Stockholm (HedgeNordic) – The journey to achieving the Article 8 classification is hazy for any fund, even more so for hedge fund managers who deal with diverse asset classes, investment styles, and financial instruments, including short positions. Ann-Sofie Odenberg and Hampus Hårdeman from Brummer & Partners shed light on their multi-strategy fund’s journey towards obtaining Article 8 classification. Faced with varied challenges on their ESG journeys, every single manager under the Brummer & Partners umbrella has worked shoulder-to-shoulder with the group’s sustainability team to turn Brummer Multi-Strategy (BMS) into an Article 8 fund.
A Disclosure Regulation, not a Labeling Regime
Thanks to Brummer & Partner’s pioneering responsible investment efforts in the hedge fund space and continuous efforts to enhance their sustainability approach, the majority of the work to classify BMS as an Article 8 fund involved formalizing existing processes and drafting the required sustainability-related disclosures. Contrary to popular belief, SFDR is not a labeling regime but a disclosure regulation, according to Odenberg.
Recent data reveals that the majority of Swedish funds have now attained Article 8 classification. This transition began gaining momentum in 2021, even before the regulatory technical standards for Article 8 and 9 funds were finalized. “When the SFDR was launched and we saw the whole classification scheme from Article 6 to Article 8 and 9, we anticipated that clients would demand Article 8 or 9 classifications,” says Hampus Hårdeman, who is part of the sustainability team at Brummer & Partners.
“While Article 8 funds need to promote environmental and/or social characteristics and Article 9 funds have sustainable investments as an objective, both classifications require extensive disclosures on how investment managers plan to fulfill their promoted environmental and/or social characteristics,” he elaborates. Additionally, these disclosures must periodically outline the actions undertaken to meet those characteristics, including the identification and consideration of principle adverse impacts resulting from investment decisions on sustainability factors.
Best-Efforts Approach
“The EU Action Plan on Sustainable Finance was put in place to direct private capital towards the fulfillment of sustainable economic activities and the transition to a carbon-neutral economy,” explains Ann-Sofie Odenberg, head of sustainability at Brummer & Partners. “The action plan has resulted in a broad set of new regulations, such as SFDR, and amendments to already existing regulations, such as MiFID,” she continues. “Amendments to MiFID put regulatory requirements on investment advisors to consider clients’ sustainability-related preferences when giving investment advice.”
As Odenberg explains, the SFDR requires investment managers to disclose in detail their approach to sustainability, including the calculation and disclosure of various mandatory sustainability indicators. While this process is relatively straightforward for traditional financial instruments like stocks and for equity-related derivatives, it becomes more complex for other types of derivatives such as commodity futures where data availability is limited.
“While the regulation suggests that one should take a best-effort approach to see through to the underlying exposure, for example, when investing in holding companies or in a fund of funds, and not blame poor data, this is not straightforward for exposures where an issuer cannot be easily identified,” says Odenberg. “It appears the regulator mainly had traditional equity or credit-based derivatives in mind.” Nonetheless, disclosure regarding how derivatives are compatible with the environmental or social characteristics that are being promoted is still required.
For example, Odenberg mentions that Lynx, a trend-following investment strategy that BMS allocates to, engages with exchanges to encourage them to disclose more sustainability and ESG-related information in future contracts. She emphasizes the importance of thinking outside the box and engaging with exchanges and index providers on ESG. “Engaging with exchanges and index providers on ESG is, by the way, a good example of best effort and thinking outside of the box when most still claim engagement can only be performed if you own stock in a company.”
“While there are some reporting challenges for some managers of hedge fund strategies, SFDR isn’t just about measurements, and we still do our best to provide meaningful information to investors.”
“We have to keep in mind that SFDR, and metrics such as EU Taxonomy revenue alignment, appears to have been drafted mainly from a traditional long-only perspective,” acknowledges Hampus Hårdeman. “While there are some reporting challenges for some managers of hedge fund strategies, SFDR isn’t just about measurements, and we still do our best to provide meaningful information to investors,” he emphasizes. Hårdeman further explains that SFDR necessitates the integration of sustainability risks into the investment decision-making process and the consideration of these risks in areas such as remuneration, shareholder engagement, and proxy voting. “Policies outlining how this is done must be publicly available on the investment manager’s website, along with an annual disclosure of principle adverse impact indicators that illustrate the negative impact of investment decisions on sustainability factors.”
“In our opinion, it is not enough for Article 8 funds to only consider ESG and make disclosures in relation to equities and corporate credits and partly for sovereigns.”
Ann-Sofie Odenberg points out that SFDR requires Article 8 funds to consider ESG and disclose information beyond equities and corporate credits, even for portfolio parts where sustainability indicators are not calculated. She emphasizes the need to keep the purpose of the EU Action Plan in mind when drafting disclosures and not to dismiss aspects that are not explicitly outlined in the regulation. “In our opinion, it is not enough for Article 8 funds to only consider ESG and make disclosures in relation to equities and corporate credits and partly for sovereigns,” says Odenberg. “There is that best-effort wording again.”
The Brummer Way
Achieving Article 8 classification can be challenging for a single-strategy investment manager and even more so for a multi-strategy fund like Brummer Multi-Strategy. However, Brummer & Partners’ unique setup, where they hold minority stakes and have board representation in the investment managers they allocate to, facilitates the alignment of sustainability efforts across all individual managers within the group. “We have an advantage as we are not only investors in the strategies that we allocate to, we are also partners and colleagues with the investment managers,” explains Hårdeman. “They are only a few steps or a phone call away and we can discuss on a day-to-day basis if we want to.”
“We have an advantage as we are not only investors in the strategies that we allocate to, we are also partners and colleagues with the investment managers.”
“To be able to do the necessary disclosures and meet the requirements in SFDR, you need to make sure that you get the information that you need from your investment managers and that there’s sufficient transparency on everything from portfolio exposures to sustainability-related policies and practices,” elaborates Odenberg. “Our unique setup certainly helps us to meet the Article 8 classification requirements.”
