Objectives

 

The objective of the Sub-Fund is to make sustainable investment within the meaning of article 9 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector by investing in a diversified portfolio of unlisted forestry management companies and forestry management operations of secondary and degraded forests (“SDF“) by financing such entities via SDF Investment Instruments.

 

The Sub-Fund aims at generating financial returns for the Shareholders of the Sub-Fund, aligned to different risk and return profiles of its investments in debt and equity. The Sub-Fund aims at protecting and restoring the biodiversity and ecosystems (namely through sustainable forest management, including practices and uses of forests and land use that contribute to enhancing biodiversity or to halting or preventing degradation of ecosystems, deforestation and habitat loss) and also seeks an environmental impact and in particular the mitigation of climate change through the sequestration and preservation of carbon in forest biomass. The Sub-Fund balances economic considerations with forestry management models adapted to the different ecological conditions of SDF to ensure the long-term sustainability of its interventions. The Sub-Fund aims at financing and developing entrepreneurial activities in the forestry sector and as such it will not acquire directly forests or land.

 

The actions of the Sub-Fund should contribute to climate change mitigation, adaptation to the consequences of climate change, the preservation of soil, the functioning of the hydrological cycle and the harbouring of biodiversity as well as strengthening local communities through increasing employment and self-employment opportunities.

 

The Sub-Fund is aligned with the objectives of the Paris Agreement and supports Nationally Determined Contributions in investee geographies, to which it contributes in the following regards:

 

  • providing new forest management concepts that will reduce Greenhouse Gas (“GHG“) emissions of the land use sector;
  • by providing proof-of-concept through its investments and increase national capacities for the implementation of these new concepts; and
  • by accounting for all GHG sequestration within its scope of activities.

 

The Fund addresses the Sustainable Development Goals with a particular focus on sustainable forest management (SDG 15), climate change mitigation (SDG 13), poverty alleviation (SDG 1), gender equality (SDG 5), decent work conditions (SDG 8) and promotion of wood as a local, low-carbon material (SDG 9).

 

Key Metrics

 

No index has been designated since the Sub-Fund’s investment model is not comparable to any existing index. To monitor the social and environmental performance of the Sub-Fund, reporting is provided on metrics pertaining to the three core areas of impact of the Sub-Fund (i.e. (i) natural capital, (ii) fair and inclusive value chains, (iii) socioeconomic opportunities and livelihoods) on a semi-annual basis.

 

Adverse impacts

 

The Sub-Fund’s investments may be subject to Sustainability Risks. Sustainability Risks are environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of the Sub-Fund’s investments.

 

Specific Sustainability Risk can vary for each product and asset class. Such risks are further described hereunder:

 

(i) Environmental Risk: The risk posed by the exposure to issuers that may potentially be (a) causing or affected by environmental degradation and/or depletion of natural resources or (b) negatively affected by the physical impacts of climate change. Environmental risks may result from air pollution, water pollution, waste generation, depletion of freshwater and marine resources, loss of biodiversity or damages to ecosystems, extreme weather events such as storms, floods, droughts, fires or heatwaves, changing rainfall patterns, rising sea levels and ocean acidification.

 

(ii) Social Risk: The risk posed by the exposure to issuers that may potentially be negatively affected by social factors such as poor labour standards, human rights violations, damage to public health, data privacy breaches, or increased  inequalities.

 

(iii) Governance Risk: The risk posed by the exposure to issuers that may potentially be negatively affected by weak governance structures. For companies, governance risk may result from malfunctioning boards, inadequate remuneration structures, abuses of minority shareholders or bondholders rights, deficient controls, aggressive tax planning and accounting practices, or lack of business ethics. For countries, governance risk may include governmental instability, bribery and corruption, privacy breaches and lack of judicial independence.

 

During the investment process of the Sub-Fund, key potential Sustainability Risks are categorised on the basis of the level of their potential adverse social and environmental impacts (i.e. significant, limited or minimal impact) and reasons, taking into account the possibly to implement mitigation measures, are presented to the Investment Committee for discussion.

 

Key risk factors related to the project are as follows:

 

  • The Fund is financing operations in settings with social conflicts around access to land and resources. Financing certain actors may deepen these social conflicts;
  • The Fund is pioneering forest management concept which are outside of the established practices and may not prove to be unsustainable management practices for certain SDF leading to further degradation;
  • Road access created by SDF forestry operations financed by the Fund lead to deforestation and invasion of illegal settlements;
  • Inadequate health and safety measures lead to accidents causing harm to employees and contractors of the Fund’s investees;
  • Minimum social standards such as payment of minimum wages and legal employment are not respected by investees who employ staff informally and pay below minimum wages. This is notably a concern with respect to gender, given that the forestry industry has typically been male dominated, and that actions taken by the Fund could inadvertently accentuate gender imbalances already prevalent among local communities;

