ESG/SFDR

ESG/SFDR

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ESG can be complicated. So AVG simplified it by creating a fully transparent ESG Report for Investors that breaks it down into easy pieces. ESG, we believe, can most aptly be compared to a credit score. Instead of Moodys, S&P and AM Best providing the underwriting methodologies, there are ESG methodologies under TCFD, World Economic Forum, SASB. Therefore, AVG simply takes the globally recognized formats, utilizes data from our underlying portfolio companies and scores them against these methods. In addition, we provide illustrations (yes, pictures) to help you visualize how the metrics work in the real world. For example, AVG uses pictures and comparisons of how much carbon has been taken out of the atmosphere by our portfolio companies. In the report it states (for every $1m of investment (x) amount of metric tonnes of carbon have been removed from the atmosphere. ESG should be simple if the whole world is going to comply with it. That is the mission of AVG, to make ESG investments, simple!

DISCLOSURES PURSUANT TO REGULATION
(EU) 2019/2088 

As part of its action plan on financing sustainable growth, the EU has introduced the regulation 2019/2088, i.e. the Sustainable Finance Disclosure Regulation (“SFDR”), which sets out sustainability disclosure requirements for a broad range of financial market participants, financial advisers and financial products. Such disclosure requirements relate to specific information on financial market participants’ approaches to integrating sustainability risks and considering adverse sustainability impacts as well as product specific characteristics. AVG is registered under the CSSF as an exempt fund manager but is subject to such disclosure obligations. The content disclosed herein has been carefully drafted to comply with the provisions of the SFDR and reflects the regulatory technical standards which the European Commission adopted on 6 of April 2022 as delegated regulation. Various legal questions relating to the SFDR have not been officially clarified by the European Supervisory Authorities or the CSSF and, therefore, remain controversial or vague. Any changes to the very limited official guidance available or any issuance of further guidance may require revisions of, and major changes to, the form, scope and substance of these disclosures. 

SUSTAINABILITY RISKS

AVG is required to publish on its website information on its policies on the integration of sustainability risks in its investment decision-making process (Art. 3 (1) SFDR). According to Art. 2 (22) SFDR, sustainability risks are environmental, social or governance events or conditions, the occurrence of which could have an actual or potential material adverse effect on the value of the investment (“Sustainability Risks”). AVG pursues an investment strategy targeting financial returns and positive climate impact. Considering Sustainability Risks forms an integral part of our pre-investment assessment of each investment. The pre-investment phase is structured into two stages, screening (consisting of positive and negative screening criteria) and due diligence. The ESG due diligence is conducted by our Director of Impact & ESG in close cooperation with experienced external ESG consultants as well as AVG’s investment team and involves an assessment of ESG risks (including Sustainability Risks) as well as the target company’s capacity to manage such risks. The ESG due diligence results in an ESG score which informs AVG’s investment team when preparing, and the investment committee when taking, an investment decision.

STATEMENT ON PRINCIPAL ADVERSE IMPACTS OF INVESTMENT DECISIONS ON SUSTAINABILITY FACTORS

AVG is required to publish on its website a statement on whether it considers principal adverse effects of its investment decisions on sustainability factors and, if so, to describe its due diligence policies with respect to principal adverse impacts of investment decisions on sustainability factors; such statement must take due account of AVG’s size, the nature and scale of its activities and the types of financial products AVG makes available (Art. 4 (1) lit. a) SFDR). According to Art. 2 (24) SFDR sustainability factors mean environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters (“Sustainability Factors”). Principal adverse impacts on Sustainability Factors are to be disclosed through a set of KPIs, the Principal Adverse Impact indicators (the “PAI Indicators”), covering climate and environment-related adverse impacts as well as adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters.

