Sustainable Finance Disclosure of Cycle S.C.A., SICAV-RAIF, Eco Technology Compartment A (the “Compartment”)
Pursuant to SFDR, the Fund is required to disclose information on the integration of Sustainability Risks, on the consideration of adverse sustainability impacts, on sustainable investment objectives, or on the promotion of environmental or social characteristics, in investment decision‐making and in advisory processes. Where the sustainability risk assessment leads to the conclusion that there are no sustainability risks deemed to be relevant to the financial product, the reasons therefor will be explained.
Sustainable Investment Objective
The Compartment has sustainable investment as its objective. Sustainable investment means an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly harm any environmental or social objective and that the investee companies follow good governance practices.
The indicators that are used to measure the attainment of the sustainable investment objective of this Compartment are defined in the Cycle Good Impact Investment Practise Document, available at https://www.cycle-group.com/impact/. An excerpt of the SFDR relevant objectives, goals and methods is listed below:
- Dark Green Fund: According to the self-classification required by the SFDR, the Compartment is a “dark green” compartment focused on the most ambitious 1.5° IPCC target and Paris ambition, investing in sustainable companies which are developing renewable energy, energy efficiency, hydrogen economy, electrical grid and emission reduction related technologies.
- Investment Objectives: The Compartment invests in European Climate Opportunities with a focus on sustainable, renewable energy, energy efficiency, hydrogen economy electrical grid and emission reduction related technologies. Bringing those new environmentally friendlier technologies to the global markets is at the core of the mission and all investment are exclusively made into sustainability. The investment hypophysis of the Compartment is focused on the highest emission reduction potential of the industrial sectors and thus fully mission aligned with the dark green investment objective classification of the SFDR.
- Sustainability Goals: The Compartment contemplates to invest in 12–15 companies developing sustainable technologies which reduce emissions directly or realise significant emission reduction with their products and services indirectly (actual operation of the products). The sustainability goals include all UN sustainability goals (SDGs) with a special focus on goal 6, 7, 9, 11, 12 and 13. Most important goal for the Compartment is the swift reduction of emissions with a focus on Super Pollutants and Full Mitigation Efforts including the mitigation of Short Lived Climate Pollutants such as Black Carbon, Methane and Hydrofluorocarbons and as an exception the most potent warming gas Sulfur Hexaluoride (SF6).
- Paris Ambition: The Compartment invests in companies targeting to support the most ambitious decarbonisation goal of the Paris agreement and the 1.5° IPCC target. Portfolio companies are selected to most effectively reduce emissions to net zero as fast as possible. Thus, the investment focus is on energy related technologies with significant emission reduction potential.
- Sectorial Benchmarking: The Compartment utilises the Science Based Target initiatives (SBTi) benchmarks as sectorial goals for decarbonisation while the technical annex provided by the European Commission’s EU Taxonomy are being completed. The EU Taxonomy will be used where sectorial benchmarks become available. Benchmarks are calculated for emissions per unit produced. Comparisons are made by product versus market average and company versus a sectorial or peer group average depending on available data.
- Global Index: The Compartment uses the X-Degree Compatibility (XDC) Model methodology developed by right based on science. XDC is an economic climate impact model and calculates easily understandable climate indicators for a global comparison. It analyses the degree of global warming that an economic entity is compatible with under various scenarios, answering the question: How much global warming could be expected, if the entire world operated at the same emission intensity as the entity in question over a given timeframe? Results are expressed in a tangible degree Celsius (°C) number: the XDC. 1). X-Degree Compatibility is calculated in four basic steps: 1. How many CO2e emissions sold the entity need to generate EUR 1 million in gross value added (GVA) compared to similar products in the market the Economic Emission Intensity (EEI).
- Calculation Method: For most companies in the energy sector the scope 3 emissions are a manifold of their combined scope 1 & 2 emissions. For technology companies and if usage of technology products is taken into account these emission gaps can widen even further to be several dimensions apart. Thus, it is key to benchmark energy technologies against comparable products in the market. For assessing the impact potential of energy technologies the Fund focuses on the following questions: 1. How many CO2e emissions can the technology save per unit produced and per EUR 1 million in gross value added (GVA) (Economic Emission Intensity – EEI). 2. What is the emission market average of similar products (measured in CO2e /unit produced)? 3. How many emissions would be omitted if all market participants would adopt these technologies and their saving potential (measured in tCO2e)?
- The Compartment considers the ClimateWise Risk Matrix , developed by Cambridge Institute for Sustainability Leadership , which includes risk estimates for Coal, Gas, Nuclear, Renewables, Oil and Gas in different regions. Climate induced risks will to certain extend manifest in all portfolios as they are bound to have wide reaching effects.
