Sustainability-related disclosure obligations for financial market participants and financial advisers

Regulation (EU) 2019/2088 (the Disclosure Regulation) requires financial market participants to disclose strategies and arrangements for dealing with sustainability risks at company level as well as at the level of the financial products offered. The respective addressees of the Disclosure Regulation within the LHI Group are LHI Kapitalverwaltungsgesellschaft GmbH (financial market participant, hereinafter referred to as “KVG”) and LHI Capital Management (financial adviser, hereinafter referred to as “CapMan”). They hereby comply with the requirements of the Disclosure Regulation.

Art. 3 EU Disclosure Regulation – Strategy for dealing with sustainability risks

Sustainability is a corporate concept for KVG and CapMan. Companies are successful in the long term when managed with a long-term view. The LHI Group considers the long-term consequences of every decision it makes. At KVG and CapMan, this also includes all investment decisions for their financial products. The two companies already deal with sustainability risks in the transaction and sales

process, and have developed binding exclusion criteria to this end. Both internally within their business processes and externally in the provision of services and products, they are guided by the minimum exclusions of the Association Concept that the industry associations of fund companies (BVI), banks (DK) and certification bodies (DDV) have jointly developed and agreed with the financial supervisory authority, the Federal Financial Supervisory Authority (Bafin).

Accordingly, contracts are excluded with companies that generate their turnover

• through weapons or armaments (more than 10%; outlawed weapons 0%)
• from tobacco production (more than 5%)
• from coal (more than 30%).

In addition, they conclude contracts with companies

• that generate revenue from casinos, betting shops or the erotic industry
• that have an ESG score from Creditreform lower than "D".

To ensure that sustainability risks are taken into account at all stages of the investment and management process, KVG and CapMan have established an ESG organisational structure and appropriate processes that cover all levels of the company. Responsibility for the business and risk strategy, also with regard to sustainability risks, lies with the respective management. Each concrete investment project is discussed in detail,

individually evaluated and decided upon in a management meeting. Consequently, the sustainability risk profile of KVG and CapMan is significantly influenced by executive management. Management is, in turn, supported by the Risk Management Department on the topic of sustainability risks. This ensures compliancewith the specifications associated with sustainability risks.

Sustainability risks are events or conditions from the three areas of environment,

social affairs or governance. Their occurrence can potentially or factually have a significant negative impact on the reputation, net assets, financial position and results of operations of KVG and CapMan, or the financial products managed through the respective advisory or administrative services. These include physical environmental risks, such as extreme weather events caused by climate change, or transition risks associated with the shift to a low-carbon economy.

Sustainability risks are not a risk type in their own right, but can have a significant impact on existing risk types and contribute, as a factor, to the materiality of these risk types. Accordingly, asset-specific risks, market, counterparty and liquidity risks, as well as operational and other risks, are always considered in the context of the regular risk assessment of investment products, taking into account the physical and transitory risk drivers. At the corporate level of KVG, only operational and other risks come into play. The monitoring of sustainability risks is an integral part of KVG’s risk management approach. In this context, the risk analysis is reviewed, evaluated and, if necessary, adjusted at regular intervals, especially with regard to sustainability risks.

Art. 4 EU Disclosure Regulation - Transparency of adverse sustainability impacts at the level of the company

The impact of one's own actions on sustainability factors plays a central role both in the start-up processes and in the portfolio management of the products as well as in disinvestment decisions. The KVG and CapMan take into account the main adverse effects of investment decisions on sustainability factors. This is done both for the design and management of financial products (KVG) and for investment services (CapMan), the latter as part of the appropriateness or suitability test for investment brokerage or investment advice. Sustainability factors are environmental, social and labour concerns, respect for human rights and the fight against corruption and bribery.

In order to avoid adverse effects on sustainability factors at the corporate level, the LHI Group of Companies, of which KVG and CapMan are members, has committed itself to the following principles of sustainability in its Code of Ethics:

1       Corporate responsibility

For us, sustainability is both a matter of course and a corporate concept for the benefit of all stakeholders of LHI and future generations. We operate in accordance with material and recognised industry, national and international standards on sustainability, and comply with regulatory disclosure requirements applicable to us.

The management team and all employees are actively involved in suitable organisational structures to ensure the central, transparent and company-wide management of all implementation and control efforts regarding our activities from a sustainability perspective. Voluntary community and social engagement are adequately supported at all times.

2       Ecological responsibility

We are committed to ensuring that the CO2 emissions generated by our business operations are in line with the EU’s holistic approach to de-carbonisation, and can, therefore, be considered “Paris Aligned”. Unavoidable CO2 emissions are more than just offset by the purchase of climate protection certificates.

To reduce our energy consumption and our carbon footprint, we are constantly improving the energy standard of our company’s premises; we use green electricity or generate it ourselves using photovoltaic systems, we promote electromobility with the installation of e-charging stations and with electrically powered company cars, as well as the use of environmentally friendly means of transport and mobile working solutions. Our outdoor facilities are maintained according to ecological standards and are home to several bee colonies.

