The obligation for financial market participants to incorporate the consideration of sustainability risks by employees in their remuneration policy for the entire firm.

The obligation to have a set remuneration policy in place emanates from the Alternative Investment Fund Managers' Directive ('AIFMD'). Article 13 of the AIFMD sets the obligation for all AIFMs controlling Alternative Investment Funds ('AIFs') to have a sound remuneration policy in place.

‘Light’ AIFMs are exempted from the EU Alternative Investment Fund Managers Directive’s license obligation as laid down in Article 2:65 of the Act on the Financial Supervision (Wet op het financieel toezicht, the AFS).

The Commission also confirms that the entity and product-level requirements of the SFDR apply to sub-threshold AIFMs. Thus, fund managers who are registered managers with the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) on the basis of the 'light regime' of Section 2:66a of the Dutch Financial Supervision Act (Wet op het financieel toezicht) must also comply with all requirements of the SFDR.

Consequently, even as an AIFM-light, a remuneration policy is required as part of complying with the SFDR.

Remuneration generally consists of regular or constant remuneration and variable remuneration. Variable compensation is often segregated into i) performance-based pay (or other forms of bonuses) and ii) carried interest.

As an impact-focused fund manager, you can link your carried interest to KPIs monitor the (positive) sustainability impact of the investment.

As a regular fund which does not consider 'sustainability' as core pillar of its investment strategy, incorporating the consideration of sustainability risks into the second category of the variable remuneration is enough.

Altering the performance/risk-based remuneration to account for the consideration of sustainability risks is sufficient when your main focus is not on sustainability.

This can be easily done if your remuneration model is either:

Regardless of their policy structure, the Guide below will help Fund Managers to incorporate sustainability risk into their remuneration policy. This helps ensure that portfolio managers and other employees are rightfully incentivised to address and understand the importance of the issue.

A variety of tools can be incorporated into a remuneration policy to ensure the latter takes into account employees' consideration of sustainability risk.

Below, please find a list of the main approaches used by Fund Managers in achieving such consideration:

A great way to incentivise sustainability consideration of employees and management is to offer professional development opportunities focused on sustainability.

Such opportunities include workshops, training, mentoring programs or attendance to sustainability-related events, and allow employees to develop relevant skills relating to sustainability risk management, monitoring and reporting. Their successful completion can be rewarded through increased compensation or career advancement opportunities.

Additionally, you can incorporate sustainability in your hiring and promotion policies. This strategy ensures employees are incentivised to prioritise sustainability matters, as they are aware their focus on the latter will help them in their career progression.

Firms can integrate sustainability factors into individual performance goals for both employees and management. This can be in the form of setting sustainability targets (i.e., setting specific and measurable targets to be achieved to receive a portion of the remuneration) or by including sustainability metrics in KPIs (incentivises to achieve sustainability-related goals alongside other performance objectives).

An example of sustainability targets would be to make a share of employee remuneration dependant on employees' ability to identify and mitigate ESG risks in the investment process, or to link remuneration to successful and thorough engagement with portfolio companies on sustainability initiatives.

An example of including sustainability in KPIs would be to have a fund manager's KPIs be structured as follows: i) investment returns, ii) client satisfaction, iii) carbon footprint reduction; and iv) diversity and inclusion.

Another way of ensuring a coherent incentive is by creating a separate bonus pool for employees and management which has a sole focus on sustainability-related initiatives.

This bonus pool can be used to incentivise and reward employees who are making meaningful contributions to the firm's sustainable objectives.

The structure of such a bonus pool can be determined by you, and can largely mirror other bonus pools you may have in structure, with relevant sustainability-related KPIs.

A fourth way of ensuring coherent incentives is to use ESG ratings as a basis for determining (variable) compensation for employees and executives.

Such approach can help align compensation with sustainability performance of the portfolio companies. This ensures that the portfolio managers and other involved employees are incentivised to prioritise sustainability in their work with the portfolio companies.

This approach works particularly well with performance-based and risk-based frameworks for remuneration.

Fifth, you can link a portion of the carry to a specific set of ESG criteria.

Examples of the latter include reducing carbon emissions, improving supply chain sustainability for portfolio companies, increasing circularity of manufactured goods, reducing water and hazardous waste emissions, among other factors.

The allocation of this carry can be adjusted based on how well the portfolio companies meet or exceed these criteria.

Finally, the Firm can subject investment managers to clawback provisions in the eventuality their investments do not meet sustainability targets or if they engage in unethical practices that harm the environment or society.

This can ensure that investment managers are held accountable for their actions, and are further incentivised to increase their focus and effort regarding social and environmental-related concerns.

The last step is the remuneration disclosure stemming as a result of the incorporation of sustainability risks consideration is the disclosure!

414 will assist you in this last step once you have successfully amended your remuneration policy to reflect this SFDR requirement.