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EU SFDR

What is the EU SFDR and Taxonomy?

Taxonomy is coming from the biology study. Taxonomy is the science of naming, describing and classifying organisms of the world.

The European Commission used this science as the first milestone to its EU Sustainable Finance Disclose Regulation (SFDR).

SFDR is a new EU regulation implemented to ensure greater transparency on sustainable investment strategies for investors. The regulation is part of the EU Commission’s Action Plan on financing sustainable growth initiated in March 2018.

How did it work and what are the benefits?

The taxonomy required by the European Commission is a classification system of sustainable economic activities. In other words, it’s a dictionary-style tool detailing specific business activities that are considered sustainable by the EU.

It fills two important needs: it provides us with a common language for talking about sustainability and uses objective, quantifiable criteria for assessing funds.

The Taxonomy is designed primarily to be used as a tool for sustainable investment by helping investors understand more clearly where funds stand in relation to one another.

The EU SFDR requires specific firm-level disclosures from asset managers regarding how they address the Sustainability Risks and the Principal Adverse Impacts (please refer to the PAIs part).

It also mandates more levels of disclosures, depending on the degree to which sustainability is a consideration.

Following this path of transparency and objectives, all funds are now classified into three categories depending on their approach to sustainability:

  • “Article 6”

Products where sustainability risks can be integrated into investment decisions, without promoting environmental or social characteristics or targeting sustainable investments.

  • “Article 8”

Products promoting environmental or social characteristics. Products where sustainability remains an important and binding aspect of the investment process, but sustainable investment is not the final objective.

  • “Article 9”

Products where the objective is the sustainable investment.

SFDR Classification of our Strategies

Based on LIOR Global Partners’ interpretation of the regulation, we have classified our strategies as follows:

Funds Strategies SFDR Classification
LIOR GP – Alpha Fund Global Macro Article 8
LIOR GP – Proxima Fund Global Fixed Income Article 8
LIOR GP – Global Short Duration Fund Global Fixed Income Article 8

 

Responsible Investment Policy

At LIOR GLOBAL PARTNERS (“LIOR”), we integrate sustainability risk into our investment analysis and decision-making processes since we believe that risks related to environmental, social and governance factors can have a material impact on return on investments. We further believe that integrating ESG criteria aims to add further value to clients by delivering performance in a more sustainable way.

LIOR’s ESG policy has been developed by our investment and management team, is implemented, monitored and reviewed by our portfolio managers as described below.

How do we integrate sustainability risks into our investment activities?

The sustainability risk is an Environmental, Social, Governance event or condition that, if it occurs, would cause a negative material impact on the value of an investment.

LIOR will rely a well-known third part data provider, Sustainalytics data, in order to manage this sustainability risk. This latter is implemented during the investment process through the following steps :

  • The integration of normative and sectoral exclusion. 
  • The application of ESG Scoring methodologies. 

In particular, LIOR mitigates serious risks mainly through the normative and sectoral stage.
Please refer to Screening & negative screening section.

How do we apply screening and negative screening?

As mentioned previously, LIOR applies normative and sectorial exclusion filter. LIOR excludes companies that do not comply with its ESG policy.

How do we apply the ESG scoring methodology? 

For the scoring methodology, LIOR relies on Sustainalytics Scoring methodology. The latter consists in considering different methodology between corporate and sovereign issuers.

ESG Risk Rating 

As part of our portfolio management process, LIOR has adopted a risk-based approach, particularly on the ESG aspect by using Sustainalytics ESG Risk Score integrating the financial materiality framework.

LIOR considers that a company’s economic value is at risk driven by its ESG factors. The overall ESG risk score provided by Sustainalytics measure that risk between 0 and 100 and are grouped into five risk categories: the lower the score, the lower the risk.

Negligible Low Medium High Severe
0-10 10-20 20-30 30-40 40+

These risk categories are absolute allowing the direct comparison between two companies coming from different sectors.

The ESG risk score are composed of three building blocks that contribute to a company’s overall rating:

  • Idiosyncratic ESG issues : We consider that dynamic by taking into account unpredictable and unexpected events.
  • Material ESG Issues : We focused on different sub factors related to given sector. It is the core and center step of Sustainalytics Methodology.
  • Corporate Governance : We consider that poor Corporate Governance can lead to ESG issues.

