Sustainability Risk Policy (Article 3)
EU Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation (“SFDR” or the “Regulation”) applied from 10 March 2021 (the “Application Date”). The Regulation requires financial market participants such as Hamilton Lane (the “firm”) to provide information to investors regarding the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and sustainable investment.
This Sustainability Risk Policy specifically addresses the obligation in Article 3(1) of the Regulation:
“Financial market participants shall publish on their websites information about their policies on the integration of sustainability risks in their investment decision‐making process.”
More information related to the firm’s responsibilities under the SFDR, and the firm’s approach to ESG (Environmental, Social, and Governance factors) and responsible investment in general, can be found on the firm’s website.
“Sustainability Risks” as defined in Article 2 (22) of the Regulation are “environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of an investment”.
Sustainability Risks include (but are not limited to) the following:
- environmental risks such as the impact of environmental events such as increased flooding risks on operations of portfolio companies;
- social risks such as impact of non-compliance with anti-slavery or working conditions laws and regulations by portfolio companies; and
- governance risks such as inadequate management oversight of portfolio companies.
Integration of sustainability risks in investment processes
The firm has a long-standing commitment to corporate responsibility. In recognition of the importance of responsible investment, the firm integrates the United Nations-supported Principles for Responsible Investment (“PRI”), the United Nations Sustainable Development Goals (“SDGs”) and ESG factors throughout the investment appraisal, due diligence, decision making and post investment monitoring process.
Hamilton Lane formally incorporates the PRI and other ESG factors in its investee GP appraisal, due diligence and decision making. Hamilton Lane is likely to reject an investment into a fund on responsible investment grounds if certain essential ESG criteria are not met at the point of initial investment appraisal.
However, the firm may consider an investment if it does not meet all ESG criteria on initial appraisal and from time to time, the firm may invest in situations that do not meet all ESG criteria at completion provided that the investment team can demonstrate a clear action plan to achieve the required standards within a reasonable period of time post-investment (e.g., by implementing remedial action plans developed in the light of due diligence findings).
After an investment has been made, Hamilton Lane uses reasonable best efforts to actively monitor its investee GPs with respect to ESG issues and opportunities and Sustainability Risks. The firm undertakes a range of such monitoring activities, including direct requests for information and, if appropriate, utilizing external data providers. Hamilton Lane also monitors its investments to evaluate best practices relating to a diverse range of topics including anti-bribery and corruption, sustainable sourcing and worker safety. Hamilton Lane will also discuss ESG risks and risk-mitigation improvements through its annual ESG review process.
Hamilton Lane will provide annual ESG reporting as required by the SFDR at the entity and product level, following the required reporting schedule.
Impacts of Sustainability Risks
Throughout the processes outlined above Hamilton Lane takes a robust and pro-active approach to integrate Sustainability Risks into its investment decisions. These are not limited to initial screening or due diligence; the firm uses reasonable best efforts to monitor and report on investments throughout the investment cycle and commits to reporting on such risks to investors as outlined above.
Through the integration of the processes outlined above, Hamilton Lane believes that likely impacts of Sustainability Risks on the returns of any given product are low. However, the relevant pre-contractual disclosure of each product will provide a more bespoke risk rating as is suitable for that product and its activities.
Review of the Policy
This Sustainability Risk Policy is effective as of March 2022 and will be reviewed at least once a year.
Principal Adverse Sustainability Impacts Statement (Article 4)
EU Sustainable Finance Disclosure Regulation
The firm considers principal adverse impacts of investment decisions on sustainability factors in a manner appropriate to its size and the nature and scale of its activities and the types of financial products it makes available. Depending on the characteristics of the product on which it is managing, and in particular the product’s designation as promoting “environmental or social characteristics” or having “sustainable investment” as its objective, the firm will determine and disclose whether, and the extent to which, it considers the principal adverse impacts of its investment decisions.
In relation to products that do not expressly claim to promote environmental or social characteristics or have a sustainable investment objective, Hamilton Lane does not consider the principal adverse impacts of its investment decisions.
