Sustainability Disclosures

DBTCA - Deutsche Bank Trust Company Americas (applicable solely to Germany-domiciled Discretionary Portfolio Management Clients)

 

Introduction

 

The Sustainable Finance Disclosure Regulation (SFDR)^[1] came into effect on March 10, 2021. SFDR imposes transparency obligations (website disclosures, pre-contractual disclosures) and periodic reporting requirements on investment management firms at both a product and entity/manager level. This disclosure document relates to the “Website Disclosure” regulatory obligations arising out of SFDR Articles 3-10.

 

Definitions

 

For the purposes of this disclosure document, the following definitions apply:

 

(1) ‘Financial Market Participant’ means:

     (a)    an insurance undertaking which makes available an insurance‐based investment product (IBIP);

     (b)    an investment firm which provides portfolio management;

(c)    an institution for occupational retirement provision (IORP);

(d)   a manufacturer of a pension product;

(e)   an alternative investment fund manager (AIFM);

(f)    a pan‐European personal pension product (PEPP) provider;

(g)   a manager of a qualifying venture capital fund registered in accordance with Article 14 of Regulation (EU) No 345/2013;

(h)   a manager of a qualifying social entrepreneurship fund registered in accordance with Article 15 of Regulation (EU) No 346/2013;

(i)     a management company of an undertaking for collective investment in transferable securities (UCITS management company); or

(j)     a credit institution which provides portfolio management.

 

(2) ‘Financial Adviser’ means:

(a)   an insurance intermediary which provides insurance advice with regard to IBIPs;

(b)   an insurance undertaking which provides insurance advice with regard to IBIPs;

(c)   a credit institution which provides investment advice;

(d)   an investment firm which provides investment advice;

(e)   an AIFM which provides investment advice in accordance with point (b)(i) of Article 6(4) of Directive 2011/61/EU; or

(f)    a UCITS management company which provides investment advice in accordance with point (b)(i) of Article 6(3) of Directive 2009/65/EC;

 

(3) ‘Financial Product’ means:

(a)   a portfolio managed in accordance with point (6) of this Article;

(b)   an alternative investment fund (AIF);

(c)   an IBIP;

(d)   a pension product;

(e)   a pension scheme;

(f)    a UCITS; or

(g)   a PEPP.

 

(4) ‘Sustainable Investment’ means an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labor relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.

 

(5) ‘Sustainability Risk’ means an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.

 

Sustainability Risk Policy

 

Article 3: Transparency of sustainability risk policies for financial market participants for Deutsche Bank Trust Company Americas (applicable solely to Germany-domiciled Discretionary Portfolio Management clients), March 2021.

 

Introduction / Summary

 

On March 10, 2021, the Regulation (EU) 2019/2088 of November 27, 2019, on sustainability-related disclosures in the financial sector (Disclosure Regulation) entered into force. The Disclosure Regulation aims to support sustainable investments by requiring Financial Market Participants (FMPs) and Financial Advisers (FAs) to disclose information regarding sustainability risks to investors and clients.

 

Article 3 of this regulation requires information to be shared with regards to the integration of sustainability risks within the investment decision-making process. The approach taken by Deutsche Bank Trust Company Americas (DBTCA) is further detailed below.

 

DBTCA applies an overarching approach to the management of sustainability that is set out in a number of group level policies and procedures. The group-wide Sustainability Policy delineates our main sustainability principles as well as the key requirements and responsibilities in connection with sustainability-related enquiries, non-financial sustainability reporting and ratings, environmental and social due diligence in the context of reputational risk management, and, together with relevant risk frameworks and broader commitments, provides relevant context regarding DBTCA's view on sustainability topics.

 

While DBTCA does not currently apply an overarching formal policy regarding the integration of sustainability risks in the investment decision-making process, DBTCA still takes sustainability risks into account, as further described in the following sections. In addition, business areas are working towards inclusion of the integration of sustainability risks within relevant policies and guidelines. These will be further enhanced on an ongoing basis as more sustainability related data becomes available over time.

 

Definition of sustainability risks

 

Regulation (EU) 2019/2088 of the European Parliament (the “Regulation”) defines a “sustainability risk” as “an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment”. Sustainability risks may occur both separately and cumulatively, may affect individual companies as well as entire sectors or regions and may have very different characteristics.

 

The following are examples of sustainability risks:

• As a result of the occurrence of extreme weather events as a consequence of climate change (known as physical risks), production locations of individual companies or entire regions can be impaired or destroyed, leading to production stoppages, rising costs to restore the production locations, and higher insurance costs. Furthermore, extreme weather events as a consequence of climate change, such as long periods of water shortages during drought, can impair or make impossible the transport of goods.

• There are also risks in connection with the changeover to a low-carbon economy (known as transition risks): for example, political measures can lead to fossil fuels becoming more expensive and/or scarcer (examples: fossil-fuel phase-out, CO2 tax) or to high investment costs as a result of requirements to renovate buildings and plants. New technologies can displace familiar technologies (e.g. electric mobility), and changes in customer preferences and expectations in society can endanger companies’ business models if they do not react in time and take counter measures (e.g., by adjusting their business models).

• A substantial increase in physical risks would require a more abrupt changeover in the economy, which in turn would lead to higher transition risks.

• Social risks arise from aspects such as non-compliance with labor law standards (for example, child labor and forced labor) and compliance with changing occupational health and safety regulations.

• Examples of risks that arise within the scope of corporate management due to inadequate corporate governance are failures to act in accordance with applicable laws that can lead to criminal penalties and/or high fines, such as tax evasion and anti-corruption laws.

 

Sustainability risks affect the following traditional risks of investments in securities in particular, and if they occur can have a significantly negative effect on investment performance:

• Sector risk
• Price change risk
• Issuer/Credit risk
• Dividend risk
• Liquidity risk
• Currency risk

 

Method of incorporating sustainability risks for Financial Markets Participants

 

DBTCA takes sustainability risks into account within the scope of discretionary portfolio management in the following manner:

 

In order to evaluate sustainability risks, DBTCA uses information provided by external service providers that specialize in the qualitative evaluation of environmental, social and governance (ESG) factors. These factors are considered during the construction of investment strategies and security lists available for selection by DBTCA portfolio managers.

 

Because sustainability risks can have different effects on individual companies, sectors, investment regions, currencies and investment classes (for example, equities or bonds), when managing investment portfolios DBTCA reduces the effects of the occurrence of sustainability risks at the portfolio level by diversifying the portfolio’s investments and asset allocations.

 

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