SUMMARY

AVG’s ESG due diligence process ensures alignment with the SFDR. For each closed investment there will be a prior ESG due diligence. Such ESG due diligence is conducted by AVG’s Investment Committee in close cooperation with external ESG consultants, particularly RIO ESG, located in the UK. AVG’s investment team and includes an assessment of ESG risks (including principal adverse impacts on Sustainability Factors) and opportunities of investment targets. The results of the ESG due diligence are then used to form an ESG score which informs AVG’s investment team when preparing, and AVG’s investment committee when taking, an investment decision. AVG considers principal adverse impacts of its investment decisions on Sustainability Factors before and after making investments on behalf of its (future) funds. As this is the first principal adverse impacts statement of AVG, it does not cover a reference period. AVG monitors the following principal adverse impact indicators for each portfolio company and aggregates them on portfolio level:

CLIMATE & OTHER ENVIRONMENT -RELATED INDICATOR

  • GHG emissions
  • Carbon footprint
  • GHG intensity of investee companies
  • Exposure to companies active in the fossil fuel sector
  • Share of non-renewable energy consumption and production
  • Energy consumption intensity per high impact climate sector
  • Activities negatively affecting biodiversity-sensitive areas
  • Emissions to water
  • Hazardous waste

SOCIAL & EMPLOYEE, RESPECT FOR HUMANRIGHT, ANTI-CORRUPTION & ANTI-BRIBERY MATTERS

  • Violations of UN Global Compact principles & Organisation for Economic Cooperation and Development (OEDC) Guidelines for Multinational Enterprises
  • Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OEDC Guidelines for Multinational Enterprises
  • Unadjusted gender pay gap
  • Board gender diversity
  • Exposure to controversial weapons ( anti-personnel mines, cluster munitions, chemical weapons and biological weapons)

ADDITIONAL PRINCIPAL ADVERSE IMPACT INDICATORS

  • Investments in companies without carbon emission reduction initiatives
  • Lack of anti-corruption and anti-bribery policies

Description of policies to identify and prioritize principal adverse sustainability impacts

AVG’s policies to identify and prioritize principal adverse sustainability impacts form part of AVG’s sustainability underwiring process. AVG uses RIO’s software to conduct reviews every 6 months on the underlying portfolio companies and scores them against global standards such as the World Economic Forum, TCFD and SASB. Responsibility for the implementation of the policies within organizational strategies and procedures rest with AVG’s senior management team. The two additional PAI Indicators have been chosen for their relevance considering the Fund’s investment strategy on the one hand and the Fund’s commitment to supporting portfolio companies in establishing sound governance frameworks on the other hand. AVG identifies and assesses PAI Indicators before and after making an investment on behalf of its (future) funds along the value chain of the company, including the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Based on the results of the assessment each potential investment receives an ESG score. Such ESG score factors in the probability of occurrence and severity of adverse impacts including potentially irremediable character. Furthermore, improvement potentials are identified and recommendations regarding respective measures to enhance the ESG score are provided. The identified improvement areas also serve as basis for establishing specific ESG targets in cooperation with the portfolio company. During the holding period the PAI Indicators will be monitored. The assessments described rely significantly on data provided by the portfolio companies. Although, during the due diligence, AVG, and its external ESG consultants, RIO, respectively, may complement such data by information obtained from other sources such as market research (sourced internally and/or externally) and expert interviews, errors cannot be completely excluded. However, given that each assessment will heavily depend in scope and depth on the individual circumstances of the respective transaction, there is no general margin of error that could be calculated or expected throughout the portfolio.

ENGAGEMENT POLICIES

At AVG, we typically seek a significant minority ownership of our portfolio companies. We support the management of the portfolio companies, e.g. by sharing the expertise of our own team as well as our consultants. Together with the portfolio companies’ management teams we work towards generating financial value and positive climate impact and this involves, based on our third party verified process with RIO ESG, avoiding, measuring and reducing principal adverse impacts on Sustainability Factors based on our ownership policies and practices. We expect reductions of principal adverse impacts over the reference periods in line with our set targets and will explore and resolve situations where such reductions appear to be at risk

