Sustainable Finance Disclosure Regulation (SFDR)

From 10 March 2021 the Sustainable Finance Disclosure Regulation (SFDR) comes into force across the Europe Union and requires disclosures at both a general entity-level and product-level by investment managers in-scope of the regulation. ThomasLloyd supports transparent disclosures by market participants in the sustainable finance sector and is pleased to make the following disclosures.

General Disclosures

Integration of sustainability risks

ThomasLloyd, its affiliates, subsidiaries and investee companies (“ThomasLloyd”) is a leading independent asset manager and impact investor in infrastructure companies and projects in emerging markets. Infrastructure investment is vital for economic and social progress, helping build resilient communities and supporting purposeful activity. ThomasLloyd’s investment strategy involves taking majority and significant minority stakes directly in companies and projects and maintaining an active ownership position throughout our investment period.

We are proud to be an Impact Investor, and we set out deliberately and intentionally to generate positive, measurable social and environmental impact alongside a market-driven financial return. We believe there need be no trade-off between financial performance and positive impact as the focus on governance and regulatory compliance in the social and environmental domains, together with the requirement to evidence the impact of an investment, are powerful tools to align the interests of all stakeholders.

We fully comply with all laws and regulations, at all times and in all applicable jurisdictions, following industry standard Environmental, Social and Corporate Governance (“ESG”) guidelines and best practices. Acting with integrity in all our operations, we avoid all forms of discrimination and embed equality and diversity in our employment policies. We respect human rights and avoid exploitation of child labour, ensure no bribery or corruption and actively manage investment projects to deliver ESG and impact outcomes in the communities and countries in which we operate.

The ThomasLloyd funds have dual objectives, which consist of delivering economic and social progress, helping build resilient communities and supporting purposeful activity, whilst protecting natural resources and the environment, and achieving an attractive return for investors by investing in Infrastructure assets. The funds aim to invest with a socially and environmentally-responsible investment approach, that is geared towards sustainable business values, reducing investment risks through diversification across countries, sectors, technologies and investment styles.

We work with our management teams to attain the sustainability objective which is a primary focus for our funds. Through this positive and direct engagement with our management teams we can create long-term value for our investors and the communities we invest in. We believe it is important to use our influence and expertise to implement positive change at investee companies and guide them towards better ESG outcomes and contribute to the United Nations’ Sustainable Development Goals (SDG’s).

Principal Adverse Impacts of investment decisions on sustainability factors

The investment decision-making process which ThomasLloyd applies considers the principal adverse impacts of investment decisions on sustainability factors. Principal adverse impacts are assessed on a pre-investment basis and monitored periodically.

Table 1 shows the 18 Principal Adverse Impacts (PAI’s) which, together with our investee companies, we will be reporting on a mandatory basis. SFDR requires us to report on these PAI’s together with at least one other indicator on climate or environment, plus at least one additional indicator related to principal adverse impacts on a social, employee, human rights, anti-corruption or anti-bribery sustainability factor. Reporting will be published annually.

Table 1: Principal Adverse Impacts (PAI’s)

Indicators applicable to investments in investee companies
Adverse sustainability indicator Metric Impact {year n} Impact {year n-1} Explanation Actions taken
CLIMATE AND OTHER ENVIRONMENT RELATED INDICATORS
Greenhouse gas emissions 1. GHG Emissions Scope 1 GHG Emissions        
Scope 2 GHG Emissions        
From 1 January 2023 Scope 3 GHG Emissions        
Total GHG Emissions        
2. Carbon Footprint Carbon Footprint        
3. GHG Intensity of Investee Companies GHG Intensity of Investee Companies        
4. Exposure to companies active in the fossil fuel sector Share of investments in companies in the fossil fuel sector        
5. Share of non-renewable energy consumption and production Share of non-renewable energy consumption and non-renewable energy production of investee companies from non-renewable energy sources compared to renewable energy sources, expressed as a percentage
       
