EU Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088, “SFDR” or “the Regulation”) requires alternative investment fund managers like Gilde Equity Management (GEM) Benelux Partners B.V.(“GEM” or “Gilde”) to provide on its website certain information with regards to (inter alia) the integration of sustainability risks, the consideration of principle adverse impacts on sustainability indicators, and where applicable, the promotion of environmental or social characteristics, or having sustainable investment as an investment objective by alternative investment funds (“AIFs”) managed by it.
This document contains three sections:
- Integration of sustainability risks in investment decision making
- Principal adverse impact statement
- Remuneration policy in relation to the integration of sustainability risks
Integration of sustainability in investment decision making
This section specifically addresses Article 3 of the Regulation:
“Financial market participants shall publish on their websites information about their policies on the integration of sustainability risks in their investment decision‐making process.”
Sustainability risk
Gilde uses the definition of sustainability risk as described in Article 2 (22) of the Regulation: “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”. Gilde believes that integration of sustainability risk considerations in the investment decision-making process is an important part of risk management.
Integration of sustainability risks in investment processes
Gilde integrates a sustainability risk assessment in its investment decision-making and portfolio management process in the manner as described below.
Initial Screening
Gilde has identified the following investments which it excludes from making an investment in due to the sustainability risk involved: an investment in a portfolio company which is currently, or likely to in the future, generate a significant share of its revenue from industries or products involved in the following:
- production, trade and/or distribution of tobacco;
- production, trade and/or distribution of weapons;
- production, distribution or sale of adult entertainment activities;
- any act, activity or event that is not compliant with the regulations and legislations of the country of operation.
Through this negative screening exercise, Gilde aims to filter out investments that have a sustainability risk exposure which is deemed too high by GEM, for reasons of, amongst others, “stranded asset” risks, reputational risks and the risk of business models no or no longer being in line with current or future laws and regulations.
Gilde conducts a pre-due diligence screening with the aim to identify and consequently avoid any investment in portfolio companies excluded on the basis of the above.
Due diligence
Gilde conducts ESG (Environmental, Social, Governance factors) risk due diligence for each potential investment. Within the ESG risk due diligence, Gilde assesses whether there are red flags (e.g., unmanageable ESG risks) that should prevent Gilde from proceeding with the potential transaction. Through this process Gilde aims to identify key sustainability risks (and opportunities) and defines appropriate mitigating activities.
Examples of sustainability risks assessed include, where relevant, inter alia negative industry risks such as controversial business activities, carbon and climate impacts, ecosystems / circularity impacts, health & safety impacts, product impacts and supply chain impacts; and company exposure risks such as reputation and brand exposure. Within the proprietary ESG due diligence framework, Gilde aims to assess the likely impacts of sustainability risks on the financial returns in a qualitative manner by allocating a grading on low, medium, high scale.
Business Operations
Gilde intends to provide portfolio companies with the appropriate tools and guidance required to assess and manage sustainability risks. Throughout the ownership phase, Gilde engages with portfolio companies challenging and supporting them in enhancing and developing their ESG risk management further. Where required, action plans are created, performance and progress are monitored, and the plans are continuously revised by the Board of Directors in the portfolio companies.
No consideration of adverse impacts of investment decisions on sustainability factors
This section constitutes Gilde’s disclosure in accordance with Article 4 (1) (b) of the SFDR.
Gilde does not consider adverse impacts of its investment decisions on sustainability factors within the meaning of article 4 sub 1 b of the SFDR and therefore does not publish an entity level principle adverse impact (“PAI”) statement on its website. The reasons are the following:
- Gilde is not required to publish a PAI statement because it has less than 500 employees;
- taking into account adverse impacts on sustainability factors in accordance with the SFDR requires data from all portfolio companies in which Gilde invests in for the account of the AIFs managed by it. Portfolio companies may not always have such data available, and obtaining such data may be excessively burdensome for a portfolio company;
- preparing a PAI statement requires significant time and capacity of Gilde, which puts an excessive burden on the small organization of Gilde;
- Finally, Gilde manages AIFs with a private equity strategy, and does not and is not allowed to offer such AIFs to the wider public. Making public disclosures regarding portfolio companies held by such AIFs is not in line with private character of the AIFs.
Gilde will revisit on an annual basis whether it intends to consider publishing a PAI statement but has not intention to do so in the near future.
Gilde remuneration policy in relation to the integration of sustainability risks
This section specifically addresses Article 5 of the Regulation:
“Financial market participants and financial advisers shall include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks and shall publish that information on their websites.”
General information regarding GEMs Remuneration Policy
Gilde’s Remuneration Policy aims to align the interests of identified staff of GEM with the interests of the investors in the GEM Funds and to avoid incentives that could result in excessive risk-tasking.
All employees receive a fixed salary. In addition to the fixed remuneration, several employees can receive a variable remuneration.
The Remuneration Policy has been adopted by the Board of GEM in accordance with binding rules implementing EU directive 2011/61/EU on Alternative Investment Fund Managers and relevant implementing regulations (together, the “AIFMD”).
Remuneration policy considerations in relation to the integration of sustainability risks
When assessing eligibility of identified staff to variable remuneration, adherence to the ESG Policy of GEM, which includes the integration of sustainability risks in the investment decision making process, may be part of the non-financial performance criteria which are taken into account in such assessment.