Sustainability Risk Management
Environmental, social or governance events or conditions, if they occur, could cause an actual or a potential material negative impact on the value of the investment. Sustainability risks relates to the potential financial impact on investments in relation to climate and other environmental, social and governance practices.
Silverhorn Group has adopted an Investment Sustainability Risk Management Policy, setting out the sustainability risk management framework, approach and techniques adopted to ensure the proper management of sustainability risks in the Group’s investment and risk management processes.
The Investment Sustainability Risk Management Policy is summarised below. Details are available to Clients and investors of Silverhorn Funds upon request.
1. Scope of the Investment Sustainability Risk Management Policy
(a) The policy is applicable to the following companies of Silverhorn Group:
- Silverhorn Investment Advisors Limited (“SIA HK”); and
- Silverhorn Investment Advisors (Singapore) Private Limited (“SIA SG”)
(each referred to as a “Company”; together referred to as “Silverhorn” or the “Group”).
(b) The scope of the policy covers the management of sustainability risks, including the risks associated with environmental, social and governance (ESG) issues, during the investment and risk management processes in the course of providing investment management services to:
- Funds managed by SIA HK on a discretionary basis; and
- Funds and/or client mandates managed by SIA SG on a discretionary basis
(each referred to as an “Applicable Mandate”).
2.1 Board of Directors
Each Company’s Board of Directors maintains overall oversight of the management of sustainability risks. The Board of Directors receives reports on material sustainability risk issues to which the Company is exposed.
2.2 Management Team
Each Company’s Board of Directors delegates the sustainability risk management oversight responsibility to the Management Team, to supervise and monitor the integration of sustainability considerations into the investment and risk management processes. Each Company’s Management Team is responsible for:
- ensuring the development and implementation of the sustainability risk management framework and policies, as well as tools and metrics to monitor exposures to the risks;
- reviewing regularly the effectiveness of the framework, policies, tools and metrics, and making appropriate revisions;
- allocating adequate resources with appropriate expertise to manage the sustainability risks of the assets managed, and ensuring that appropriate and timely actions are taken to address the risks; and
- updating the Board of Directors on material sustainability risk issues in a timely manner.
The Management Team reviews and approves the sustainability risk management framework and policies, and receives reports on material sustainability risk issues to which the Company is exposed.
2.3 Chief Investment Officer
The Group’s Chief Investment Officer (CIO) is designated to be overall responsible for the development, implementation and review of the Group’s sustainability risk framework and policies, including to appoint and directly supervise the Investment Risk Committee.
2.4 Investment Risk Committee
The Group’s Investment Risk Committee is responsible for overseeing the Group’s investment risk management activities in accordance with the framework and policies established and approved by the Management Team, including the management of sustainability risks.
The Investment Risk Committee is appointed by the CIO, and consists of at least the CIO and representatives of the legal, compliance and fund operations teams.
2.5 Investment Team
The Group’s investment team(s) are responsible for proposing the sustainability risk assessment framework for the Investment Risk Committee’s approval, and are involved in the investment management processes for day-to-day management of sustainability risks, including to:
- assess the sustainability risks to which an investment is exposed;
- make investment decisions taking into consideration the overall impact of the assessed sustainability risks on the portfolios; and
- monitor the portfolios’ exposure to sustainability risks on an ongoing basis and report to the Investment Risk Committee.
2.6 Compliance Team
The Group’s compliance team is responsible for ascertaining that the established policies and procedures on sustainability risk management adhere to the applicable rules and regulations.
2.7 Internal Audit Function
The Group’s internal audit function is responsible for considering, as part of its independent review, the robustness of its risk management framework in managing environmental risks.
3.1 Definition of Sustainability Risks
The Group has identified the material sustainability risks to which investments are or may be exposed, categorised as follows:
(a) Environmental risks
i. Climate-related risks: Physical risks
Physical risks stem from the direct impact of extreme weather events and progressive, longer-term shifts in the climate patterns.
Extreme climate-related weather events and progressive, longer-term shifts in climate patterns may have financial implications for companies either directly, such as from damage to assets and infrastructure, water and raw material availability, or indirectly from supply chain disruptions or impact on operations or productivity.
ii. Climate-related risks: Transition risks
Transition risks are risks associated with the ongoing viability of a business as the high-carbon economy transitions to a low-carbon economy.
Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change, such as reduced demand for commodities, goods and services with a high carbon footprint owing to changing consumer preferences or government policies.
Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organisations
iii. Pollution and waste risks
Pollution and waste risks are risks that companies’ business activity may pose to human health and the environment from pollution or waste, and the reputational risks associated with investing in such companies.
(b) Social risks
i. Human capital risks
Human capital risks relate to human capital issues (i.e. gender pay gap, workplace health and safety) that will lead to the companies’ high turnover, low engagement and productivity and financial loss.
ii. Product liability risks
Product liability risks relate to business’ product safety and quality, chemical safety, privacy and data security, consumer financial protection, which will lead to the damage of business reputation and financial loss.
iii. Stakeholder opposition risks
Stakeholder opposition risks relate to controversial sourcing and community relations, which will lead to damage of business reputation and financial loss.
iv. Social opportunities
Social opportunities relate to the impact of the business can make for the community to access to communications, finance, health care, and opportunities in nutrition and health. Negative impacts of social opportunities will lead to reputation damage and financial loss.
(c) Governance risks
i. Corporate governance risks
Corporate governance covers the issues on companies’ policies in data protection, privacy, crime, health and safety. Corporate governance risks refer to the risk of negative impacts in these areas which will lead to damage of business’ reputation and financial loss.
3.2 Risk Identification and Assessment of Investments
The Group’s sustainability risk assessment framework makes reference to the industry standards on sustainability and materiality maintained and sector classification to assess the ESG factors that are likely to be financially material to specific industries.
The sustainability and materiality standards identify sustainability issues that are likely to affect a firm’s operating performance or financial resilience within whatever industry it operates in – from consumer goods, healthcare, and infrastructure to financial services and transportation.
Based on the sector classification and sustainability and materiality standards, Silverhorn’s proprietary Sustainability Risk Heat Map aggregates industry classification and sustainability-related general business issues into a simplified matrix, covering sectors and the corresponding sustainability risks.
For each sector, a risk score is assigned on each sustainability risk category on a scale of 1 (low risk) to 4 (critical risk).
3.3 Portfolio Sustainability Risk Assessment
For each Applicable Mandate, the sustainability risk exposure is identified by assessing the relevance and materiality of sustainability risks based on the investment strategy and industry exposure.
i. Relevance Assessment
The relevance of sustainability risks to a mandate is assessed by the nature of investments and investment strategies.
Sustainability risks may be irrelevant to the investment and risk management processes for a mandate owing to the nature of the investments or investment strategy (such as quantitative strategies or forex strategies).
ii. Materiality Assessment
The materiality of sustainability risks to a mandate in each sustainability risk category is assessed by the portfolio risk exposure weighted by sector exposure, in accordance with the Sustainability Risk Heat Map.
The formula for calculating the portfolio risk exposure in each category is the sum of the risk scores of each investment as classified by sector, weighted by the assets under management (AuM) in each respective sector. The sector weights by AuM are calculated based on the industry classification of the underlying investments in equities and debts. For investments in collective investment schemes, the sector weights are based on the respective fund managers’ reporting, and investment team’s estimation where sector exposure information is not available.
Derivatives and cash are not in the scope of the materiality assessment.
iii. Risk Levels
For each Applicable Mandate, the portfolio risk exposure in each sustainability risk category is expressed on a scale of 0 to 4, corresponding to different risk levels as described below:
|Portfolio Risk Exposure||Relevance||Risk Level||Materiality|
|Portfolio risk exposure = 0||Irrelevant||—||—|
|1 ≤ Portfolio risk exposure < 2||Relevant||Low risk||Immaterial|
|2 ≤ Portfolio risk exposure < 3||Relevant||Medium risk||Immaterial|
|3 ≤ Portfolio risk exposure < 4||Relevant||High risk||Material|
|Portfolio risk exposure = 4||Relevant||Critical risk||Material|
Silverhorn defines the sustainability risk appetite of a mandate by taking into account (i) the portfolio risk exposure based on the target sector exposure; and (ii) any other specific risk appetite, such as client requests and any ESG impact and sustainability classification in accordance with the applicable regulatory requirements.
For each Applicable Mandate, the respective investment team assesses the Mandate’s sustainability risk appetite (i) at the start of investment management services; and (ii) if there is any change of strategy, target allocation, or risk appetite. The risk appetite is approved by the Investment Risk Committee, and disclosed to the relevant clients and/or investors.
