Updated on March 6, 2023
The European Union has introduced a series of legal measures, the primary one being the Sustainable Finance Disclosures Regulation (Regulation (EU) 2019/2088) of the European Parliament and of the Council of November 27, 2019 on sustainability-related disclosures in the financial services sector ("SFDR") requiring firms that manage investment funds and other collective investment schemes to provide transparency on how they integrate sustainability considerations into the investment process with respect to the schemes they manage. The SFDR was subsequently supplemented and amended by (i) Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18, 2020 ("Taxonomy Regulation") and (ii) the Regulatory Technical Standards (Regulation (EU) 2022/1288) of the Commission of April 6, 2022 ("RTS").
Sustainability Risk Policy
A sustainability risk means "an environmental, social, or governance event or condition that, if it occurs, could cause an actual or potencial material negative impact on the value of the investment". In the context of Armilar, sustainability risks are risks which, if they were to crystallise, would cause a material negative impact on the value of the Armilar's investment.
Integration of sustainability risks into investment decision-making processes
Consideration of sustainability risks is part of the investment decision‐making and risk management processes of Armilar relating to the funds it manages and investments it makes. Before any investment decisions are made on behalf of any funds that Armilar manages, Armilar will identify the material risks associated with each such proposed investment; these will include any relevant and material sustainability risks. These risks form part of the overall investment proposal submitted to the investment committee. The investment committee will assess the identified risks alongside other relevant factors set out in the proposal and will approve or decline the investment proposal. The assessment of sustainability risks is done by engaging external and internal subject matter experts and is based on both private information gathered from the company management and from publicly available information. Where material issues are identified, the investment committee may request further action to be taken to ensure that these issues are properly investigated, before proceeding to investment. The potential investment may be rejected if the material issues identified cannot be mitigated. The deal team will document all material sustainability risks identified, in order to ensure appropriate monitoring, and where appropriate, value creation, of the portfolio companies’ ESG performance during its ownership period.
The investment decision-making process is part of Armilar’s wider policies and procedures on the integration of sustainability and ESG risks in its decision-making process in relation to its funds generally. Further information on this is set out in Armilar’s ESG Policy available on the website.
No consideration of sustainability adverse impacts
Armilar does not currently consider the principal adverse impacts ("PAIs") of the investment decisions on sustainability factors as set out under the SFDR. As soon as Armilar starts considering adverse sustainability impacts of its investment decisions, it shall disclose the relevant information to investors and on Armilar's website.
Article 4º of the SFDR on sustainability-related disclosures in the financial services sector requires entities that are not covered by SFDR's criteria set out in Article 4(3) and (4) of the SFDR to make a "comply or explain" decision whether to consider the PAIs of its investment decisions on sustainability factors, in accordance with a specific regime outlined in SFDR, in the Taxonomy Regulation and in the RTS (the "PAI regime”). Armilar is not covered by SFDR's criteria set out in Article 4(3) and (4) of the SFDR which applies to larger institutions and has opted not to comply with the PAI regime, both generally and in relation to the Funds under management.
Also, currently Armilar does not market or manage funds that promote, among others, environmental or social characteristics or a combination of both (as set out in Article 8 of the SFDR) nor those aimed at sustainable investments (as set forth in Article 9 of the SFDR). As such, the underlying investments of said funds do not consider the EU criteria applicable to environmentally sustainable economic activities. In any case, although not corresponding to the type of funds described in Articles 8 and 9 of the SFDR, not providing for characteristics or objectives such as those identified in said Articles, the same type of result, e.g., to contribute to a sustainable economy, may be collaterally achieved and is pursued by Armilar in the investments made by such funds.
Armilar has carefully evaluated the requirements of the PAI Regime in Article 4 of the SFDR, and in the Taxonomy Regulation and the RTS. Armilar is supportive of the policy aims of the PAI regime, to improve transparency to clients, investors, and the market, as to how financial market participants integrate consideration of the adverse impacts of investment decisions on sustainability factors. However, Armilar is concerned about the lack of readily available data to comply with many of the reporting requirements of the PAI regime; in particular it should be noted that (i) Armilar's investment scope is limited to sectors and geographic areas that, in Armilar's opinion, entails limited adverse impacts on sustainability, (ii) Armilar invests in small entities and start-ups that, due to their size and limited resources, are not capable of providing the information required to determine precisely the adverse impacts of Armilar's investment decisions in accordance with the SFDR, the Taxonomy Regulation and the RTS, (iii) Armilar is a small organisation with limited resources and personnel and not capable of determining precisely what the adverse impacts of its investment decisions would be, based on the different criteria set forth in the SFDR, the Taxonomy Regulation and the RTS, and (iv) Armilar believes that companies and market data providers are not yet ready to make available all necessary data for the PAI regime.
Armilar will keep its decision not to comply with the PAI regime under regular review.
Notwithstanding Armilar's current decision not to comply with the PAI regime, Armilar has implemented positive ESG-related initiatives and policies, as part of Armilar's overall commitment to ESG matters.
Remuneration Policy
The Remuneration Policy approved by Armilar defines the principles of the company’s remuneration system. It sets consistent standards for all staff and in relation to its directors and highest ranking officers complies with the requirements set forth in the Portuguese legislation that has implemented EU Alternative Investment Funds Manager Directive (AIFMD).
The remuneration system targets an alignment of interests between investors and Armilar, avoids incentives for inappropriate risk taking, and is in line with the sustainable long-term financial development of the company. The remuneration system also does not reward assumption of excessive sustainability risks in accordance with the SFDR.
Final Considerations
Armilar has been committed to increase its ESG and sustainability efforts into its own operations as well as that of its funds and portfolio companies. Hence, and in the interest of its investors and other stakeholders, as described above, Armilar incorporates in its activity responsible investment values and principles, and intends to progressively include other environmental, social and corporate governance issues in the various decision-making processes throughout the life cycle of each investment. As this is a matter under continuous review, the policies, procedures and information made available will be updated as needed.