Sustainable Finance Disclosure Regulation (SFDR)
Sustainability in SKAGEN
We believe that companies that incorporate sustainability in their business strategy will outperform their peers over the longer term. Investing sustainably is thus essential in order to achieve the best possible risk-adjusted returns for unit holders.
Ever since publicly stating our ESG guidelines in 2002, SKAGEN has spoken and written about ethical companies; companies whose business practices we do not want to be a part of and how we expect companies to treat all shareholders equally. As society has evolved, as we have learned more and as the challenges the world is facing have grown, we have adapted as well.
SKAGEN's sustainability framework is embedded under the Storebrand Group framework for sustainable investments. Storebrand is a global leader in sustainable investments. As the first Norwegian company to establish a sustainable investment department in 1995, it has a track record of developing and offering a variety of leading and innovative sustainable funds. SKAGEN's sustainability framework benefits from being integrated within the Storebrand framework in key areas. The most important of which is adherence to joint exclusion criteria and normative expectations of the companies the group invest in. This framework is referred to as the 'Storebrand Standard' and consists of a comprehensive set of exclusion criteria and principles that SKAGEN adheres to in its investment process. As part of the Storebrand Group, we adhere to overarching group principles on sustainable investments, combined with internal processes that operationalise our commitment to integrating sustainability risks.
EU Sustainable Finance Action Plan
The European Union (EU) has adopted The Sustainable Finance Action Plan (SFAP) as part of its “European Green Deal”. The goal is to promote sustainable investment across and beyond the EU. The SFAP will come into effect in several stages, starting in March 2021.The EU’s objective is for the union to be carbon neutral by 2050, and the SFAP is a key part of reaching this goal. For the financial sector there is a new Sustainable Finance Disclosure Regulation aiming to better classify and streamline the sustainability credentials of investment funds, and a new EU Taxonomy for classification of different economic activities. The taxonomy has six environmental objectives and will make it easier for investors to compare financial products promoting environmental characteristics.
The SFAP has three main objectives:
- To reorient capital flows towards sustainable investment and away from sectors with high greenhouse gas emissions
- To manage financial risks stemming from climate change, resource depletion, and environmental degradation
- To foster greater transparency and long-termism in financial and economic activity in order to achieve sustainable and inclusive growth.
The EU’s Sustainable Finance Action Plan is relevant for asset managers, pension funds, banks and insurers, amongst others. There will also be sustainability indices developed for better benchmarking and comparability of investment strategies and funds.
EU Sustainable Finance Disclosure Regulation
The EU Sustainable Finance Disclosure Regulation (SFDR) is a new set of EU rules for increased comparability and reduced greenwashing among financial products. The regulation will increase the information available for investors about both the potential positive and negative impact of their investments and the related ESG risk.
The new disclosure regulation is, together with the above-mentioned Sustainable Action Finance Plan, a crucial part of the EU’s Sustainable Finance Framework and European Green Deal. The SFDR sets out strict criteria for the classification of funds that are defined as sustainable. These criteria er described in the regulation’s Articles 6, 8 and 9.
- Article 9 funds, also known as ‘products targeting sustainable investments’, include products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective.”
- Article 8 funds, also known as 'environmentally and socially promoting’, applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
- Article 6 covers funds that are not Article 8 or 9, however sustainability may still be part of the portfolio manager's process, e.g. by assessing the sustainability risk. Note that this category covers all other products and will as a consequence include everything from funds that report sustainability as not relevant to funds that have good integrations of sustainability – only not as defined by the SFDR (for example, an index fund that excludes the worst companies from an ESG perspective).
- SKAGEN's equity funds are classified as Article 8 funds. For further details on this, please refer to the funds' prospectuses on the relevant fund web pages.
Investment Process Strategies
SKAGEN's approach to integrating sustainability risks in our investment process is built on three pillars: Exclusion, Integration and Active Ownership. Each method is applied in different circumstances and leads to different investment outcomes. The full potential of a sustainable investment strategy is only realised when all three methods are applied together. Exclusion sits at the start and end of the investment process. Each potential investment must be screened in advance to ensure that it complies with our minimum criteria. Further information about sustainability risks is provided for companies that pass the initial negative screening to be used in the construction of the investment case. When a company has entered our equity funds, it is routinely monitored through a quarterly ESG screening control process.
Sustainability in Financial Advisory
In our advisory process, we offer advice that is tailored to the preferences of our clients. A client's sustainability preferences is one of several factors we seek to assess, hence sustainability is an integrated part of our investment advice.
We provide clients with our sustainable investment policy at the initial client meeting. We inform them where on our website they can find the sustainable investment policy as well as the remuneration policy and the latest fund prospectuses, all addressing the integration of sustainability risks.
During the initial client meeting, we also determine how important sustainability exposure is to the client. For clients that express a sustainability preference, we suggest relevant products and provide them with product disclosures detailing the respective sustainability risks. Sustainability preferences will vary from client to client, and we always seek to provide holistic advice that balances the financial (e.g. funds' risk profile) and sustainable preferences and interests of our clients. Client feedback is integrated into our final investment proposal and is sent to the client for review.
Principal Adverse Impacts
When offering investment advice to clients, we provide information on “principal adverse impacts”. This is intended to show investors and prospective investors how investment decisions made at product or entity level have or may have adverse impacts on sustainability factors relating to (i) climate and the environment and (ii) social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.
Sustainability in Remuneration
The company's remuneration scheme is determined by the company's Board of Directors and is reviewed and checked by the company's internal auditor on an annual basis. The company's remuneration scheme is designed to promote good and efficient risk management and ensure that management acts in accordance with the investment mandates of the mutual funds managed and prevent risk taking that is incompatible with the funds' investment strategy. Sustainability is a specific risk metric and it informs the remuneration of employees directly exposed to managing sustainability risks at entity or product level. Furthermore, the remuneration scheme must ensure accountability and a long-term perspective.