REFERENCES TO INTERNATIONAL STANDARDS

AVG is committed to contribute to the objectives of the Paris Agreement. Therefore, AVG seeks to invest through its (future) funds in companies whose product/service offering includes competitive and scalable climate solutions and whose growth strategy is or can be aligned with the climate goals of the Paris Agreement. Our process includes measurements utilizing the World Economic Forum (WEF) and SASB (Sustainability Accounting Standards Board) principally. However, our process can include any other methodology that Limited Partners or Investors would like such as TCFD. We recognize that different markets require different disclosures, so our process adapts to those demands. In the context of our climate risks analyses, as part of our due diligence process, we are using two different scenarios (e.g. 1,5 degree and 3 degree) developed by the International Panel on Climate Change (e.g., RCP or SSP scenarios) on a regional/country level.

SUSTAINABILITY-RELATED DISCLOSURES (ART. 9 SFDR)

SUMMARY

The Nordic ESG and Impact Fund SCSp (the “Fund”) is an impact growth equity fund managed by AVG. Thus, the actions and decisions described in the following section are each made by AVG for and on behalf of the Fund. The Fund pursues an impact private equity strategy and qualifies under Art. 9 SFDR as it has sustainable investments within the meaning of Art. 2 (17) SFDR as its objective. Sustainable investments are investments 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 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 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 (“Sustainable Investments”).  

 

The Fund’s sustainable investment objective is to accelerate the “decarbonization” of the economy through private equity investments. Accordingly, the Fund invests in private companies with a focus on climate solutions. Portfolio companies within the following industry verticals: energy, industry, transportation, buildings and food & agriculture must have a measurable positive climate impact. During the pre-investment phase, the Fund conducts an ESG due diligence and a climate impact assessment for each investment it makes. Such assessments are conducted by AVG’s Director of Impact & ESG in close cooperation with external ESG consultants as well as AVG’s investment team. During the holding phase, AVG monitors and tracks ESG risks as well as climate impact based on its bespoke AVG Impact Methodology. AVG is committed to actively support the Fund’s portfolio companies to achieve the agreed impact targets which are the key indicators for the Fund in attaining its sustainable investment objective.

NO SIGNIFICANT HARM TO THE SUSTAINABLE
INVESTMENT OBJECTIVE

According to the SFDR’s definition of Sustainable Investment, such investment must not, inter alia, significantly harm any environmental or social objective. In order to meet the do-no-significant-harm requirement in the context of the SFDR a financial market participant must consider the principal adverse impacts of its investment decisions on Sustainability Factors and whether its investments are aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. AVG’s entity level approach to considering principal adverse sustainability impacts is described in detail above (see Description of policies to identify and prioritise principal adverse sustainability impacts) and is being applied to the investment processes of the Fund accordingly. AVG engages experienced ESG consultants to assess principal adverse sustainability impacts before and after making an investment along the value chain of the respective portfolio company, including the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. From the results of the ESG due diligence an ESG score is derived which informs AVG’s investment team when preparing, and AVG’s investment committee when taking, an investment decision.  During the holding phase, AVG will monitor and engage with portfolio companies in order to resolve issues relating to do-no-significant-harm.

SUSTAINABLE INVESTMENT OBJECTIVE OF THE
FINANCIAL PRODUCT

Our sustainable investment objective is to accelerate the “decarbonisation” of the economy to support the goals of the Paris Agreement through private equity investments. Therefore, we only invest in companies whose business model we expect (and support) to generate a direct or indirect positive climate impact by providing solutions for reducing, avoiding or removing greenhouse gas emissions.