6. Energy consumption intensity per high impact climate sector  Energy consumption in GWh per million EUR of revenue of investee companies, per high impact climate sector        
Biodiversity 7. Activities negatively affecting biodiversity sensitive areas
Share of investments in investee companies with sites/operations located in or near to biodiversity sensitive areas where activities of those investee companies negatively affect those areas        
Water 8. Emissions to water Tonnes of emissions to water generated by investee companies per million EUR invested, expressed as a weighted average        
Waste 9. Hazardous waste ratio Tonnes of hazardous waste generated by investee companies per million EUR invested, expressed as a weighted average        
SOCIAL AND EMPLOYEE, RESPECT FOR HUMAN RIGHTS, ANTI-CORRUPTIONAND ANTI-BRIBERY MATTERS
Social and employee matters 10. Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises   Share of investments in investee companies that have been involved in violations of the UNGC principles or OECD Guidelines for Multinational Enterprises        
11. Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises Guidelines for Multinational Enterprises        
12. Unadjusted gender pay gap Average unadjusted gender pay gap of investee companies        
13. Board gender diversity Average ratio of female to male board members in investee companies        
14. Exposure to controversial weapons (antipersonnel mines, cluster munitions, chemical weapons and biological weapons) Share of investments in investee companies involved in the manufacture or selling of controversial weapons        
Indicators applicable to investments in sovereigns and supranationals
Adverse sustainability indicator Metric Impact {year n} Impact {year n-1} Explanation Actions taken
Environmental 15. GHG Intensity GHG intensity of investee countries        
Social 16. Investee Companies subject to social violations Number of investee countries subject to social violations (absolute number and relative number divided by all investee countries), as referred to in international treaties and conventions, United Nations principles and, where applicable, national law
       
Indicators applicable to investments in real estate assets
Adverse sustainability indicator Metric Impact {year n} Impact {year n-1} Explanation Actions taken
Environmental 17. Exposure to fossil fuels through real estate assets
Share of investments in real estate assets involved in the extraction, storage, transport or manufacture of fossil fuels
       
Social 18. Exposure to energy-inefficient real estate assets
Share of investments in energy inefficient real estate assets
       

For the optional indicators, the minimum requirement is to pick one “E” or “S” metric per investment and ensure sound governance practices to assess attainment of the investment objective. However, we go further than is required by the legislation and our reporting at company or project level is based on a range of additional ESG sustainability indicators, selected after analysis by internal and/or external experts and consultation with third-party assurance providers.

Sustainability Indicators

We use more metrics which allows us to clearly demonstrate that our engagement with investee companies can positively influence a number of Environmental and Social factors and term such metrics ‘Sustainability Indicators’. Within the environmental domain, such factors include carbon reduction, biodiversity & land use and water management. Within the social domain, this includes equality & diversity, human rights, health & safety, healthcare and stakeholder engagement. Within the governance domain, this includes bribery & corruption and money laundering. The metrics used were selected after analysis by internal and/or external experts and consultation with third-party assurance providers and examples are provided below.

Table 2: Examples of Sustainability Indicators used

Environment / Social / Governance Sustainability Indicator
Environment Carbon reduction
Environment Biodiversity & land use
Environment Water management
Social Equality & diversity
Social Human rights
Social Health & Safety
Social Stakeholder engagement
Social Healthcare
Governance General Governance
Governance Anti-bribery & Corruption

Materiality

Materiality analysis is used to identify the most important issues, manage risk effectively, and agree priorities with management. Risks and impacts which carry the greatest risk, are irreversible and have the highest probability of occurrence are deemed most material.

As a promoter of SFDR Article 9 funds ThomasLloyd’s approach is to apply the Principal Adverse Impacts Framework both as part of our pre-investment due diligence and as part of our continuous oversight. Additionally, Sustainable Indicators are selected prior to an investment being made and are monitored over the life of the investment.

The selection of indicators is made following a review of the materiality analysis of ESG risks to an investment and following discussions with prospective management teams.

Due diligence

Our investments are made to deliver economic and social progress, help build resilient communities and to support purposeful activity, whilst protecting natural resources and the environment. Investment decisions are both top-down, based on review of the macro-economic, legal and regulatory frameworks, and bottom-up on a detailed assessment of the investee company’s ability to meet the selection criteria.

Exclusion criteria are used to eliminate certain investments on both a top-down and bottom-up basis. Top-down exclusions are made by screening potential investments on a country and sector basis. Countries are screened against criteria including, but not limited to:

  • UN Anti-Corruption List
  • Transparency International Corruption Perceptions Index
  • World Bank Ease of Doing Business Index
  • Bertelsmann Stiftung’s Transformation Index (BTI)

Certain sectors are also excluded from investment if they are not considered consistent with a socially and environmentally responsible investment approach. These include, but are not limited to, the production and trade of armaments and weapons of war, illegal and outlawed products, and activities in gambling and pornography.

