Sustainability
Principal Adverse Impacts Statement
Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector (“SFDR”) requires firms in scope of the regulation to make a “comply or explain” decision regarding whether they consider the principal adverse impacts of their investment decisions on sustainability factors (“PAIs”), in accordance with a specific regime outlined under SFDR (the “PAI Regime”).
JOHCM Funds (Ireland) Limited (“JOHCM Ireland”) is in scope of the SFDR and therefore the PAI Regime and has carefully evaluated the requirements of SFDR regarding the consideration of PAIs. It has opted to comply with the PAI Regime and consider the PAIs.
Sustainability Risks
JOHCM (Ireland) Limited (“JOHCM Ireland”) as acts the Manager of certain funds in the JOHCM Group funds range and has appointed J O Hambro Capital Management Limited (“JOHCML”) as Investment Manager to those funds. JOHCM Ireland has implemented a Sustainability Risks Policy (the “Policy”), which sets out JOHCM Ireland’s policies in respect of the integration of sustainability risks in its investment decision-making process, as required by SFDR. The following is a summary description of the key features of the Policy, including how JOHCML, as Investment Manager, identifies, measures, manages and monitors sustainability risk within the investment process. Further information can be found in the funds’ prospectuses.
Under SFDR, “sustainability risk” means an ESG event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. The Policy therefore approaches sustainability risk from the perspective of the risk that ESG events might cause a material negative impact on the value of its clients’ investments.
As part of its broader risk management processes, JOHCML has implemented procedures to identify, measure, manage and monitor sustainability risks within investment analysis and decision-making. Each investment team has autonomy to integrate ESG and sustainability considerations in a manner consistent with their investment approach. Where any ESG or sustainability considerations may materially and negatively impact the financial performance of an investment, those factors are taken into account as part of JOHCML’s investment processes in the same way as it considers other potential risk factors.
In measuring sustainability risk, JOHCML may take into account both “physical” and “transition” risks. An example of a “physical” or tangible risk related to a sustainability event is the impact of severe climate-related weather events leading to business disruption or losses for a fund’s investment positions. “Transition” risks focuses on the risk to real and financial assets as the world moves towards a more sustainable environmental and social model.
JOHCML uses a variety of tools in order to select investments. These include applying sustainability metrics, exclusionary screens, best-in-class investment criteria, managing the strategy on a thematic basis, or impact investing. Once investments have been made, JOHCML will then conduct periodic monitoring of the portfolio of the relevant fund to check that positions remain within sustainability risk limits, and take corrective action if those limits are breached.
Impact of Sustainability Risks on Returns
JOHCML has assessed the impact of sustainability risks on the returns of the funds, and sets out in this section a qualitative summary of those risks.
Assessment of sustainability risks is complex and requires subjective judgements, which may be based on data which is difficult to obtain and incomplete, estimated, out of date or otherwise materially inaccurate. Even when identified, there can be no guarantee that JOHCML will correctly assess the impact of sustainability risks on the funds’ investments.
To the extent that a sustainability risk occurs, or occurs in a manner that is not anticipated by JOHCML there may be a sudden, material negative impact on the value of an investment, and hence the returns of a fund. Such negative impact may result in an entire loss of value of the relevant investment(s) and may have an equivalent negative impact on the returns of the relevant fund.
The impacts following the occurrence of a sustainability risk may be numerous and vary depending on the specific risk and asset class. In general, where a sustainability risk occurs in respect of an asset, there will be a negative impact on, and may be an entire loss of, its value. For a corporate, this may be because of damage to its reputation with a consequential fall in demand for its products or services, loss of key personnel, exclusion from potential business opportunities, increased costs of doing business and/or increased cost of capital. A corporate may also suffer the impact of fines and other regulatory sanctions. The time and resources of the corporate’s management team may be diverted from furthering its business and be absorbed seeking to deal with the sustainability risk, including changes to business practices and dealing with investigations and litigation. Sustainability risks may also give rise to loss of assets and/or physical loss including damage to real estate and infrastructure. The utility and value of assets held by businesses to which a fund is exposed may also be adversely impacted by a sustainability risk.
Sustainability risks are relevant as both standalone risks, and also as cross-cutting risks which manifest through many other risk types which are relevant to the assets of the funds. For example, the occurrence of a sustainability risk can give rise to financial and business risk, including through a negative impact on the creditworthiness of other businesses. The increasing importance given to sustainability considerations by both businesses and consumers means that the occurrence of a sustainability risk may result in significant reputational damage to affected businesses. The occurrence of a sustainability risk may also give rise to enforcement risk by governments and regulators, and also litigation risk.
A sustainability risk may arise and impact a specific investment or may have a broader impact on an economic sector, geographical regions and/or jurisdictions and political regions.
Many economic sectors, regions and/or jurisdictions, including those in which the funds may invest, are currently and/or in the future may be, subject to a general transition to a greener economic model. Drivers of this transition include governmental and/or regulatory intervention, evolving consumer preferences and/or the influence of non-governmental organisations and special interest groups.
Laws, regulations and industry norms play a significant role in controlling the impact on sustainability factors of many industries, particularly in respect of environmental and social factors. Any changes in such measures, such as increasingly stringent environmental or health and safety laws, can have a material impact on the operations, costs and profitability of businesses. Further, businesses which are in compliance with current measures may suffer claims, penalties and other liabilities in respect of alleged prior failings. Any of the foregoing may result in a material loss in value of an investment linked to such businesses.
Further, certain industries face considerable scrutiny from regulatory authorities, non-governmental organisations and special interest groups in respect of their impact on sustainability factors, such as compliance with minimum wage or living wage requirements and working conditions for personnel in the supply chain. The influence of such authorities, organizations and groups along with the public attention they may bring can cause affected industries to make material changes to their business practices which can increase costs and result in a material negative impact on the profitability of businesses. Such external influence can also materially impact the consumer demand for a business’s products and services which may result in a material loss in value of an investment linked to such businesses.
Sectors, regions, businesses and technologies which are carbon-intensive, higher polluting or otherwise cause a material adverse impact on sustainability factors may suffer from a significant fall in demand and/or obsolescence, resulting in stranded assets the value of which is significantly reduced or entirely lost ahead of their anticipated useful life. Attempts by sectors, regions, businesses and technologies to adapt so as to reduce their impact on sustainability factors may not be successful, may result in significant costs being incurred, and future ongoing profitability may be materially reduced.
In the event that a sustainability risk arises, this may cause investors to determine that a particular investment is no longer suitable and to divest of it (or not make an investment in it), further exacerbating the downward pressure on the value of the investment.
PAI Due Diligence