Ecological standards also apply to the selection of contractors and business partners, as well as to the purchase of labour and food.

3       Social and societal responsibility

We observe the prohibition of discrimination and the observance of human rights. As an employer, we promote diversity and equal opportunities, provide performance-based remuneration, and ensure occupational health and safety at all times.

We are aware of our social responsibility. We behave in a manner that reflects the responsibilities of our company within society. We are socially committed, e.g. by means of donations, to charitable or social institutions or memberships that represent a form of sponsorship by nature.

In order to safeguard their sustainability standards and to maintain due diligence at all stages of the investment and management process, KVG and CapMan have established an ESG organisational structure and appropriate processes covering all levels of the company.  

Responsibility lies with the Executive Board, and has been anchored in the position of Chief Sustainability Officer (CSO). From KVG and CapMan, an officer with overarching responsibility for ESG has been appointed. The ESG Officer participates in all committees related to the issue of sustainability and bears a coordinating and multiplier function, especially with the operational units affected by ESG issues, in which a responsible member of staff participates in the ESG committees affecting the department, and is then responsible for the transfer of knowledge within the department.

The activities of the KVG and CapMan are in line with the 17 sustainability goals of the UN Global Compact. The KVG is a signatory of the United Nations-backed investor initiative "Principles for Responsible Investment" (UN PRI). This means that the sustainable investment approach is subject to the obligation to take these principles into account in the investment policy.

KVG and CapMan do not make any proprietary investments. The aforementioned ESG standards apply to the investment offer to third parties. A concrete investment project, which is to be discussed in detail, individually assessed and decided upon in a management meeting, is subject to a conformity comparison with the general catalogue of exclusion criteria and, if necessary, further (individually agreed) exclusions at the respective individual investment level in the first review step. In the further

review phase, and depending on the asset class, the respective ESG checklist – and subsequently a scoring system – are used to review and assess sustainability and adverse instances of sustainability impact in terms of the Disclosure Regulation and taxonomy compliance.

For real estate, the LHI ESG scoring system was developed for this purpose, which will be replaced by the scoring model of the “ESG Circle of Real Estate” (ECORE) in the future (higher standards for individual products are also possible). As part of the annual budget planning process, the LHI ESG score is validated and reviewed with regard to potential measures that could increase the LHI ESG score. These measures are taken into account and implemented during ongoing operations. This ensures the continuous and structured improvement of the LHI-ESG score per property.

The declaration on the main adverse effects of investment decisions on sustainability factors pursuant to Del.VO (EU) 2022/1288 ("RTS") on the EU Disclosure Regulation of the KVG is available on the website as a pdf for the first time for the reporting period 2022. The following mandatory and optional indicators for determining and weighting the most important adverse sustainability impacts ("PAI" = Principle Adverse Impact criteria) are relevant for KVG and CapMan:

"Declaration on the consideration of the main adverse impacts on sustainability factors in investment advice"

In accordance with Article 11 (3) of Commission Delegated Regulation (EU) 2022/1288 of 6 April 2022 (‘RTS on SFDR’), CapMan declares that it takes appropriate account of the above-mentioned main adverse impacts on sustainability factors when providing investment advice.

CapMan provides information on the extent to which sustainability factors play a role in the selection of investment products when providing investment advice. The most important adverse impacts on sustainability factors are explained. The information provided by CapMan (pre-contractual information on the financial products referred to in Article 8 (1), (2) and (2a) of Regulation (EU) 2019/2088 and Article 6(1) of Regulation (EU) 2020/852, publication pursuant to Art. 24 RTS, client information pursuant to Section 63 (7) WpHG) is based on a careful analysis and assessment of the negative impact that certain investment products can have on sustainability factors. The risks and potential negative impacts on the environment, social concerns and corporate governance are weighed up to promote well-founded and transparent decisions in the interests of customers.

Article 5 - Transparency of the remuneration policy in connection with the consideration of sustainability risks

Sustainability risks are currently not explicitly taken into account in the remuneration policy. However, the Code of Ethics and the principles of sustainability contained therein are part of the target agreements of all employees of the LHI Group.

Published Version:

7.0        10/2024          Addendum to Article 4: Statement on the consideration of the main adverse impacts on
                                        sustainability factors when providing investment advice
6.0        06/2024          Clarification of the information on Articles 3 (exclusion criteria) and Article 5.
5.0        11/2023           Addition to investment services in the information on Article 4.
4.0        07/2023          Addition and updating of the information on Articles 4 and 5. References to the
                                         publication “Statement on the main adverse impacts of investment decisions on
                                         sustainability factors.
3.0        12/2022          Correction and addition of information on Articles 3, 4 and 5
2.0        12/2022          Complete revision of the initial publication in all points
1.0        03/2021          Initial publication