Bottom-up exclusions are made by screening at the level of the potential investment. This includes analysis of the operational activities of the company and the track record, affiliations and good-standing of the investment sponsors. The criteria include but are not limited to:

  • Good corporate governance including:
    • Compliance with international accounting and reporting standards
    • HR policies, including non-discrimination and fair pay
    • Health and Safety standards and worker protection
    • Social impact of goods and services
    • Anti-Money Laundering and prevention of bribery and corruption policy
  • Environmental criteria including:
    • Greenhouse gas emissions
    • Energy performance
    • Biodiversity protection
    • Water preservation
    • Waste reduction

Chart 1: The ThomasLloyd Investment Process (TIP)

Remuneration

ThomasLloyd is committed to the integration of material ESG factors into all corporate and investment decisions, in order to deliver transparency, mitigate investment risk and enhance risk-adjusted returns on investments. A key consideration within the scope of the Remuneration Policy is therefore to align personal objectives (linked to any elements of reward for employees) to the risk-appetite, values and long term interests of ThomasLloyd and the funds under management.

We seek to set rewards that align the interests of our employees with those of our clients and that mitigate the need to take unnecessary risk. The policy applies to all employees who, by definition of their roles and remit, influence investment decision-making. The remuneration policy supports a consistent approach to managing sustainability risks, acknowledging financial and non-financial targets to promote alignment with our core values, investment objectives and sustainability outcomes.

The Remuneration policy is reviewed annually to ensure continued and relevant alignment. It is intended to support management to the full term of the fund.

The policy is managed by a Remuneration Committee. The Remuneration committee partners with internal departments responsible for Compliance, Audit and Risk and collaborates regarding the creation of incentives, remuneration proposals and award decisions related to managing sustainability risks.

Governance, Ownership & Accountability

We believe that the highest governance standards are implemented through accountability and transparency. Table 3 sets out the ESG Governance Roles within ThomasLloyd and the accountable owner in each case.

Table 3: ThomasLloyd's ESG Governance Model

Owner Role
ThomasLloyd Group Board • Overall responsibility for ThomasLloyd's Responsible Investment Strategy
ThomasLloyd Fund Board • Overall responsibility for the implementation of the investment objectives of the fund, including the sustainable investment objective
ESG Monitoring and Stewardship Committee • Reviews ESG performance
• Determines implementation and stewardship strategies with management and adjudicates on disputed matters
Investee Company Board Member • Responsibility for overall ESG performance and stewardship at an investee company level
Internal specialists • Ensure company policies are aligned with international standards and regulatory requirements
• Propose methodologies to monitor ESG risks and outcomes
• Perform analysis of ESG risks and opportunities
• Engage with external ESG experts and consultants

Product Disclosures

SFDR requires ThomasLloyd to classify its products under Article 6, Article 8 or Article 9. ThomasLloyd offers two Luxembourg-domiciled funds which are being classified as Article 9 under SFDR; ThomasLloyd SICAV - Sustainable Infrastructure Income Fund and ThomasLloyd Cleantech Infrastructure Fund SICAV. ThomasLloyd intends to self-certify these products as being Article 9 pending any regulatory approval. The following disclosures apply to both funds.

Summary

ThomasLloyd invests where our money makes a difference. Infrastructure investment is vital for economic and social progress; helping build resilient communities and supporting purposeful activity. We set out deliberately and intentionally to generate positive, measurable social and environmental impact alongside a market-driven financial return.

We believe there is no conflict between doing well and doing good and, as outlined in our Responsible Investment Policy, there need be no trade-off between performance and positive impact. The focus on governance and regulatory compliance in the social and environmental domains, together with the ‘do no significant harm’ (DNSH) principle and the requirement to evidence the impact of an investment, are powerful tools to align the interests of all stakeholders.

Our socially and environmentally-responsible investment approach embeds ESG factors in the pre and post-investment phases and requires investee companies to provide detailed data on the Principal Adverse Impacts of their operations and a wide range of Sustainability Indicators. This process is summarised in our Engagement Policy, which details governance practices and adherence to all relevant international standards.

Continuous progress towards the attainment of the environmental and social objectives of the fund is measured through the use of Sustainability Indicators, the outcomes of which are presented on an annual basis at a fund level. We supplement this disclosure with detailed Impact Reports, which evidence the socio-economic impact of our investments in the communities in which we operate.

No significant harm to the sustainable investment objective

Investments are made against an ESG framework which measures ESG risks, and applies the Principal Adverse Impacts from SFDR. The application of this framework is designed to evidence that investments do no significant harm to any environmental or social objective and that investee companies have sound governance practices in place.

The fund continues to evidence the DNSH principle of investments throughout the life of an investment. This is done by presenting data on ESG risks using the same methodology, and by reporting weighted data on a pro-rata exposure basis across a range of Principal Adverse Impacts, mandatory under the SFDR framework.