INVESTMENT STRATEGY

The Fund’s investment strategy is set forth in various provisions of the Fund’s limited partnership agreement. Accordingly, the Fund invests in private companies with a focus on climate solutions. Portfolio companies within the following industry verticals: energy, industry, transportation, buildings and food & agriculture must have a measurable positive climate impact. Due to the Fund’s operational investment strategy, it is our aim to support these portfolio companies in achieving scale-up of climate solutions and maximize climate impact over the holding period. We only invest in companies which are aligned with our investment strategy and our commitment to sustainability and positive climate impact. Therefore, in accordance with and subject to our AVG Impact Methodology we explicitly exclude investments in companies whose business activities largely consist of:     
  • Forced labor and/or child labor according to ILO Core Labor Standards;
  • Violation of human rights as defined by the UN Universal Declaration of Human Rights;
  • Cultivation, processing and sales of tobacco;
  • Gambling (e.g., operating casinos, producing equipment for casinos or betting offices, online betting providers);
  • Production of or trade in adult entertainment products;
  • Production of or trade in military weapons and/or ammunition;
  • Coal mining and trading as well as coal-fueled power plants;   Oil prospecting, exploration and extraction from oil shale, tar or oil sands;    Production of nuclear energy;   Non-sustainable, commercial logging of forests;   Destruction or significant degradation of protected or conservation areas;
  • Oil prospecting, exploration and extraction from oil shale, tar or oil sands;
  • Production of nuclear energy;
  • Non-sustainable, commercial logging of forests;
  • Destruction or significant degradation of protected or conservation areas;
provided that such investments shall not be prohibited if and to the extent they qualify as environmentally sustainable pursuant to the EU Taxonomy. In both phases, pre-investment as well as post-investment, we assess good governance practices of our portfolio companies. Typically seeking majority ownership of portfolio companies, AVG is in a strong position, and intends, to assess and support sound governance practices, management structures, employee relations, remuneration of staff and tax compliance at its portfolio companies. Management participations will be used as an instrument to incentivize management teams.  

PROPORTION OF INVESTMENTS

In line with its investment strategy and binding legal constituting documents, AVG intends to only invest through its (future) funds in companies to attain its sustainable investment objective, to scale their positive climate impact while controlling for do-no-significant-harm and that good governance practices are followed through its ESG due diligence and monitoring process.

MONITORING OF SUSTAINABLE INVESTMENT OBJECTIVE

During the post-investment phase progress towards achieving climate impact targets and the implementation of recommended measures for ESG management improvement are monitored and continuously managed. Progress is tracked and quantified throughout the lifecycle of the Fund using KPIs.

METHODOLOGIES

AVG’s bespoke AVG Impact Methodology is based on the five dimensions of impact defined by the Impact Management Project (IMP) and uses IRIS+ metrics provided by the Global Impact Investing Network (GIIN). The KPIs used for quantifying and tracking progress include the PAI Indicators (as described in detail above (please refer to Description of policies to identify and prioritise principal adverse sustainability impacts) and selected IRIS+ metrics provided by the Global Impact Investing Network (GIIN). AVG is committed to set itself decarbonization goals for financial institutions consistent with the Science Based Targets Initiative (SBTI). Whenever feasible, AVG will work with its portfolio companies to commit to science-based net-zero targets based on the sectoral decarbonization approach (SDA). The impact of climate solutions can be expressed as their contribution to “avoided” greenhouse gas emissions across the value chain. Accordingly, climate impact estimates shall be based on product- or technology-specific life cycle analyses (LCAs) and in line with guidance provided by the Greenhouse Gas Protocol.

DATA SOURCES AND PROCESSING

A main source of data processed is information provided by the portfolio company. During the pre-investment phase, AVG’s access to such information is restricted to what the portfolio company provides for due diligence purposes. Market data, originated by research (either sourced internally or externally) based on freely available information or proprietary sources of information such as, for example, expert interviews, may supplement and be used to verify the information provided by the portfolio company. If needed, the data may also be supplemented by estimates based on plausible fact-based assumptions. The need for estimates highly depends on the quality and availability of data provided by the individual portfolio company. Therefore, the proportion of estimated data cannot be provided in advance. Nonetheless, the aim is to reduce the use of estimates to a minimum. The data will be processed by AVG’s investment team and AVG’s Director of Impact & ESG and no acquisition will be closed unless assessed by external consultants providing for an additional layer of scrutiny regarding the data. During the post-investment phase, AVG’s access to company data is typically very good given the Fund’s strong ownership in the portfolio companies. 

