On March 10, 2021, the European Sustainable Finance Disclosure Regulation (SFDR) became applicable. This regulation emerged from the EU action plan for sustainable growth and is thus part of wider efforts at European level to make the financial sector more sustainable.
The regulation requires financial companies, including Providence Capital, to disclose information about how they consider sustainability aspects (also known as environmental, social and governance aspects; “ESG”) when investing.
Providence Capital recognizes the importance of the transition to a more sustainable economy and the role investors can play in this. For that reason, Providence Capital sets minimum sustainability requirements for investments.
At the same time, Providence Capital does not have an explicit focus on sustainable investing and / or impact investing. Providence Capital therefore does not offer portfolios that promote ecological and / or social characteristics or that have sustainable investments as their objective.
In the sections below you can read more about how we take sustainability aspects into account when investing.
First of all, Providence Capital takes certain sustainability risks into account when investing. Providence Capital defines a sustainability risk as the following:
“An environmental, social or governance event or condition (also known as an ESG factor) which, if it occurs, could cause an actual or potentially material adverse effect on the value of the investment”
ESG factors can – directly or indirectly – influence the value of a portfolio. For example, factors such as resource scarcity and climate legislation could negatively affect the continuity and profitability of certain companies.
Providence Capital uses a multi-strategy. This means that multiple asset classes are used to determine an optimal allocation of the portfolio. Investments are also made worldwide. Due to this diversity of products and worldwide spread, there is also a great diversity of sustainability risks that may affect returns. Sustainability risks are integrated into the investment process because all relevant aspects of an investment are taken into account when selecting and monitoring investments, as far as possible, including sustainability risks.
Providence Capital believes that investments in unsustainable companies are generally more exposed to sustainability risks. Providence Capital therefore does not, in principle, invest in companies that do not comply with the UN Global Compact principles. By avoiding these companies, Providence Capital expects to limit the sustainability risks to which portfolios are exposed.
To determine whether companies comply with the UN Global Compact principles, Providence Capital uses data from specialized data providers and underlying investments of most investment funds are regularly screened. We report on this to our clients on a quarterly basis. In addition, of course, Providence Capital takes into account – as far as possible – all relevant aspects of an investment, such as sustainability risks, when selecting and monitoring investments.
Negative effects on sustainability
The previous section described how Providence Capital deals with sustainability risks: the negative effects of sustainability factors on the value of investments. However, the reverse is also possible: investments can have a negative effect on sustainability factors. For example, investments can contribute (indirectly) to climate change, to waste production or to income inequality. Providence Capital does not yet actively consider such negative effects when making investment decisions. Providence Capital has chosen this because there is currently insufficient reliable data available to adequately analyze these negative effects and integrate them into the investment process.
Providence Capital also believes that the regulations regarding the consideration of such unfavorable effects are currently insufficiently developed, as a result of which the risk of differences in interpretation is too great.
Providence Capital will periodically reconsider this decision. If the availability and reliability of sustainability data improves and if there is more clarity with regard to the legal rules regarding the weighting of these effects, Providence Capital may decide in the future to actively include adverse effects on sustainability factors in investment decisions.
If you would like to learn more about how Providence Capital deals with responsible investing and the integration of sustainability aspects, you can download our Responsible Investment Policy here.
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