Sustainable investment objective of the financial product

The Fund aims to invest with a socially and environmentally-responsible investment approach, that is geared towards sustainable business values, reducing investment risks through diversification across countries, sectors, technologies and investment styles.

Investment strategy

The Fund makes Investments with the aim of delivering economic and social progress, helping to build resilient communities and supporting purposeful activity, whilst protecting natural resources and the environment. Investment decisions are both top-down, based on review of the macro-economic, legal and regulatory frameworks, and bottom-up on a detailed assessment of the individual Infrastructure Company’s ability to meet the selection criteria.

The Sub-Fund uses the following selection criteria:

  • Top-down criteria, including but not limited to:
    • Sovereign credit ratings as issued by Standard & Poor’s and Moody’s
    • Transparency International Corruption Perception Index
    • World Bank Ease of Doing Business Index
    • Bertelsmann Stiftung’s Transformation Index (BTI)
  • Bottom-up criteria, including but not limited to:
    • Good corporate governance incl. compliance with international accounting and reporting standards
    • Human Resources policies, including non-discrimination and fair pay
    • Health and Safety standards and worker protection
    • Social impact of goods and services
    • Anti-Money Laundering and prevention of bribery and corruption policy
  • Environmental criteria, including but not limited to:
    • Greenhouse gas emissions
    • Energy performance
    • Biodiversity protection
    • Water preservation
    • Waste reduction

Proportion of investments

The fund only intends to make sustainable investments.

Monitoring of sustainable investment objective

Progress towards the sustainable investment objective is monitored continuously, through engagement with our management teams, and reported to investors frequently through ad-hoc reporting. Certifications are made annually.

Methodologies

Carbon Reduction – emissions avoided measurement

The aim of the indicator is to quantify the emissions avoided in a given time period through the generation of renewable energy. The methodology is applied only to actual, or estimated, export of energy by renewable generators. Emissions avoided are calculated by multiplying the total energy exported by the emission factor of the grid the energy was exported to. This estimates the amount of emissions avoided by diverting funds to renewables as opposed to generation from non-renewables sources.

Biodiversity & land use – policy indicator

The aim of the indicator is to assess the impact of our investments on environmental outcomes including biodiversity, wildlife and habitat and where relevant also, social outcomes. Impacts on biodiversity and habitat may affect risks with respect to regulation and future liabilities. The same is true where land was previously employed for a use which had positive social outcomes. The indicator is measured based on having a policy, the robustness of that policy, adherence with that policy, and where material risks exist, requiring the company to report on specific biodiversity and habitat metrics.

Water Management – Water usage measurement & policy indicator

This indicator is measured through ensuring an appropriate policy is in place for the operations of the investee company related to Water Management. Where relevant, we may also ask companies to measure water usage, particularly for sites located in areas of high or extremely high water stress.

Equality & Diversity – policy indicator

This indicator is measured through policy alignment with fundamental International Labour Organisation (ILO) conventions and confirmation of adherence to those policies. Assessment is also made against equality and diversity metrics including gender pay gap and gender ratio.

Human Rights – policy indicator

This indicator is also measured through policy alignment with fundamental ILO conventions and confirmation of adherence to those policies.

Health & Safety – Lost Time Injuries (LTI’s) & policy indicator

The indicator used to measure health & safety is a requirement to have a robust health and safety policy in place and confirmation of adherence to this policy. Our investee companies are also required to report LTI’s. This is defined as the number of work-related injuries which cause the injured person to be absent from work for at least one normal shift after the event because of unfitness to perform any duties.

Stakeholder engagement – qualitative indicator

This indicator is qualitative and includes engagement activities, such as Corporate Social Responsibilities (CSR) with the local community.

Healthcare – policy indicator

This indicator requires a healthcare policy to be in place and for annual adherence to that policy to be confirmed.

General Governance – qualitative indicator

The indicator requires sound governance practices to be in place. Robust policies and controls are required to mitigate governance risk and improve the overall governance of the organisation.

Anti-bribery and Corruption – policy indicator

The indicator requires robust policies to be in place across anti-bribery and anti-corruption areas. Annual adherence to such policies are required.

Data sources and processing

Quantitative data used in the presentation, or calculation, of Sustainability Indicators is sourced directly from our investee companies. Policy documents are provided by investee companies and are validated by ThomasLloyd, or external experts. Data quality is validated through comparison with historical data and the expectations of internal and/or external experts.

Data is processed using the methodology described for each indicator, and using a consistent methodology from one year to the next. If it is required that the methodology be revised from one reference period to the next this revision will be highlighted.

