EU Sustainable Finance Disclosure Regulation
As Magnetar Financial LLC (“MFL”) manages certain funds registered for marketing under the Alternative Investment Fund Managers Directive (2011/61/EU) (the “AIFMD”) in one or more member states of the European Economic Area (“EEA”), MFL is required by the Sustainable Finance Disclosure Regulation (Regulation 2019/2088) (the “SFDR”) to make certain disclosures on its website, including information about MFL’s policies on the integration of sustainability risks into its investment decision-making process; its approach to adverse sustainability impacts; and the consistency of its remuneration policies with the integration of sustainability risks. For these purposes, 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.
No consideration of adverse sustainability impacts
MFL does not currently consider adverse impacts of investment decisions on sustainability factors as funds managed by MFL do not have a specific ESG focus. MFL’s primary focus is therefore achieving risk-adjusted returns. MFL acknowledges that the pursuit of the objectives of its funds may, in some circumstances, have an adverse impact on sustainability factors but MFL does not take account of such impacts in its management of the funds. In the future, MFL may decide to take account of adverse sustainability impacts.
Policies on the integration of sustainability risks into the investment decision-making process
Sustainability risks can be relevant to a variety of sectors and can directly impact equity values, credit spreads, commodities, interest rates, foreign exchange, bond prices and all other associated market parameters. MFL recognizes in particular that the environmental, social and governance (“ESG”) practices of companies may, in certain circumstances, influence the risk and prospective return of investments in those companies.
MFL believes that incorporating the consideration of sustainability risks into its investment process is consistent with its mandate to deliver risk-adjusted returns to investors. Where it is practicable to do so, MFL will seek to consider sustainability-related risks as part of its investment analysis and processes. As with other aspects of the investment process, any consideration of any sustainability risks forms part of MFL’s efforts to create value for investors and manage or reduce exposure to investment risk.
Sustainability risks are only one of a host of elements that may be taken into account by MFL when making investment decisions. MFL will apply its best judgment, on a case by case basis, as to how to properly weight sustainability risks. MFL will not hold one type of sustainability risk paramount relative to others, or to other investment criteria generally, nor employ a rigid implementation rule-set. MFL’s investment professionals are expected to be sensitive to sustainability risks, to identify material potential sustainability risks, and to raise such risks in the appropriate forum for evaluation as part of the overall investment process, where deemed relevant.
MFL’s ESG policy mandates the adoption of additional ESG policies that are specific to each of the investment strategy ‘Pillars’ that MFL manages. MFL currently markets alternative investment funds in the EU that fall under its Alternative Credit & Fixed Income Pillar (“ACFI”) and its Systematic Investing Pillar (“SI”).
Policies applicable to the Alternative Credit & Fixed Income Pillar
When considering a prospective investment opportunity, MFL’s ACFI team will review sustainability risks in the evaluation and underwriting for the proposed investment where the position is long-term/illiquid or concentrated. The ACFI team does not generally consider sustainability risks for positions that are short-term, non-control and where exposure to an individual counterparty is de minimis, such as flow trading positions, highly diversified corporate investments, or co-investment opportunities sourced by other Magnetar teams.
Sustainability risks form part of the assessment of investment risk and will be considered in relation to underwriting, structuring and pricing, as appropriate.
Magnetar’s Healthcare strategy, which forms part of the ACFI Pillar, takes an active bottom up, fundamental approach to portfolio construction with a general focus on liquid names. Through its process-oriented approach to diligence, where relevant sustainability risks may be considered as part of the evaluation and underwriting of current and potential investments. In particular, ESG-related elements may be considered when identifying and evaluating potential risks related to the anticipated glide path, both near- and long-term, of a company.
Policies applicable to the Systematic Investing Pillar
Investments under the Systemic Investing (“SI”) Pillar are typically made pursuant to systematic trading models. These models seek to identify exogenous factors that can be traded systemically to generate attractive rates of return and require a stable trading regime.
Accordingly, the investing strategies under the SI Pillar do not undertake any idiosyncratic analysis of individual positions, outside of the rule sets that drive systematic investing. Sustainability risks may therefore only be of relevance where a given quantitative sustainability risk could be applied to the investing universe and shown to be of statistical significance in improving a model’s risk-adjusted rate of return.
MFL’s SI team therefore conducts periodic analyses of specific sustainability risks that are quantitatively available, to determine whether such risks appear to have explanatory power with respect to past returns of the strategies. If a sustainability risk proves stable, explanatory and material to strategy returns, the SI team may seek to incorporate the factor into its trading model.
New Business & Ethics Committee
In 2014, Magnetar Capital established the New Business & Ethics Committee (“NBE”) composed of senior leaders across Magnetar. The NBE has overall responsibility for Magnetar Capital’s ESG policy and its implementation, including revision of the policy from time to time as circumstances warrant.
The NBE is responsible for screening new investment strategies or types, as well as major new initiatives, with respect to, among others, regulatory, operational and reputational, as well as related economic risks that should be brought to the attention of the Executive Committee. The NBE will also assure that ESG factors are properly considered in its reviews, and that any identified issues are brought to the attention of the Executive Committee where warranted. However, the NBE will not generally review individual trades for potential ESG issues. Its review is limited to those individual trades that otherwise meet the criteria for review by the NBE, including but not limited to that the trade is a novel trade that represents activity in a new jurisdiction or is directly consumer facing. Investment activity not considered by the NBE will be evaluated by the relevant investment team at the Pillar level in accordance with the Pillar-specific ESG policies.
The NBE will conduct periodic reviews to verify that the investment Pillars have undertaken to incorporate sustainability risks in their investment processes and that the processes are functioning as designed in this respect.
Consistency of remuneration policies
MFL’s remuneration policies are consistent with its approach to the integration of sustainability risks into the investment decision making process. As sustainability risks are a type of financial risk, MFL acknowledges that failure to consider such risks could have an adverse impact on the performance of investments and the performance of funds managed by MFL.
Pursuant to MFL’s remuneration policies, MFL awards fixed and variable remuneration to staff. Variable remuneration is awarded on a discretionary basis by taking into account the performance of an individual employee and the size of the overall bonus pool, which is determined by reference to the performance of the staff members’ business unit or department, the funds managed by MFL, and the overall financial performance of MFL itself. Performance measures take into account both future earnings and future risks. To the extent that sustainability risks have an adverse impact on performance, this is likely to be reflected in the overall level of variable remuneration awarded to staff.