As an EU-based alternative investment fund manager (“AIFM“), TCX Investment Management B.V. (“TIM“) is subject to Regulation (EU) 2019/2088 of the European Parliament and the Council on sustainability-related disclosures in the financial sector (“SFDR“) in respect of its management of The Currency Exchange Fund N.V. (“TCX“). Among other aspect, the SFDR is aimed at the integration of sustainability risk in investment decision-making and the prevention of ‘greenwashing’ in the field of sustainable investments.[1] The SFDR entered into force on 10 March 2021. Further implementing measures are expected to enter into force in 2022.

TIM/TCX’s purpose and objective
In respect of the SFDR, it is important to realize first, that TIM’s sole purpose as an AIFM is to manage TCX, an alternative investment fund (“AIF“). Consequently, TIM’s compliance with the SFDR can fully be tailored to TCX’s objectives and operations.

Secondly, TCX’s main objective is to enter into derivative transactions with counterparties that aim to hedge away the FX risks that arise on the debt and equity investments they make in emerging and frontier markets. To the extent that some of these investments are sustainable investments as defined in the SFDR, TCX has exposure to sustainable investments. However, this involvement is indirect only, with TIM having no control over, and limited insights into, the investment decisions of TCX’s counterparties and the sustainability impact of these decisions, if any (e.g., their impact on CO2 emissions).

At the same time, considering TCX’s objective of ‘contributing to the financial viability and stability of an economic activity by de-risking the activity through FX derivatives’, it seems clear enough that TCX is engaged in some form of ‘sustainable finance’ with the objective of having a positive ‘development impact’. Also, though the financial returns on TCX’s portfolio are a function of prevailing interest and FX rates and not of environmental and social factors, the Fund’s ability to raise and retain capital could be affected in the future if its reputation is damaged by engaging directly or indirectly in activities that are not (perceived to be) ‘sustainable’ in the broadest sense (environmentally, socially, financially, or otherwise).

Integration of sustainability risks in TIM/TCX
In compliance with articles 3-7 of the SFDR, we disclose here that the following aspects of sustainability risk management have been implemented by the team, all predating the SFDR:

  • With respect to SFDR article 3 on “the transparency of sustainability risk policies”[2]:
    • TIM maintains an ESGT Policy covering TCX’s investment decision-making process. This policy specifies the ESGT standards that all TCX investors and counterparties should have in place to manage the ESGT risks in their investment portfolios (e.g., the IFC Performance Standards for high-risk portfolios). There is also the requirement to comply with an Exclusion List. This list is based on the IFC Exclusion List and is enshrined in Schedule 7 of the TCX Investors Agreement.
    • TIM does not have its own “policy on the integration of sustainability risk in its investment decision-making process” because it does not invest for its own account and has no plans do to so in the future[3].
  • With respect to SFDR articles 4 and 7 on “the transparency of adverse sustainability impacts”:
    • TIM provides TCX’s investors with online access to a bespoke Development Impact Dashboard that is updated monthly. This dashboard provides an overview of TCX’s hedging portfolio and capital market development activities, including (i) the ESGT risk classification of the economic activities that underlie the portfolio,[4] (ii) the breakdown of these activities by economic sector, including the “SE4ALL” segment,[5] and (iii) the classification of the exposure between high, middle, low, and least developed countries.[6] Quarterly, a report is sent to the investors that provides a deeper analysis of the data.
    • Annually, TIM extends the quarterly report with estimates of the impact of the underlying transactions the fund hedges on (i) job creation, (ii) value added in the form of incremental salaries, profits and taxes, and (iii) energy impact in terms of gigawatts generated and CO2 emissions avoided. These statistics are produced using a Joint Impact Model developed by Steward Redqueen [7] in close collaboration with several development finance institutions, including several TCX investors (more information may be found in TCX’s 2020 Impact Report). Important to note in the context of the SFDR is that these measures do not enter into TCX’s investment decision-making process as ex-ante inputs, but are ex-post estimates provided for information purposes only.
  • With respect to SFDR article 5 on “the transparency of remuneration policies in relation to the integration of sustainability risks”:
    • A significant portion (presently: 40%) of the variable performance fee TCX pays to TIM each year is a function of TIM’s ability to achieve volume and other ‘development impact’ targets set by the TCX Supervisory Board and General Meeting each year. TIM’s performance against these targets is a key driver of its ‘development impact’ reporting (as explained above) and is communicated to the investors monthly.
    • TIM’s Human Resource Manual includes a Code of Conduct that requires its employees to comply with prevailing laws and regulations and the policies and procedures that apply to TIM and TCX. This includes the Operational Guidelines, which detail the due diligence requirements for TCX’s investors and counterparties with reference to TCX’s KYC/AMLTF, ESGT, and credit risk policies. Additionally, there is a Reputational Risk Policy; a Diversity, Equal Opportunity, and Anti-Discrimination Policy; a Fraud Risk Management Policy; and an Anti-Bribery and Corruption Policy. In case of non-compliance with this Code of Conduct and the associated policies and procedures, TIM’s HR Manual makes it explicit that the employee’s remuneration and/or continued employment may be affected negatively, and there may be legal repercussions.

