services and outsources the portfolio management to the Investment Adviser.

1. Investment Adviser: the Investment Adviser provides a report to the Board on a quarterly basis or such other period as required on industry trends, insight into future challenges in the energy efficiency sector including the regulatory, political and economic changes likely to impact the sector;

2. Alternative Investment Fund Manager: following advice from the Investment Adviser and other service providers, the AIFM maintains a register of identified risks including emerging risks likely to impact the Company;

3. Broker: provides advice periodically specific to the Company on the Company's sector, competitors and the investment company market whilst working with the Board and Investment Adviser to communicate with Shareholders;

4. Company Secretary: briefs the Board on forthcoming legislation/ regulatory change that might impact on the Company; and

5. Association of Investment Companies ("AIC"): The Company is a member of the AIC, which provides regular technical updates as well as drawing members' attention to forthcoming industry and regulatory issues.

Procedure for oversight

Audit and Risk Committee: Undertakes a review at least twice a year of the Company's risk matrix and a formal review of the risk procedures and controls in place at the AIFM and other key service providers to ensure that emerging (as well as known) risks are adequately identified and, so far as is practicable, mitigated.

Principal risks

The Board considers the following to be the principal risks faced by the Company along with the potential impact of these risks and the steps taken to mitigate them.

Viability statement

In accordance with the UK Corporate Governance Code ("UK Code") and the Listing Rules, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the 'Going Concern' provision.

In reviewing the Company's viability, the Directors have assessed the viability of the Company for the period to 31 December 2025 (the "Look-forward Period").

The Company's Shareholders had the opportunity to vote on an ordinary resolution on the continuation of the Company at the General Meeting held on 28 February 2023. The Continuation Vote did not pass.

In response to the failed Continuation Vote, the Board is proposing at the AGM an amendment to the Company's Investment Policy whereby the Company is placed into a Managed Run-Off. This Continuation Managed Run-Off Resolution seeks to acknowledge and reflect the views expressed by Shareholders in the February 2023 Continuation Vote whilst the Board continues to consider strategic solutions in respect of the Company's assets to realise the maximum value for Shareholders in the shortest possible time, recognising the inherent difficulties in the construction of the portfolio, including the number of individual investments, multiple geographies and long tenors. The Continuation Managed Run-Off Resolution is described in greater detail in the accompanying Notice of Annual General Meeting. Accordingly, the Directors recognise that the outcome of Continuation Managed Run-off Resolution is not yet known and therefore, creates material uncertainty around going concern, and may cast significant doubt about the Company's viability.

Notwithstanding the above, the Board believes that the Look-forward Period, being approximately three years, is an appropriate time horizon over which to assess the viability of the Company, particularly when taking into account the long-term nature of the maturity of the Company's assets, which is modelled over three years and the principal risks outlined above. In considering the prospects of the Company, the Directors looked at the key risks facing the Company, focusing on the likelihood and impact of each risk as well as any key contracts, future events or timescales that may be assigned to each key risk.

On the assumption that the resolution in respect of the Continuation Managed Run-Off (as explained in the Chair's Statement and the Chair's letter accompanying the AGM Notice, which can be found on the Company's website) is approved at the Company's AGM in June 2023 and after undertaking prudent and robust enquiries, and assessing all data relating to the Company's current liquidity and forecast liquidity based on downside scenarios, the Directors have a reasonable expectation that the Company has adequate resources to: continue in operation; realise the Company's assets in an orderly manner; and meet its liabilities as they fall due, over the Look-forward Period.

Going concern

The Directors have adopted the going concern basis in preparing the financial statements. The following is a summary of the Directors' assessment of the going concern status of the Group and Company.

The Group and Company continues to meet day-to-day liquidity needs through its cash resources. The Directors have a reasonable expectation that the Group and Company has adequate resources to continue in operational existence for at least twelve months from the date of this document.

