IDI Emerging Markets Partners makes the following disclosures in accordance with the Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (the “SFDR”).
Pursuant to Article 3 of the SFDR, IDI Emerging Markets Partners is required to disclose the manner in which sustainability risks (as defined hereafter) are integrated into the investment decision-making process.
A sustainability risk means an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investments made by IDI Emerging Markets Partners. In the context of the firm, sustainability risks are risks which, if they were to crystallise, would cause a material negative impact on the value of the portfolios of the firm's funds.
Such risk is principally linked to climate-related events resulting from climate change (i.e. physical risks) or to the society’s response to climate change (i.e. transition risks), which may result in unanticipated losses that could affect an investment. Sustainability risks can also affect companies by introducing social risks (e.g. gender gaps, social inequality) and governance risks (e.g. bribery issues, selling practices).
The impacts following the occurrence of a sustainability risk event may be numerous and vary in significance depending on industries, regions and asset classes. Those that are particularly relevant to IDI Emerging Markets Partners and its investments include:
- Sustainability risks linked to its investments in emerging markets, which may have greater exposure to such risks than others. For instance, governance risks are often more pronounced in emerging markets, materializing from a lack of maturity or corporate tenure or an often more concentrated ownership. Additionally, companies in many emerging markets usually assign fewer resources on corporate sustainability and deliver less robust disclosures than more mature markets resulting in a more challenging task for portfolio managers and external data providers to identify and assess the materiality of eventual sustainability risks. Lag on labour and human rights practices, child labour, corruption are other example of sustainability risks in emerging markets that could damage a company’s reputation and earnings prospects, and increase the risk of regulatory scrutiny and restrictions. Such event could significantly impact the return of IDI Emerging Markets Partners financial products.
- Sustainability risks linked to its investments in smaller companies. Likewise companies in emerging markets, smaller companies may also assign fewer resources on corporate sustainability and deliver less robust disclosures than bigger companies which could magnify the challenging task stated above. Failure to identify, manage or mitigate sustainability risks could result in a negative impact on the returns of IDI Emerging Markets Partners financial products.
Such sustainability risks are integrated into the investment decision making and risk monitoring to the extent that they represent a potential or actual material risks and/or opportunities to maximizing the long-term risk-adjusted returns. IDI Emerging Markets Partners and its shareholders are committed to incorporating sustainability risks into the different investment stages (screening, Due Diligence (DD), monitoring) and is convinced that incorporating ESG factors (i.e. environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters) in investment activities can both protect investment value and enhance long-term returns.
To integrate sustainability risks into local private equity fund managers, IDI Emerging Markets Partners assesses managers’ integration practices. This is done through a good understanding of the manager’s investment approach and decision-making, risk management and portfolio monitoring processes. The review is made during the DD made with the support of an ESG questionnaire designed for fund investments. This enables IDI Emerging Markets Partners team to evaluate local managers that meet their expectations for the level and style of ESG integration applied to their portfolio and allows managers to clearly understand those expectations. When interacting with local managers, IDI Emerging Markets Partners tailors its expectations according to various characteristics, including (i) the size of the manager (smaller firms may have fewer responsible investment tools and staff to integrate ESG factors into processes, and so cannot be expected to have the same ESG offering as larger firms), (ii) the strategy of the manager (sectorial approach, kind of investments, maturity and size of the investees companies) and (iii) the experience of the manager and its local peers with ESG issues.
For direct investments, DD on ESG factors (through desk research and site visits) is an iterative process with repeated interaction between the different actors (portfolio company, investment manager, external ESG consultant and/or internal dedicated team of ESG operational specialists). It begins at the screening stage of the investment process as early findings should be used to guide the scope of DD with a view to ensuring the key ESG aspects are well understood, and ultimately, managed. The aim of scoping is to define the boundaries of the ESG DD.
IDI Emerging Markets Partners consider it as essential to integrate the evaluation and reporting of ESG issues into on-going monitoring. The team recognises the need to not just consider ESG factors as part of their investment process but also the need to effectively communicate their approach and the ongoing performance of their portfolios to stakeholders. Therefore, the IDI Emerging Markets Partners portfolio managers include ESG factors in the process of its quarterly review of the portfolio. It is also included in the reporting process to investors.
No consideration of sustainability adverse impacts
IDI Emerging Markets Partners does not consider the adverse impacts of its investment decisions on ESG factors in the manner prescribed by Article 4 of the SFDR.
IDI Emerging Markets Partners is supportive of the SFDR and the improvement of transparency towards investors and the markets. However, taking into account the funds size, the nature of its investments and the type of products it makes available, IDI Emerging Markets Partners is aware about the current lack of non-financial data of satisfactory quality and quantity to allow the firm to adequately assess the potential adverse impact of its investment decision on ESG factors.
This decision will be kept under review as the underlying rules are finalised and are embedded in the short to medium term.
IDI Emerging Markets Partners pays its staff a combination of fixed remuneration (salary and benefits) and variable remuneration (including bonus). Variable remuneration for relevant staff takes into account compliance with all of the firm's policies and procedures as well as with the firm’s internal risk management framework and risk limits, including those relating to the integration of sustainability risks. In this regard, IDI Emerging Markets Partners remuneration policies do not encourage risk-taking which is inconsistent with its internal risk limits or with the risk profile of the funds that IDI Emerging Markets Partners manages, including regarding sustainability risks stemming in particular from climate-related events or from the society’s response to climate change.