For all Applicable Mandates, to which sustainability risks are assessed to be relevant, the Group has the risk appetite that the Mandates’ portfolio sustainability risk exposure be maintained within the level of immaterial sustainability risk.
As at last review of this policy, sustainability risks are assessed to be relevant and immaterial for all the appliable mandates under management.
5.1 Investment Opportunities Identification
The investment team applies a top-down sustainability risk assessment to all investment opportunities, including funds, private equities, and private debt investments.
The aim is to identify the opportunities which carry the highest risks of irresponsible behaviours, together with the highest demonstrable negative impacts.
This initial screening process helps the team to define if the investment opportunities are acceptable (and potentially fixable) or unacceptable from sustainability risk management perspective.
5.2 Investment Due Diligence
In making investment decisions for a portfolio, the investment team makes investment decisions taking into consideration the sustainability risk appetite and overall impact of the assessed sustainability risks on the portfolio. While conducting due diligence on a new investment opportunity, the Sustainability Risk Heat Map is utilised to help identify the sustainability risks based on the respective sector exposure.
The investment team assesses the sustainability risks to which the investment opportunity is exposed, and focuses on topic areas highlighted by the Sustainability Risk Heat Map, such as climate change impact, supply chain management and workplace health and safety.
The investment opportunity is considered approved from sustainability risk management perspective if the sustainability risks in all risk categories are assessed to be at a low or medium risk level in the initial screening process.
If the sustainability risk exposure in any risk category is assessed to be high or critical risk, the issues are highlighted in the investment memorandum and due diligence documentation, escalated to the Investment Risk Committee and the CIO, and discussed in the Investment Committee meeting as part of the investment risk assessment to be taken into consideration in approving the investment opportunity.
6.1 Periodic Monitoring
Sustainability risk exposure is overseen by the Investment Risk Committee.
The investment teams monitor each mandate and investment opportunity through
(i) periodic review of the mandate’s underlying portfolio; (ii) meetings with the investment manager of the collective investment schemes invested by the mandates, and, in certain cases, the management team of the portfolio companies; (iii) periodic portfolio reviews; and (iv) active participation on advisory boards and committees of the underlying investments when appropriate.
Any relevant and material sustainability risks identified will be escalated and discussed in the next Investment Committee meeting with the key participants including senior leaders of the investment teams and portfolio managers, and the Investment Risk Committee, to decide on the remedial actions.
6.2 Active Risk Management Measures for Material Risk Exposure
If an Applicable Mandate’s overall sustainability risk exposure is assessed to be material, active risk management measures described herein will be incorporated.
As at the last review date of this policy, none of the Applicable Mandates under management is assessed to be exposed to material sustainability risks.
(b) Scenario Analysis
If environmental risks are assessed to be relevant and material to an Applicable Mandate, the investment team will develop capabilities in scenario analysis to assess the impact of the risks on the portfolio, including the resilience of the investment strategy and portfolio to financial losses under a range of short and long-term environmental scenarios and outcomes.
(c) Stewardship and Engagement Policy
If environmental risks are assessed to be relevant and material to an Applicable Mandate, sound stewardship will be exercised to help shape the corporate behaviour of investee companies positively through engagement and proxy voting.
In such cases, the investment team will develop an engagement policy, determine the level of engagement having regard to the circumstances and limitations of each case, maintain proper documentation on the engagement efforts, and reports on the stewardship initiatives to investors and clients.
(d) Portfolio Carbon Footprint Disclosure
Portfolio carbon footprint is a representation of carbon emissions normalised by the portfolio’s market value and expressed in tons of carbon dioxide equivalent emissions per million dollars invested.
If environmental risks are assessed to be relevant and material to an Applicable Mandate, the investment team will calculate the portfolio carbon footprint of the Scope 1, Scope 2, and Scope 3 GHG emissions (where data is available or can be reasonably estimated) associated with the underlying investments.
Relevant information will be disclosed to the investors, including the portfolio carbon footprint, calculation methodology, underlying assumptions and limitations, and the proportion of investments assessed or covered.
In relation to a Fund, the calculations will be based on the positions as of each financial year end of the Fund, and the disclosure will be made to the Fund’s investors no later than the usual due date of the Fund’s audited accounts.
In relation to a client mandate managed on a discretionary basis, the calculations will be based on the positions as of each calendar year end, and the disclosure will be made in the year-end reporting to the Client.