Sustainable Finance Disclosure Regulation
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.
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.
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 and carry out financial, SDG and ESG analysis of companies in the portfolio. 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 sustainability 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.
ESG/Sustainability Goals of our funds:
CARN considers sustainability issues and ESG factors as having implications for drivers of risk and return at the company and market level. In the management of our funds Latitude and Longitude we seek to allocate capital to companies that are both profitable and sustainable.
CARN views the UN Sustainable Development Goals (SDGs) as the most recognized and coherent global framework for evaluating sustainability with regards to environmental, social, and economic development. The broad ESG goal of our funds is to allocate capital to companies whose business models are positively aligned with the achievement of the SDGs and exclude or avoid those that are not. This goal is supported by analyses of SDG alignment of company business models and the analysis of ESG practices in company operations. These analyses are incorporated in the investment processes and ownership activities of our funds.
Investment Strategies used to fulfil our funds’ ESG considerations:
CARN does not provide capital to companies or industries that we consider in breach of ethical standards or that undermine sustainable development. We have therefore committed to excluding companies involved in the following activities from our funds:
- Fossil fuels
- Breaches of fundamental ethical norms including corruption, tax evasion, human rights and environmental damage.
By excluding companies involved in the business activities listed above, we are thus avoiding investments that undermine or harm the fund’s ESG and broader sustainability goals and considerations.
As stock-pickers, positive selection is at the core of the CARN’s investment strategy for both Latitude and Longitude. This entails actively seeking out quality companies with strong financial and sustainability characteristics.
Our funds will invest in companies where CARN views the business model as being well positioned in relation to the transition to a more sustainable economy, in alignment with the UN SDGs. To support this goal, we assess and measures the alignment of a company’s main business activities with the UN SDGs and will not invest in a company that receives a negative score.
CARN also expect companies in our funds’ portfolios to have good ESG practices embedded in their operations and processes, including how they treat their employees, manage natural resources and work on behalf of shareholders and other stakeholders. We assess companies’ handling of material ESG issues and score their performance across a range of ESG metrics in relation to industry peers.
Our in-house SDG and ESG scores are combined to create an overall sustainability score per company that is incorporated in the investment processes and ownership activities of the Sub-fund.
In addition to being an active investor, CARN is a responsible and active owner. As such, we aim to vote at all 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.