 

To mitigate the most serious Sustainability Risks, no investments will be made if there is evidence of the following (which, for the avoidance of doubt, are considered to be key risk factors in the forestry sector):

 

(i) Important forest conversion or deforestation associated to the project proponent since 1994; the definition of what is considered important is provided by the principles and criteria elaborated by the Forestry Stewardship Council (ii) Unclear land tenure and high risk of conflict over land tenure, potentially involving resettlement;

 

(iii) Child labour or forced labour;

 

(iv) Important governance risks when investing in communities, including, for example, unresolvable internal conflict; and

 

(v) Any illegal activity or violation of national, regional or local rules, regulations or laws.

 

Considering the applicable policy regarding the integration of the sustainability risks and the investment process, it is not anticipated that Sustainability Risks will negatively impact the financial returns of the Sub-Fund. However, climate change and the increase of extreme weather event such as storms, heat and shift in precipitation may nevertheless affect the Sub-Fund and its’ financial returns.

 

Policies

 

FCCF’s core ESG policies are documented in the sub-fund’s Environmental and Social Principles. This details how ESG is integrated into the investment process and may be discussed further upon request. Nonetheless the following key principles of the investment process should be noted:

 

  • Through its support for sustainable secondary tropical forest management and associated timber processing activities, the Fund aligns with the objectives of the UN Conventions on Climate Change (“UNFCCC”) and the UN Convention on Biological Diversity (“UNCBD”) as well as the UN agenda for sustainable development, encapsulated in the Sustainable Development Goals (“SDGs”). The Fund also adheres to the Universal Declaration on Human Rights, and in that framework the labour standards of the International Labour Organization and the Declaration on the Rights of Indigenous Peoples.
  • The Fund verifies that its investments are consistent with the climate mitigation and adaptation objectives of the host country, and its commitments to the Paris Agreement as well as the three main goals of the CBD. The Fund addresses the Sustainable Development Goals where appropriate, with a particular focus on sustainable forest management (SDG 15), climate change mitigation (SDG 13), poverty alleviation (SDG 1), gender equality (SDG 5), decent work conditions (SDG 8) and promotion of wood as a local, low-carbon material (SDG 9).
  • The Fund requires that all its investments comply with national environmental and social laws, including legal obligations pertaining to the host country’s adherence to relevant international legal frameworks, notably those cited above. The Fund also contributes to the creation of enabling legal and regulatory environments conducive to the sustainable management of SDF.
  • The Fund does not finance investments that contravene good international practices to prevent money laundering and the financing of terrorist activities.
  • Within the framework of projects financed by the Fund, forest management must adhere to the Principles and Criteria of the FSC. Projects that involve the transformation and commercialization of timber should ensure traceability (or chain-of-custody), and have a due diligence or legal assurance system in place.
  • The Fund does not finance projects the activities of which are included in the International Finance Corporation’s (IFC) Exclusion List.
  • The Fund aligns with the strategy “Attribution des fonds pour le financement international de la lutte contre le changement climatique” published by the Luxembourg Ministère de l’Environnement, du Climat et du Développement Durable.

 

Engagement Policy

 

The Fund engages with stakeholders on a Fund and investee level. On Fund level, FCCF commits to ensure continuous exchange with the Governments of the target countries, research organisations (CATIE), NGOs (20×20 Initiative), and other multi-stakeholder organisations (FSC), and attend fora and platforms related to sustainable forest management. Through this exchange, the Fund seeks to promote knowledge exchange and the continuous validation of its activities by third parties.

 

On an Investee level, all investees must engage with project stakeholders transparently and in a culturally appropriate matter, according to FSC® Principles and Criteria. In the majority of cases, the Fund will take Board positions in its Investee companies. In such instances, the logic of planet, profit and people remain core to the Fund’s engagement position.

 

Business Codes

 

Besides the principles highlighted above, the Sub-Fund is aligned with the objectives of the Paris Agreement and supports Nationally Determined Contributions in investee geographies, to which it contributes in the following regards:

 

  1. providing new forest management concepts that will reduce GHG emissions of the land use sector;
  2. by providing proof-of-concept through its investments and increase national capacities for the implementation of these new concepts; and
  3. by accounting for all GHG sequestration within its scope of activities.

 

The umbrella Fund, Investing for Development SICAV, is a member of various groups and initiatives which support and uphold global best practice with regards to ESG. Further information can be found here.

 

Remuneration

 

The remuneration policy of the Fund is provided and details that social targets are taken into account in the variable compensation of key staff. The remuneration policy is available here.

 

These disclosures reflect current practices within the sub-fund. Should there be any evolution in these practices, this will be reflected and explained on the website.