SUSTAINABILITY AND RISK POLICY
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SUSTAINABILITY RISKS AND THE INVESTMENT PROCESS
A sustainability risk is an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment of UIV. In its decision-making UIV pays close attention to all identifiable sustainability risks at each stage of the Investment process.
The sustainability risks can generally be associated with:
Fossil fuels: Companies that continue to rely on fossil fuels are at risk of experiencing a negative impact of the ongoing global energy transition: increased cost of financing, increased cost of raw materials, etc.
Water: Climate change will increase scarcity of water for many regions and industries in the future.. For water dependent industries, scarcity of water will increase operational and financial risks.
Waste: Improper waste management has a substantial impact on our environment. Companies associated with these practices run the risk on legal action, financial risk and commercial risk.
Land and Biodiversity: Deforestation and biodiversity loss resulting from land conversion for industrial use create risks due to their impact on water availability, climate change and soil fertility. A second order effects are the social unrests, environmental lawsuits and reputational damage.
Human capital: Insufficient efforts on managing labor rights, employee health and safety, development of appropriately skilled personnel and diversity and inclusion practices directly creates operational and reputational risks to companies and may harm their operations.
Social capital: Not considering social capital issues (customer privacy and data security, (cyber) security risks, interaction with communities in which companies operate and negative impact on access and affordability of basic goods and services for them) creates reputational and legal risks.
Integrity: (Perceived) fraud, bribery, tax evasion, failure to comply with rules and regulations or unethical business practices may lead to reputational risks, legal action and commercial risk. Risks are not confined to the company itself, but also to those involved at various stages in its supply chain.
UIV integrates sustainability risks in its investment process in the following manner:
Screening and research: All investment opportunities are initially assessed for compliance with UIV’s essential investment principles, as well as for alignment of their potential positive environmental and/or social impact with UIV’s impact thesis, which emphasizes contribution to 5 SDGs that are core to the sustainable urban transformation. Any negative impact on other environmental and social objectives, stipulated by the UN 2030 Agenda for Sustainable Development, if identified at this stage, is assessed for its materiality and manageability. Should it be considered as unmanageable and largely offsetting the core potential impact of the opportunity, no further investment-related actions shall be taken.
Due diligence and investment structuring: For all investment opportunities receiving a ‘green light’ approval from UIV’s Investment Committee a detailed technical, legal, and financial due diligence procedure is undertaken, where both core and additional positive impacts, and manageable potential material negative impacts are analyzed further in depth. The structuring of a prospective investment involves also, in consultation with the investee management team, the setting of specific targets for the core positive impact, the additional impact sought according to UIV’s impact thesis on goals related with climate action and decent work conditions and inclusiveness, as well as for decreasing/mitigating the potential negative impact on other SDGs.
Portfolio management and exits (divestments): At this stage of the Investment process all impacts (core; additional; material negative) are regularly measured and progress on the targets set is tracked through a proprietary developed impact rating system. UIV’s impact framework captures all relevant developments as well as adjusts the impact ratings for non-achievement of target(-s) set for reducing the material negative impact (if present). It also allows for aggregation of the individual investee impact results (ratings) on a portfolio (fund) level. Furthermore, the exit strategies and options are always evaluated in a way that puts higher weight on ensuring a lasting effect of the core impact generation capacities of the investees, while also not incurring additional harmful environmental and/or social hazards.
Renumeration policy in relation to the integration of sustainability risks
UIV’s mission is centered on the intentional achievement of material net positive impact for the environment and society through investments in transformative businesses within the urban sustainability domains. Its remuneration policy is fully aligned with this mission and integrates the sustainability risks, and the potential adverse sustainability impacts of the investment decisions through the direct link between UIV’s performance fee and the progress achieved on the impact targets (core; additional; material negative), as captured in the overall impact rating of the investment portfolio (fund). Specifically, if the portfolio (fund) impact rating at exit is below certain threshold (7.5 of 10 possible grades) UIV’s performance fee will be subject to a malus of up to 50%.