The above describes the manner and extent to which sustainability risks are integrated into the business processes of TIM/TCX. This integration relates to our mandate and desire to achieve as high a positive ‘development impact’ as possible, be this environmentally, socially, financially, or otherwise.

Classification of TIM/TCX under the SFDR
TCX’s stated objective is to make the individuals, companies, and countries it indirectly touches through its hedges more resilient to financial market fluctuations, by absorbing the FX risks that they would otherwise bear themselves. The objectives of these derivative investments (making the investees of its counterparties more viable and stable financially by reducing their FX risks) are not the same as the specific environmental and social objectives targeted by the SFDR in its definition of “sustainable investments”. It is also important to realize that the returns on TCX’s portfolio are not a function of environmental and social factors. The returns on the portfolio are a function of the evolution of global interest and FX rates.

TCX does not promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, in the narrow sense of the SFDR. Moreover, TCX does not have as its objective making sustainable investments as defined in the SFDR. Accordingly, we hereby confirm that:

  • TIM and TCX “do not consider the adverse impact of investment decisions on the sustainability factors” beyond making sure that TCX’s investors and counterparties qualify for consideration as parties TCX may deal with, based on the ESGT standards specified in TCX’s ESGT Policy.
  • As noted earlier, TIM has no control over, and limited insights into, the “sustainability factors[8] that enter the investment decisions of TCX’s counterparties and the potential adverse impact of these decisions on these sustainability factors, if any. In particular, the absence of a direct commercial and legal relationship between TCX and its counterparties’ investees means that TIM is not presently in the position to obtain relevant data in sufficient quantity to perform due-diligence and reporting on the “principal adverse impact indicators” specified by the SFDR. In the same vein, we note that it is not presently possible for us to establish the degree to which the credit risks TCX faces are a function of its counterparties’ ESGT decisions, or the market risks it faces are a function of the ESGT decisions of individual governments (e.g., the volatility of the Brasilian Real in response to shifts in foreign investor perceptions of the Brasilian government’s deforestation policies in the Amazon region).

Based on the above, we consider that the disclosure requirements specified in articles 8-11 of the SFDR do not apply to TIM in its management of TCX or otherwise. Put differently, TCX is what is commonly referred to as an ‘article 6’ or ‘grey’ financial product for the purposes of the SFDR, and not a ‘light-green’ or ‘deep-green’ product (articles 8 and 9, respectively).

[1] The SFDR defines a ‘sustainable investment’ as (a) 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 (b) 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 (c) 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.
[2] “Sustainability risk”, as defined, is the risk that the occurrence of an environmental, social, or governance event has a potential material negative impact on the value of an investment.
[3] TIM’s only material asset is a cash bank account. Operationally, TIM is a certified carbon neutral company that offsets its carbon footprint (80% of which relates to business travel) through the purchase of carbon credits (in 2020, this concerned a renewable forestry project in the DRC). The certifying entity was
[4] The risk classification may be Low, Medium or High, as defined in the ESGT Policy. This data (and the data on economic sectors) is obtained through simple ‘disclosure forms’ that are completed for each trade TCX closes.
[5] The SE4ALL (Sustainable Energy For All) initiative supported by the United Nations and several TCX investors seeks to drive faster action towards the achievement of Sustainable Development Goal 7 (SDG7) – access to affordable, reliable, sustainable and modern energy for all by 2030 – in line with the Paris Agreement on climate. TCX supports such initiatives by absorbing the FX risks that many companies and projects engaged in the SE4ALL segment are exposed to.
[6] Based on the OECD’s classification of the DAC countries.
[8] This means the environmental, social, and governance indicators on which an investment decision is based.