LIMITATIONS TO METHODOLOGIES AND DATA

AVG’s methodologies and data depend on the quality of data provided by the portfolio companies and by third parties. Although we typically apply thorough assessments with various data sources involved (please refer to Data Sources and processing), there can be no guarantee that data provided by the portfolio companies, or third parties is complete and accurate. With our combination of internal and external assessments, we aim, and expect, to detect incomplete or false data early on and prevent it from affecting our impact target setting. Should we discover incomplete or false data within our models and calculations, our Director of Impact & ESG will review, analyze and suggest a solution for such issue to AVG’s senior management team. 

LIMITATIONS TO METHODOLOGIES AND DATA

AVG’s methodologies and data depend on the quality of data provided by the portfolio companies and by third parties. Although we typically apply thorough assessments with various data sources involved (please refer to Data Sources and processing), there can be no guarantee that data provided by the portfolio companies, or third parties is complete and accurate. With our combination of internal and external assessments, we aim, and expect, to detect incomplete or false data early on and prevent it from affecting our impact target setting. Should we discover incomplete or false data within our models and calculations, our Director of Impact & ESG will review, analyze and suggest a solution for such issue to AVG’s senior management team. 

DUE DILIGENCE

Prior to each investment, AVG conducts a pre-screening and a due diligence covering ESG and climate impact requirements. The ESG due diligence is conducted by our Director of Impact & ESG in close cooperation with experienced external ESG consultants and AVG’s investment team. The ESG due diligence involves an assessment of ESG risks (including principal adverse impacts on Sustainability Factors) and opportunities of investment targets. From the results of the ESG due diligence an ESG score is derived which informs AVG’s investment team when preparing and AVG’s investment committee when taking an investment decision. 

ENGAGEMENT POLICIES

The Fund will typically seek majority ownership of portfolio companies. We provide practical management support by sharing the expertise of our own team as well as our consultants. Together with the portfolio companies’ managements we work towards generating financial value and positive climate impact and this involves, based on our bespoke AVG Impact Methodology, avoiding, measuring and reducing principal adverse impacts on Sustainability Factors constructively using the Fund’s ownership role. The Fund aligns its own interests with those of the portfolio company’s management, inter alia, through management participations. Together with the portfolio companies’ managements, we set company specific impact targets. We support the management of the portfolio companies not only in their operational value-creation, but also regarding sustainability related issues which our Director of Impact & ESG can help resolve. We seek and expect full alignment of interest and motivation regarding the agreed impact targets. In case of protracted controversies around impact targets or more broadly sustainability issues the Fund is willing and committed to exercise its rights as a majority shareholder to resolve such issues in the interest of the portfolio company and the Fund.

ATTAINMENT OF THE SUSTAINABLE
INVESTMENT OBJECTIVE 

The Fund’s sustainable investment objective is to accelerate the “decarbonization” of the economy to support the goals of the Paris Agreement through private equity investments. Therefore, the Fund invest in companies whose business model, or parts thereof, generates a direct or indirect positive climate impact by providing solutions for reducing, avoiding or removing greenhouse gas emissions. For each investment we set impact targets to mark the decarbonization contribution we seek with the respective portfolio company, and we track our progress in achieving those impact targets throughout the holding phase. For the kind of investments the Fund seeks to make, i.e. private equity climate impact investments, no appropriate benchmark (e.g. EU Climate Transition Benchmark or EU Paris-aligned Benchmark) is available and the methodological requirements set out in Delegated Regulation (EU) 2020/1818 are not being complied with.

ART. 5 DISCLOSURE

As an exempt alternative investment fund manager within the meaning of section 2 (4) of the KAGB, AVG does not have, and does not need to have, a remuneration guideline or policy in accordance with the requirements of the KAGB. Sustainability Risks are not considered with respect to the remuneration of AVG’s team members.

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