Limitations to methodologies and data

Where available, we require realised data to be used but if this is not available, estimates will be used. Estimates are validated against historical comparisons and expectations of internal and/or external experts. Where estimates are used this will be made clear in the data presented.

Due diligence

Prior to a new investment proposal being accepted, extensive due diligence is undertaken, often by both internal experts and external consultants. Prior to ratification of an investment proposal, the Investment Committee is provided with an Investment Committee Memorandum which details the rationale for the investment (including the suitability relative to the investment objective) and descriptions on the risks and opportunities involved. The memorandum provides details on ESG risks and opportunities obtained during the request for information(RFI) process and due diligence phase of our investment process, which includes a materiality assessment of the ESG risks and opportunities.

Engagement policies

Responsible Investment is inherently part of ThomasLloyd’s culture and is consistent with our fiduciary duty to manage investments in the best interest of clients. The philosophy that underpins all our investment activities is ‘Realising Sustainable Value’. For the communities in which we operate, and for our investors together, it delivers a triple return; social, environmental and financial.

Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment, investors and society. We believe that through positive and direct engagement with our investee companies we can create optimal long-term value for our investors and for the communities in which we invest.

ThomasLloyd’s Stewardship Policy embeds our investment philosophy into a practical framework of engagement with investee companies who must address and manage the environmental and social factors that affect their operations and are material for their business. Our policy reflects our view of best practice and is aligned with the UK Stewardship Code.

The objectives of our Stewardship and Engagement are as follows:

  • Maintain influential and supportive relationships with management teams to engage and advise on issues including company strategy, performance, risk, capital structure and corporate governance.
  • Ensure early identification of and accountability for key risks to investments and use engagement to manage and mitigate those risks and enhance the reputation of ThomasLloyd.
  • Adhere to the legal, regulatory and governance frameworks of the fund jurisdiction (for example, the Commission de Surveillance du Secteur Financier in Luxembourg, CSSF).
  • Adhere to the legal, regulatory and governance frameworks of the investment jurisdiction and to regulatory compliance in the social and environmental domains.
  • Adhere to the IFC/World Bank performance standards and to the eligibility criteria of the Lux Flag Environment Label (for example the requirement to evidence the socio-economic impact of an investment).
  • Create l long-term value for our investors and the communities we invest in through embedding international best practice at the investee company level.
  • Use our influence and expertise to implement positive change and guide management teams towards better ESG outcomes and contribute to the SDG’s.
  • Continually assess and scrutinise management performance and alignment of their behaviours with our core values and the objectives of the organisations to which we are signatory, including PRI.
  • Inform our investors of the outcome of our stewardship practices with utmost transparency.

ThomasLloyd adheres to the legal, regulatory and governance frameworks of the investment jurisdiction. ThomasLloyd also adheres to the performance standards of the International Finance Corporation (IFC), member of the World Bank Group.

Our achievements and future commitment to Responsible Investing were recognised in July 2020 by the Board of LuxFLAG which resolved to grant the use of the LuxFLAG Environment Label to ThomasLloyd SICAV - Sustainable Infrastructure Income Fund. The LuxFLAG Environment Label is recognised for its high standards and rigorous assessment of applicant investment funds’ investment strategy, ESG integration into the investment process as well as an affirmation of their transparency to investors, which are all key components of the eligibility criteria of the LuxFLAG Environment Label.

Attainment of the sustainable investment objective

In order to attain the sustainability objective, the ThomasLloyd funds will make investments in economic activities which aim to provide investors with a financial return and contribute towards environmental and social progress. Investments are made against an ESG framework which measures ESG risks, and applies the Principal Adverse Impacts from SFDR. The application of this framework is designed to evidence that investments do no significant harm to any environmental or social objective and that investee companies have sound governance practices in place.

Continuous progress towards the attainment of the environmental and social objectives of the fund is measured through the use of Sustainability Indicators, the outcomes of which are presented on an annual basis at a fund level. Each relevant indicator is compiled at an individual investment level and weighted on a pro-rata basis of the exposure to each individual investment as at the reporting date. Progress is measured by comparison to previous reference periods, once these have been reported.

The fund continues to evidence the DNSH principle of investments throughout the life of an investment. This is done by presenting data on ESG risks using the same methodology, and by reporting weighted data on a pro-rata exposure basis across a range of Principal Adverse Impacts, mandatory under the SFDR framework. Sound governance practices, the standards for which are set out in ThomasLloyd’s Stewardship policy, are monitored continuously and certified annually.