In accordance with Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (Sustainable Finance Disclosure Regulation – “SFDR”), “sustainability risk” means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment.
Sustainability risks such as a progressing climate change may lead to negative impacts on the assets of the Financial Products or their Investee Companies. With respect to climate change, there are in particular actual physical risks (e.g., extreme weather events) and transition risks (e.g. costs for the transformation of the energy system). In the field of good governance and with regards to social characteristics, there are, for example, risks concerning the reputation of Investee Companies or potential claimed damages. Corresponding political and regulatory measures may also lead to considerable costs and the reduction of asset values.
To the extent that sustainability risks materialize, this may result in a significant reduction of the Financial Products’ net asset value and thus have a strong adverse impact on returns.
The AIFM considers sustainability risks as part of its investment strategy in the following phases of an investment:
- Pre-Investment (sourcing and screening)
- Investment (due diligence)
- Holding (portfolio management, monitoring, reporting)
- Exit (performance evaluation, disclosure)
No consideration of adverse impacts of investment decisions on sustainability factors (Article 4 SFDR)
The AIFM does not consider principal adverse impacts of its investment decisions on sustainability factors as set out in the SFDR.
Principal adverse impacts according to the SFDR are the most significant negative impacts of investment decisions on sustainability factors relating to environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. Considering these impacts would require the AIFM to report according to a set list of indicators for which there is not sufficient data available to the AIFM. Until there is more practical guidance with regard to applying the detailed provisions on principal adverse impacts with insufficient data, the AIFM will regularly review the possibility to consider principal adverse impacts.
At this point, however, due to the blind pool-character of the fund portfolio, the AIFM is not able to determine ex ante whether all of the Financial Products’ Investee Companies will be providing sufficient data to properly consider all principal adverse impacts. As the AIFM is managing Financial Products, which will be minority shareholders in Investee Companies, the AIFM is not in the position to ensure the adherence to standards or high-quality reporting on all necessary data for the assessment of principal adverse impacts on sustainability factors. Moreover, gathering data from early-stage Investee Companies would often put a disproportionate burden on the relatively small management teams.
Integration of sustainability risks in remuneration policies (Article 5 SFDR)
As a registered AIFM within the meaning of Section 2(4) of the German Investment Code (KAGB), HZG Fund Management GmbH is not obligated to have a remuneration policy in accordance with the requirements of the KAGB. Accordingly, there is no remuneration policy according to Article 5(2) SFDR, in which to integrate the consideration of sustainability risks.