In relation to products that promote environmental or social characteristics, or have sustainable investment as their objective, the firm considers principal adverse impacts to the extent described in that product’s pre-contractual documents. In all cases, please refer to a product’s pre-contractual information for the specific policies applicable to that product.
Therefore, this Principal Adverse Sustainability Impacts Statement specifically addresses the obligation in Article 4(1)(a) of the Regulation:
“Financial market participants shall publish and maintain on their websites:
(a) where they consider principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts, taking due account of their size, the nature and scale of their activities and the types of financial products they make available.”
Hamilton Lane notes that pursuant to the Regulation, the European Supervisory Authorities (the “ESAs”) are mandated to develop regulatory technical standards (the “RTS”) with respect to climate and other environment-related adverse impacts, and with respect to social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.
Hamilton Lane notes further that as of the date of this Policy, the ESAs have published a final draft of the RTS, but they remain subject to adoption by the European Commission. Notwithstanding this, where adverse impacts are considered in respect of one of the firm’s products, the firm will apply the standards as set out in the draft RTS as of the date of this Policy and will take ongoing advice to monitor and update its policies where necessary due to any change in the RTS upon adoption by the European Commission.
Hamilton Lane will also monitor the development and adoption of any further RTS and consider, where appropriate on a product-by-product basis, the adoption of those standards to be set out in such RTS.
“Sustainability factors” are defined in Article 2 (24) of the Regulation as: “environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters”.
Adverse Sustainability Impacts Statement
Hamilton Lane has published here, in accordance with its obligations under Article 4 of the RTS, an adverse sustainability impacts statement in the format prescribed by the RTS. Hamilton Lane notes that the European Commission, in its 25 November 2021 letter to the European Parliament and European Council, has indicated that the reporting of adverse sustainability impacts should be completed by 30 June 2023 with respect to the first “reference period” under the RTS, such period being 1 January 2022 to 31 December 2022.
Hamilton Lane notes that the ESAs, in a joint supervisory statement dated 25 February 2021 (the “Joint Statement”), propose that a short form adverse sustainability impacts statement, using the draft RTS “as a reference for applying the provisions of Articles 2a, 4, 8, 9, and 10 of the SFDR” should be made until the first reference period. Hamilton Lane has therefore adopted an adverse sustainability impacts statement in the format proposed by the Joint Statement.
As noted above in the second paragraph of this statement, Hamilton Lane considers principal adverse impacts of its investment decisions on sustainability factors in a manner appropriate to its size and the nature and scale of its activities and the types of financial product it makes available. The present statement is the consolidated principal adverse sustainability impacts statement of Hamilton Lane. This principal adverse impacts statement covers the interim reference period from 10 March 2021 to 31 December 2021.
Hamilton Lane uses the definition of principal adverse sustainability impacts as described in Recital 20 of the Regulation: “Those impacts of investment decisions that result in negative effects on sustainability factors, with sustainability factors referring to environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.”
Hamilton Lane believes that investment decisions that negatively impact climate or other environment-related resources, or have negative implications for society, are detrimental to value creation. Hamilton Lane will use reasonable best efforts to make the necessary preparations to gather, monitor and report the principal adverse sustainability impact indicators listed below.
Description of policies to identify and prioritise adverse sustainability impacts
The firm’s incorporation of ESG factors in its investment appraisal, due diligence and decision-making processes identifies principal adverse impacts on relevant Sustainability Factors. Throughout the lifecycle of a product’s investment, the firm’s due diligence data collection and monitoring enable the relevant investment team to identify and manage the materiality of any principal adverse impacts, or their risk of occurring, and take suitable mitigating action.
As with Sustainability Risks, Hamilton Lane will use reasonable best efforts to ensure principal adverse impacts on Sustainability Factors are screened, monitored and measured in a manner suitable to each Hamilton Lane product. The diligence policies with respect to these impacts are disclosed on a product-by-product basis in the relevant pre-contractual disclosures (such as the private placement memorandum or offering memorandum).
The RTS contains 14 mandatory ESG metrics (‘principle adverse sustainability impact indicators’). These indicators should be gathered at portfolio investment level and aggregated at entity level (i.e. Hamilton Lane). These mandatory indicators will be included in the firm’s principal adverse impacts statement for the first reference period (i.e., the calendar year 2022).
