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Integration of sustainability risks in the investment decision process
Definition
A sustainability risk refers to an environmental, social or governance (ESG) event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment.
The definition of sustainability risk refers to environmental, social and governance events or conditions, however there is no regulatory definition for these events or conditions. The EU Taxonomy refers to the following criteria, activities, and practices in relation to ESG:
- Environment: climate change, sustainable use and protection of water and marine resources, transition to a circular economy, waste prevention and recycling, pollution prevention control and protection of healthy ecosystems.
- Social: equality, social cohesion, social integration, and labour relations.
- Governance: sound management structures, employee relations, remuneration of relevant staff and tax compliance.
The AIFM reviews and assesses potential sustainability risks within the meaning of SFDR as part of its decision-making process and ongoing risk monitoring with respect to investments made or to be made by the Fund and has integrated such review within its internal procedures and policies, as further detailed hereafter.
Relevance of sustainability risks
Sustainability risks may affect the Fund’s performance having regard to the types of investments made or to be made in accordance with its investment policy and objectives, meaning that if any such risk occurs, returns on investments may be materially negatively affected as a result. Investors and potential investors should note that it is difficult to assess with reasonable certainty the probability of the occurrence of such risks and the likely impact of such materialized sustainability risks on the value of investments.
ESG risk assessment process
The AIFM generally considers materially relevant sustainability risks into the investment process alongside with other material factors. The degree to which sustainability risks will be taken into account may vary from one product to another and may depend on the product scoping and concrete structuring of each individual product.
The AIFM considers sustainability risks assessment as a mean of identifying investment opportunities, managing and monitoring investment risk, and therefore integrate this assessment in their investment decisions and their due diligence processes in order to maximize the long-term risk-adjusted return.
When deciding whether ESG data are material for a particular investment, the AIFM shall evaluate the relevance of the information and the likely impact on the financial return of the investment in the context of the particular fund’s investment strategy. Indeed, even if the fund concerned does not pursue or promote ESG objectives for the moment nor has sustainable investments’ objectives, it remains exposed to sustainability risks.
The identification and assessment of risks, including sustainability risks, will take place on an ongoing basis if and when investments are made in accordance with the Fund’s investment policy.
Such review is performed by the AIFM as summarized below:
- Prior to an investment decision being taken on behalf of the Fund, the AIFM identify the material risks, including sustainability risks, associated with the proposed investment;
- These risks form part of the overall investment proposal to be submitted to the board of managers of the AIFM;
- Ultimately and following its assessment, the AIFM makes the relevant investment decision having regard to the Fund’s investment policy and objectives and subject to the board of managers’ approval.
The identification, assessment and, to the extent possible, mitigation of sustainability risks is embedded into the above process.