Sustainable Finance Disclosure Regulation
ENTITY LEVEL
In March 2018, the European Commission published an Action Plan on Financing Sustainable Growth (the “EU Action Plan”) that set out an EU strategy for sustainable finance. The EU Action Plan identified several legislative initiatives, including Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”). SFDR requires transparency with regard to the integration of evaluations of environmental, social or governance (ESG) events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of the investments made by a financial product (“Sustainability Risks”) and consideration of adverse sustainability impacts of financial products and financial market participants.
CARN is committed to integrating all relevant financial, operational and sustainability related risks in our investment decision-making processes. As a long-term and active investor with a strong interest in sustainability, CARN is acutely aware of the potential financial implications of sustainability related risks and opportunities. We are convinced that sustainability and financial goals are broadly aligned, and that investments in companies with strong sustainability profiles will contribute to superior returns in the long term. Similarly, companies who do not adequately address sustainability in their business models and operations will encounter higher costs and competition and will prove to be less attractive investments in the long term.
Sustainability risks
Due to the nature of the CARN’s investment strategy and types of securities it holds, our investments are exposed to varied Sustainability Risks which include, but are not limited to:
- corporate governance malpractices (e.g. board structure, executive remuneration);
- shareholder rights (e.g. election of the likely directors, capital amendments);
- changes to regulation (e.g. greenhouse gas emissions restrictions, governance codes);
- physical threats (e.g. extreme weather, climate change, water shortages);
- brand and reputational issues (e.g. poor health & safety records, cyber security breaches);
- supply chain management (e.g. increase in fatalities, lost time injury rates, labour relations);
- work practices (e.g. observation of health, safety and human rights provisions).
Specific information on the risks of investing (including Sustainability Risks, where applicable) can be found in the product-specific disclosures below.
Principal adverse impacts of investment decisions on sustainability factors are not currently assessed due to the lack of available and reliable data. The situation will however be reviewed going forward.
Remuneration policy
As part of CARN’s investment strategy, we endeavor to excel in two areas: fundamental analysis and sustainability. All employees are expected to work actively to contribute to this goal. Investment staff are required to ensure compliance with CARN’s strict exclusions policy. Prior to making an investment decision, members of the investment team must consider all relevant considerations and risks associated with the investment.
CARN’s renumeration policy is formulated to encourage members of the investment team to think long term and incorporate all relevant financial, operations and sustainability considerations in investment decisions. Moreover, the integration of risks is part of the overall consideration of risks for our investment products and is included in all references to risks in CARN’s remuneration policy.
Principle Adverse Sustainability Impacts Statement
Explanation of no consideration: For this year from June 2023 to June 2024, CARN will not be fully assessing or reporting on the principle adverse impacts of investment decisions on sustainability factors. This is due to the fact that there is currently very limited reliable data in the market to effectively assess and report on the sustainability metrics. However, we are currently working on establishing the most effective method of collecting and assessing data, including talking directly with our client companies, as well as working with third party providers.
As of June 2024, we will be fully considering the principle adverse impacts of investment decisions on sustainability factors. We will publish the full report by the end of June 2024, and review this every subsequent year following.
PRODUCT SPECIFIC
Negative Screening
The Sub-Fund’s exclusion policy promotes environmental and social responsibility by avoiding investment in companies that engage in harmful practices. It prohibits investment in companies
that produce weapons violating humanitarian principles, contribute to human rights violations, cause severe environmental damage, have high greenhouse gas emissions, or are involved in
corruption or unethical practices. The policy demonstrates a commitment to ethical and sustainable investing.
The Sub-Fund shall not invest in companies which themselves or through entities they control:
1. develop or produce weapons or key components of weapons that violate fundamental humanitarian principles through their normal use. Such weapons include biological
weapons, chemical weapons, nuclear weapons, non-detectable fragments, incendiary weapons, blinding laser weapons, antipersonnel mines and cluster munitions.
2. produce tobacco or tobacco-products
3. produce cannabis for recreational use
4. companies that contributes to serious or systematic human rights violations, serious violations of the rights of individuals in situations of war or conflict, the sale of weapons to states engaged in armed conflict that use the weapons in ways that constitute serious and systematic violations of the international rules on the conduct of hostilities, the sale of weapons or military materiel to states that are subject to investment restrictions on government bonds, severe environmental damage, acts or omissions that on an aggregate company level lead to unacceptable greenhouse gas emissions, gross corruption or other serious financial crime or other particularly serious violations of fundamental ethical norms.
For point 2 and 3, we accept companies with these activities if is constitute less than 5 percent of their income.
The exclusion policy considers principal adverse impacts on sustainability factors by prohibiting investment in companies that engage in practices that have negative impacts on the environment or society. By excluding companies that contribute to severe environmental damage, have unacceptable levels of greenhouse gas emissions, or are involved in serious human rights violations, the exclusion policy takes into account the principal adverse impacts that these practices have on sustainability factors.
Active Ownership
In addition to being an active investor, CARN is a responsible and active owner. As such, we aim to vote at shareholders meetings at companies in which we are, via our funds Latitude and Longitude, a shareholder at the time of said meeting. We also engage in dialogue with the management of portfolio companies to better understand their strategies, risk management and growth prospects and to bring up issues related to capital structure and strategy, accounting practices, sustainability topics and corporate governance.
Use of index
As an active investor with an absolute return mandate, CARN does not use an index to determine our financial or ESG performance of either of our funds.
Fund-specific Sustainability Risks
Assets held by CARN’s funds Latitude and Longitude may be subject to partial or total loss of value because of the occurrence of a Sustainability Risk (as described in the General Risks section above) due to fines, reduction of demand in the asset’s products or services, physical damage to the asset or its capital, supply chain disruption, increased operating costs, inability to obtain additional capital, or reputational damage.
A Sustainability Risk event may arise and impact a specific investment or may have a broader impact on an economic sector, geographical or political region or country which may impact the portfolio of the fund(s) in its entirety.
The broad ESG Goals of Latitude and Longitude may lead CARN to invest in or exclude securities for non-financial reasons, irrespective of market opportunities in order to achieve the stated ESG Goals. While we remain convinced that the integration of sustainability and ESG considerations will support strong returns over time, the risk remains that the financial returns of our funds may not be equivalent to or surpass those of non-ESG financial products.