The firm is making necessary preparations to gather, monitor and report the mandatory principal adverse impact indicators within the specified time period. Hamilton Lane will report on all indicators related to principal adverse impacts on sustainability factors as set out in Table 1 of Annex I of the Regulatory Technical Standards of the Regulation as described above.
Furthermore, Hamilton Lane will select at least one additional indicator related to principal adverse impacts on a climate or other environment related sustainability factor that qualifies as principal as set out in Table 2 of Annex I, as well as at least one additional indicator related to principal adverse impacts on a social, employee, human rights, anti-corruption or anti-bribery sustainability factor that qualifies as principal as set out in Table 3 of Annex I. Hamilton Lane will select these additional indicators based on the probability of occurrence and severity of adverse impacts (including their potentially irremediable character).
The firm engages with its investee GPs to make sure they are aware of the importance of collecting information about their portfolio assets’ principal adverse impacts. Hamilton Lane wants its investee GPs to develop, first, awareness of their adverse sustainability impacts and, second, methods for addressing those adverse impacts. By helping its investee GPs bring transparency on environmental matters to investors at all levels, Hamilton Lane believes that it can deliver superior risk adjusted returns to its investors.
References to international standards
As the firm continues to expand its responsible investment program, Hamilton Lane maintains a list of relevant responsible investment partner organizations and memberships which create potential synergies and provide valuable insights and benefits. The firm is currently a signatory of the United Nations Principles for Responsible Investment (“PRI”).
The goal of the Paris Agreement is to keep global warming below 2° Celsius. Hamilton Lane hopes to positively contribute to the overall goal of the Paris Agreement by gathering, monitoring and reporting climate-related adverse impact indicators. Hamilton Lane seeks to work with its investee GPs to ensure they have adequate monitoring procedures for the measurement of adverse impact indicators including (i) Scope 1 GHG emissions of companies, (ii) Scope 2 GHG emissions of companies, (iii) Scope 3 GHG emissions of companies, and (iv) share of companies active in the fossil fuel sector.
As Hamilton Lane prepares to develop a methodology for selecting, monitoring and reporting on other adverse impact indicators, it will also develop and report on the methodology and data used (including any forward-looking climate scenarios) to measure that adherence or alignment, including a description of the scope of coverage, data sources and how the methodology forecasts the future performance of projects.
Review of the Policy
This Principal Adverse Sustainability Impacts Statement (Version 1) is effective as of March 2022.
Remuneration Policy – Sustainability Risks (Article 5)
EU Sustainable Finance Disclosure Regulation
This Remuneration Policy (Sustainability Risks) specifically addresses the obligation in Article 5 of the Regulation:
“Financial market participants and financial advisers shall include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks and shall publish that information on their websites.”
REMUNERATION AND SUSTAINABILITY RISKS
Sustainability Risks, by their nature, may materialise only over long time periods, and the firm’s remuneration policy is designed to reflect that infrequent, high magnitude risks are not always best captured by short term indicators. The remuneration policy aims to promote adherence to the value creation strategies that Hamilton Lane believes provide the best returns on business activities.
Hamilton Lane recognises that incentive structures can lead to harmful outcomes if improperly structured, and that incentive structures need to be adjusted to ensure continued alignment with the full range of desired outcomes. Therefore, the firm has adopted a remuneration policy effective as of March 2022 which it believes is consistent with the integration of Sustainability Risks over near and far time horizons.
Among other forms of remuneration that are provided on a fixed basis, the firm awards employees variable discretionary bonuses on an annual basis. This includes a comprehensive review of the employees’ contributions across various criteria and as the firm believes that long-term ESG factors should be properly integrated across the firm, part of the appraisal criteria relates to an employee’s contribution to sustainability initiatives of the firm. These criteria are applied in a differential way among team members as is appropriate to their impact on the firm’s investment activities that may or may not be involved with sustainability risks.
Review of the Policy
This Remuneration Policy disclosure reflects the Remuneration Policy that is effective as of March 2022 and will be reviewed at least once a year.