In reaching this conclusion, the Directors have considered the Group's investment commitments, cash position, income and expense flows. As at 31 March 2023, the latest practicable date before publication of this report, the total commitments were £98.7 million and income generating capital deployed since IPO was £62.2 million, after realisations of £0.5 million. As at 31 March 2023, the Group had cash of £33 million (including the £5 million held as collateral for FX hedging) and no debt as at that date. The Directors are also satisfied that the Group and Company would continue to remain viable under downside scenarios, including a delay in realisations of cash from investments. The Group and Company continues to meet its day-to-day liquidity needs through its cash resources. Total expenses for the year ended 31 December 2022 were £2.54 million (Period from incorporation to 31 December 2021: £0.92 million annualised), which represented approximately 2.63% of average net assets during the year ended 31 December 2022 (Period from incorporation to 31 December 2021: 0.94%). At the date of approval of this document, based on the aggregate of investments and cash held, the Group and Company has substantial operating expenses cover.

Since the date of the Continuation Vote, the Group has not entered any new commitments and its investing activity is solely in respect of funding legal commitments to existing investments, with the aim of protecting the future returns from those existing investments and realisations. The Company has amended its dividend policy and has indicated that it will only pay dividends which are covered by net income, and after reviewing cash flow forecasts, and only in respect of 6 month periods not quarterly periods. Therefore the next dividend declaration will be in respect of the 6 month period ended 30 June 2023. In addition, the Group will review its current policy on hedging its euro investments, taking into account the consideration of its strategic options following the failure of the Continuation Vote and cash flow requirements.

Following consultation with the Company's Shareholders in April 2022, who were supportive of the continuation of the Company in the context of its plan to commit and deploy the IPO proceeds by the end of 2022 or early 2023, it was agreed to hold a continuation vote in February 2023. With the IPO proceeds now fully committed, Shareholders voted at the meeting on 28 February 2023 against continuation.

At the general meeting held at the end of February 2023, the resolution to amend the Articles relating to future continuation votes was not approved by Shareholders and therefore the next continuation vote will be at the AGM in June 2023, in accordance with the Articles, prior to the current commitment in the Articles, following the vote against continuation, to put proposals to Shareholders for the reconstruction, reorganisation or liquidation of the Company by 28 August 2023.

As summarised in the Chair's Statement and the Chair's letter accompanying the AGM Notice, given the private and illiquid nature of the investments, the duration and the complexities of the Portfolio, the Directors do not believe it is in the best interests of Shareholders to place the Company into liquidation at this time. The Board is proposing a resolution at the Company's AGM in June 2023 that the Company be re-organised and put into Managed Run-Off whereby assets will be realised at the best value which the Directors consider can be achieved within a reasonable timeframe.

During the period of managed run-off, the Board will continue to consider all strategic options in respect of the Group's assets, some, but not all of which would result in the restructuring and winding up of the Group and Company in due course. The Directors also recognise that any proposals put to Shareholders are yet to be approved by the Shareholders. The Directors note that these conditions indicate the existence of material uncertainty which may cast significant doubt about the Group and Company's ability to continue as a going concern.

However, based on the assessment and considerations above the Directors have concluded that the financial statements of the Group and Company should be prepared on a going concern basis. The financial statements do not include the adjustments that would result if the Group and Company was unable to continue as a going concern.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group's and the Company's financial statements in accordance with UK adopted international financial reporting standards in conformity with the requirements of the Companies Act 2006.

Under company law, Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that year. In preparing the financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• state whether applicable UK adopted international financial reporting standards in conformity with the requirements of the Companies Act 2006 have been followed, subject to any material departures disclosed and explained in the financial statements;

• make judgements and accounting estimates that are reasonable and prudent; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The Directors have delegated responsibility to the Investment Adviser for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

Directors' conrmations

The Directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Group's and the Company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed in the Corporate Governance section confirm that, to the best of their knowledge:

• the Group's and the Company's financial statements, which have been prepared in accordance with UK adopted international financial reporting standards in conformity with the requirements of the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position and loss of the Group and the Company; and

• the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties that it faces.

In the case of each Director in office at the date the Directors' report is approved:

• so far as the Director is aware, there is no relevant audit information of which the Group's and Company's auditors are unaware; and

• they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Group's and the Company's auditors are aware of that information.

For and on behalf of the Board,

Miriam Greenwood OBE DL

Chair of the Board

30 April 2023

Financial Statements

The notes are an integral part of these financial statements.

The notes are an integral part of these financial statements.

The notes are an integral part of these financial statements.