The score is also constructed using a 2-dimensional approach: the exposure and management of the company. The company exposure score will inform investors about the material ESG risk the company faces while the company management score will assess how well the company is managing those risks.
The E, S and G pillars are obtained via linear combination of the sub-factors coming from the 3 building blocks and the weight matrix used is sub-industries dependent.
Sustainalytics has a global coverage of more than 20 000 companies and the latter is continually increasing.

Country Risk Rating

The country risk rating provided by Sustainalytics is also a score from 0 to 100, where 0 mean negligible risk and 100 mean severe risk. The rating combines the country wealth score and the ESG factors scores to provide a more holistic view of sovereign risk.

The overall score measures the national wealth comprised of natural and produced capital (NCPC), human capital (HC) and institutional capital (IC) and a country’s ability to utilize and manage its wealth. The aggregate score combines then a wealth score with the ESG risk factors score and is defined as a weighted sum of the risk score for the three dimensions (NCPC, HC & IC).

We benefit from a coverage of 170 countries from Sustainalytics’ research.

Portfolio Scoring

As mentioned above, LIOR’s portfolio scoring methodology is based on the use of overall ESG scores from Sustainalytics’ research. The scoring methodology applies to cash assets (cash equity and cash bonds (sovereign and credit)). The overall portfolio score is a weighted sum of the ESG scores of the portfolio’s cash assets.

How do we ensure that our remuneration policies are consistent with the integration of sustainability risks?

At LIOR, the integration of the sustainability risk throughout the management process is carried out both at the entity and at individual level:

  • LIOR undertakes to donate 10% of its profit to charitable organizations
  • The remuneration will be linked with the degree of consideration of sustainability risks by each PM during their investment process.

Principal Adverse Impacts

Introduction and objectives

Under Article 4 of the (EU) SFDR 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, financial market participants shall publish on their website information on whether or not they consider Principal Adverse Impacts (“PAI”) on sustainability issues arising from their investment decisions.

Nearly all types of economic activity have the potential to impact various sustainability indicators, both positively and adversely. PAI indicators are a way of measuring how issuers negatively impact sustainability factors.

The EU SFDR defines sustainability factors as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. PAI is generally understood to mean negative impact, caused by an investment decision or investment advice, on these factors.

PAI consideration

LIOR Global Partners (“LIOR”) considers the PAI of investment decisions in a variety of ways across its investment processes.

Where applicable, LIOR already applies standard exclusions to industries and companies with unacceptable adverse impacts (please refer to the Exclusion Policy).

In the event that any of the securities in the portfolio become “excluded” by the LIOR’s updated Exclusion Policy after the investment in this specific security, the disinvestment process will apply: The targeted security will be sold within a maximum of 3 months following the discovery of the exclusion. However, this sales period may be extended, in the following exceptional cases:

  • If the accelerated sale could be detrimental to the interests of the investor (in the event of liquidity issues, for example).
  • If the issuer of the targeted security is subject to certain sanctions that do not allow the sale of the security on the markets traditionally used and authorized by LIOR.

LIOR will gradually integrating the consideration of adverse impacts in its due diligence processes together with the relevant financial risks, the relevant sustainability risks indicators and the interests of the clients.

LIOR adheres to the objectives that the SFDR sets out with regard to PAI.  LIOR has chosen to mitigate a full consideration for the time being due to the lack of sufficient data and/or data of sufficient quality.

LIOR has decided to avoid, as much as possible, any approximations, forecast or proxies to complete the lack of sufficient data available regarding adverse impacts. LIOR intends to monitor the industry position closely and to update its approach in due course as the position evolves and further regulatory guidance will be made available.

At the same time, LIOR continues to constantly review the data available with our third part data providers and on the rest of the industry.

The PAI indicators

LIOR Global Partners’ PAI Statement – EN Version – June 2023

LIOR Global Partners’ PAI Statement – FR Version – Juin 2023

Disclaimer

Lior Global Partner is a Monegasque company regulated by the Commission de Contrôle des Activités Financières for the following activities: (i) advisory and assistance in the management, on behalf of third parties, of portfolios of transferable securities or futures financial instruments and (ii) management of foreign undertakings for collective investment. Lior Global Partners is registered with the Registre du Commerce et de l’Industrie under number 20S08619, with registered office at 27, Boulevard Albert 1er, Ermanno Palace (1st floor), 98000 Monaco, Principality of Monaco.

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