Future Food Fund & SFDR
What is the sustainable finance disclosure regulation (SFDR)?
Following the adoption of the 2015 Paris Agreement on climate change and the United Nations 2030 Agenda for Sustainable Development, the EU Commission has expressed in the Action Plan “Financing Sustainable Growth” its intention to clarify fiduciary duties and increase transparency in the field of sustainability risks and sustainable investment opportunities with the aim to:
- Reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;
- Assess and manage relevant financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and
- Foster transparency and long-termism in financial and economic activity.
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”) sets out sustainability disclosure requirements for a broad range of financial market participants, financial advisors and financial products. It was enacted to address the twin objectives of increasing transparency of sustainability-related disclosures and to increase comparability of disclosures for end-investors.
What is Future Food Fund (FFF) required to do under the SFDR?
FFF has to transparently communicate several sustainability-related disclosures on its website, directly accessible to potential investors. These disclosures on a manager level include:
- FFF’s consideration of sustainability risks in investments; i.e. how are sustainability risks taken into account in FFF’s decision to invest or divest in specific underlying funds?
- FFF’s policy regarding principal adverse impacts (PAI) of investment decisions on sustainability factors and the due diligence policies with respect to those impacts, i.e. how does FFF take the possible negative impact of investment decisions on people or planet into account (i.e. sustainability in the broadest sense)?;
- FFF’s integration of sustainability goals in its remuneration policies; i.e. how does FFF’s sustainability performance affect the compensation its management or other team members receive?
Furthermore, SFDR requires fund managers to categorise their funds as falling under one of three categories and to explain the category used in the marketing material for the fund.
- Article 6 covers funds which do not integrate any kind of sustainability into the investment process and could include stocks currently excluded by ESG funds such as tobacco companies or thermal coal producers. While these will be allowed to continue to be sold in the EU, provided they are clearly labelled as non-sustainable, they may face considerable marketing difficulties when matched against more sustainable funds.
- Article 8, also known as ‘environmental and socially promoting’, applies “… where a financial product promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.”
- Article 9, also known as ‘products targeting sustainable investments’, covers products targeting bespoke sustainable investments and applies “… where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.”
FFF is an impact investor, delivering environmental and financial returns in equal measure. We believe financial returns are strongly correlated with sustainable management of environmental, social and governance risks (ESG). Sustainability and impact are deeply rooted within the management of the Fund. It is embedded in its mission and investment process. The Fund therefore classifies as an article 9 fund within the meaning of Regulation (EU) 2019/2088, that is, a product targeting sustainable investments.
- Who are we: we are a specialist food & agri fund investing in Seed and Serie-A in NW Europe. We are a diverse and experienced team backed by entrepreneurial F&A
- What are we doing: We contribute to positive environmental impact through VC investments. We are venture capital investing in entrepreneurs building sustainable food systems. By adding capital, knowledge and network we help them to make a positive impact with their food & agriculture ventures.
- How are we doing it: By driving innovation and change to food systems. Current food and agricultural systems pose a big problem to a sustainable life on earth. By driving innovation and change to these systems, they transform from being the cause of overstretching the planetary boundaries to becoming the solution.
- Why are we doing it: If we want a sustainable future on earth we need to stay within the planetary boundaries which are holding the stability of the earth together. We are undermining the stability and ability of planet earth to support human development as we know it. The insight is deeply troubling but it also give us hope as it shows us how to fix things.
How does FFF integrate sustainability risks in its decision to invest or divest in specific underlying funds? (Article 3 SFDR)
Sustainability Risks are defined as environmental, social, or governance (ESG) events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of the investment. FFF assesses sustainability risks in the ‘ESG Analysis’, which is part of the due diligence of each investment and the outcome of which is integrated in the investment decision. This ESG analysis is part of a bigger decision making progress where we screen the entire proposition on whether they could positively impact the environment, based on our proprietary Theory of Change methodology.
FFF has two governing bodies that provide input and decision making in this process, the Investment Committee (IC) and the impact board (IB). The IC makes the decision to progress with a prospective investment into the due diligence phase and makes the final investment, follow-on investment, and divestment decision. The independent IB reviews and approves the setting of impact targets (pre-investment).
How does FFF consider principal adverse impacts of investment decisions on sustainability factors? (Article 4 SFDR)
As part of our impact investing strategy, we consider possible adverse sustainability impacts of our portfolio companies in due diligence and monitor these potential risks after the investment. These include the Principal Adverse Impact (PAI) indicators provided by the European Union as part of the SFDR. Because of our early stage (start-up/ young scale-up) investment strategy and the fact that we invest in companies with a sustainable objective we do not currently consider or expect material adverse impacts on these key performance indicators. Our typical investment companies are also likely to be inherently conscious about their potential adverse impacts and strive to mitigate these where possible. However, in the situation that a risk of material negative impact occurs this would be recorded and reported to our stakeholders.
How does FFF’s sustainability performance affect the compensation its management or other team members receive? (Article 5 SFDR) Remuneration (SFDR article 5) at FFF reflects the success of the company and is based along multiple KPI’s. To have an effective risk management system it takes into account the careful and diligent decision making and lacks any form of incentives for its employees in excessive risk taking for both business and sustainability. Renumeration is also aligned with the long-term interest of the entity and our success-based incentive program is based on both financial and impact results (i.e. achieving aforementioned impact targets).