- The Compartment identifies, evaluates and selects portfolio companies due to their market potential as cleantech companies and the value of the investments is supposed to be inversely correlated to environmental risks in general and climate risks in particular, i.e. carbon pricing valuation risks. The portfolio companies are expected to potentially thrive from the market shift away from fossil fuels.
- Supply chain and grid operation risks may negatively affect portfolio companies and portfolio returns.
- The Fund may be affected by the risk slow market adoption due to lock-in effects in regulation, delays in certifications and thus market adoption.
Likely Impacts following the Occurrence of a Sustainability Risk
In general, environmental and social issues are strongly connected. Many social issues are related to energy, water climate change, global worming consumerism and waste products. Investments with a positive impact on the environment contribute to a positive social impact. The value of the investments of the Compartment is supposed to be inversely correlated to social risks, in particular risks of economic or social disadvantages of communities.
However, such environmental positive impacts may not or not fully be completely realisable in the short time frame of the immanent window of opportunity to address emission reduction and counteract accelerated global warming. Delay risks for implementation arise from slow adaptation of regulatory frameworks, hold-up of technology adoption because of market resistance or bottlenecks in project engineering, planning and construction.
The relationship of social and environmental benefits can be exemplified as follows:
- Investments in decentralised, resilient, renewable energy infrastructure reduces environmental stress due to pollutants such as NOx gases or 2.5ppm particles on the broader population while supporting more jobs per kWh produced and leading to higher employment in the built up of these industries and new emerging infrastructure.
- Investments in technologies with higher energy efficiency and lower cost for producing affordable and clean energy, clean water and implementation of these technical innovations in industrial and energy infrastructure helps create more sustainable cities and communities thus leading to less social inequality, strengthening sustainability and resilience of society as a whole.
- The societal opportunity costs of inaction against global warming are immense. Accelerated global warming already leads to unprecedented heat waves, cyclones, floods, effects on agriculture, fisheries and health. These risks are already manifesting and have an impact on the most vulnerable members of society.
Governance and Reporting
- Process: The Compartment integrates Sustainability Risks into decision-making and investee engagement throughout the investment process. The Compartment’s investment evaluation of investees includes an ESG risk assessment, leading to an ESG risk score according to the level of ESG risks. The ESG risk assessment, conducted during the due diligence phase, is customized according to the profile of the investee. If the ESG risk assessment leads to a high-risk categorization where ESG-related risks cannot be mitigated to a satisfactory extent, the investment will not proceed. If the Sustainability Risks are considered low to medium, the results of the ESG due diligence are included in the Investment Memorandum presented to the Investment Committee whose investment decision is informed by the review of ESG factors. Where significant Sustainability Risks are identified as a result of the ESG due diligence of an investee but the level of risk remains overall low or medium, a clear ESG risk mitigation strategy may be requested as a prerequisite for investment, and regular updates related to the ESG risk mitigation strategy and/or ESG Action Plan as a reporting requirement. Mandatory incident reporting further facilitates our ESG risk management. Finally, our Compartment’s engagement with investees, including on ESG matters, is an integral component of Cycle’s investment process and contribution to positive development impact.
- No Adverse Impact: The investment process provides that the portfolio companies follow good governance practices and that the precautionary principle of ‘do no significant harm’ is ensured. No adverse impact on the environmental and social goals should arise from investment decisions or from the portfolio companies themselves.
- Investment Decisions: The Compartment's investment process includes a sustainability evaluation, and every investment memorandum includes a section on the potential emission reduction potential of evaluated companies and their technologies. The core investment focus of the Fund are sustainable technologies especially in the energy efficiency, hydrogen economy and electrical grid. Thus, in the selection of companies to be screened, in the due diligence of companies and in the investment management process, the sustainability performance aspect is paramount.
- Compartment Returns: The impact of additional emission regulations and sustainability policies fostering emission reduction of all industries are projected to have a positive impact on the technologies the Compartment invests in. Compartment's returns are expected to prosper as portfolio
- Remuneration Policies: The Fund has a remuneration policy accessible on the funds website https://www.cycle-group.com.
- Impact Reporting: Annual Impact Reports are provided to measure the sustainability of investments and their impact using Impact Investment and Investment Reporting Standards (IRIS) performance metrics developed by the Global Impact Investing Network. Management and investment decisions about an individual investment will be made not in isolation but in the context of the investment policy and the Impact Investment and Investment Reporting Standards. As a whole with risk and return objectives reasonably suited to the Fund. IRIS is an initiative of the Global Impact Investing Network, a non-profit organisation dedicated to increasing the scale and effectiveness of impact investing. Impact investments are investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return. The GIIN recognises impact measurement as a core characteristic of impact investing and offers IRIS as a free public good to support transparency, credibility, and accountability in impact measurement practices across the impact investment industry.