Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) (“SFDR”)
The purpose of this Section is to provide investors with certain disclosures required under the SFDR. Further information can be found at https://kbassociates.ie/sustainable-finance-disclosures-regulation-details/ and www.iguanainvestments.com/ESG
Following the UK’s departure from the European Union and the end of the transition period on 31 December 2020 the SFDR is not part of UK law. This means that, as a UK-based investment manager, Iguana Investments Limited (the “Investment Manager”) is outside the scope of SFDR. However, the Investment Manager has decided to adopt the SFDR on a voluntary basis with respect to the Iguana Investments ICAV it manages.
Sustainability Risk Policy Statement
The Investment Manager integrates the consideration of Sustainability Risks into the due diligence it undertakes as part of its investment decision processes. However, the Investment Manager does not screen out potential investments based solely on Sustainability Risks. Further, the Investment Manager does not invest in or divest specific assets based solely on Sustainability Risks, as the Investment Manager’s key objective in managing the Fund is to generate an overall investment return through long-term capital growth as well as dividend and other income. The likely impact of Sustainability Risks on the returns of the Fund has been assessed by the Investment Manager and it has been determined to be low. However, Sustainability Risk is an evolving, multi-faceted and multi-point-impact risk category and there can therefore be no guarantee that this will remain the case throughout the lifetime of the Fund.
No Consideration of Sustainability Adverse Impacts
The Investment Manager has elected for the time being not to consider the principal adverse impacts of investment decisions of the Fund on Sustainability Factors, primarily as the regulatory technical standards supplementing SFDR which will set out the content, methodology and information required in the principal adverse sustainability impact statement remain in draft form and have been delayed. The Investment Manager will keep the decision to not consider the principle adverse impacts on Sustainability Factors under review and will formally re-evaluate this decision on a periodic basis.
The Investment Manager has updated its remuneration policy to meet the requirements of SFDR. The remuneration policy is designed to ensure that the remuneration of key decision makers is aligned with the management of short and long-term risks, including the oversight and where appropriate the management of sustainability risks in line with SFDR. The remuneration policy is reviewed periodically or as required by regulations and is available to view upon request.
The Iguana Investments Long/Short Equity Fund (“Fund”) pursues an investment strategy that is designed in part to promote certain Environmental and Social characteristics in the manner contemplated by Article 8 of the SFDR. It does not however have, as its objective, sustainable investment as such term is understood in accordance with SFDR. The Environmental and Social characteristics the Fund seeks to promote are met by the integration of Environmental, Social and Governance ("ESG") factors into: (a) the investment analysis and (b) the investment decision making process for the Fund. In more detail:
a) Investment analysis. The Fund seeks to analyse and consider each potential company investment on its own merits and ESG issues are considered as part of fundamental analysis when evaluating an investment by reference to the UN Principles of Responsible Investment (PRI). The PRI approach in brief is to consider the impact of ESG factors relevant to an individual business or industry at all key assumption points when conducting detailed financial modelling and valuation on a potential investment. For example, a business that would generally be considered to have both a limited life and a heavy environmental impact, such as fossil fuel production, would see these negative environmental impacts reflected in the financial model and valuation by incorporating some or all of the following points:
1) a very low or significantly negative value assigned to the terminal growth component of the Discounted Cashflow valuation;2) a significantly higher than normal discount rate to reflect the poor quality and significant wider social and economic costs of corporate cashflows;3) and a lower future profit margin reflecting an expected future requirement for high regulatory emissions and remediation/clean-up costs likely to be required by the business.
In this example, these adjustments would cumulatively have a very material impact on the financial analysis, ensuring that the ESG drawbacks of the business model are adequately considered in parallel with the financial metrics and ensuring that ESG considerations are reflected in the investment analysis. ESG factors are incorporated into the modelling process using publicly available information and data feeds and are monitored on an ongoing basis.
b) Decision-making process for the Fund. The Fund has an internal decision-making process to discuss and decide whether or not to invest in a security. The rationale behind the investment decision centres around a number of ‘questions’ that we ask and answer that collectively should be answered in the affirmative if the inclusion of the security in the portfolio is to be justified. These questions cover a number of issues such as valuation, competitive position, strategy and management, and also include evaluating and considering whether or not and how the company’s strategy and actions are improving or reducing its current sustainability position. the Investment Manager considers various ESG factors as part of its decision-making process, key areas of focus for the Fund are presently felt to be: overall level of corporate CO2 additions (especially Scope 3 emissions), overall sustainability; and governance considerations. Additional information on the ESG criteria the Investment Manager applies can be found in its Environment Social and Governance (ESG) Policy.
The Investment Manager commits to be an active owner and to incorporate ESG issues into its ownership policies and practices and will seek appropriate disclosure on ESG issues by the entities in which it invests.