Disclosures required under the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation
Section 1 – Integration of sustainability risks in ETF’s investment decision making process
ESG investing takes into account environmental, social and governance factors. It looks at the existing footprint of established companies and focusses on their compliance with standards, both existing and aspirational. To be sure, ETF Partners aims at best-practice ESG compliance across its portfolio companies. However, such ESG screening and integration tends to miss the point when dealing with innovative, fast growing companies. That’s because they are usually small organisations with a small ‘footprint’ of their own, but with the potential to make a hugely positive impact through the products they are developing. Impact investing goes a few steps further. Here investors focus on intent, purpose, and real outcomes in the future. Our particular focus at ETF Partners is on positive environmental impact and on supporting companies that have the potential to achieve very significant outcomes.
We think the correct approach for measuring our form of impact investment is to look at the potential in our young companies to make a difference. We must evaluate the potential environmental impact of our companies’ innovative solutions, and then support them on an ongoing basis. Our analysis covers five broad attributes:
• Alignment with UN Sustainability Goals
• Impact Potential
• Additionality through Innovation
• Impact Performance
• Financial Maturity
Section 2 – Principle Adverse Impact Statement
ETF’s policies and methodologies in relation to investment decisions and sustainability factors are set out above, but ETF does not at present make disclosures on the adverse impacts on sustainability factors of its investment decisions as set out in Article 4 of the SFDR as the regulatory technical standards referred to in such article have not yet been adopted. ETF will monitor this situation and intends to make such disclosures required under Article 4 in the future.
Section 3 – Remuneration Policy
The partners in ETF and ETF employees are paid a combination of fixed and variable remuneration, with the variable remuneration dependent to some degree on performance in relation to investments and impact goals. Fund specific performance incentives (carried interest) are, for some products, partially contingent on investments meeting impact goals set on acquisition.
Section 4 – Article 9 Disclosures in relation to Environmental Technologies Fund 4 LP (“ETF Fund 4”)
Environmental Technologies Fund 4 LP has been classified by ETF as falling within Article 9 of the Sustainable Finance Disclosure Regulation, as it has sustainable investment as its objective.
As a values-driven organisation, ETF’s drive for impact and sustainability through innovation is embedded in every facet of ETF Partners. In addition to internal ESG commitments within the firm detailed in our ESG policy, every partner and employee regards the achievement of impact as a key component of their job. Impact is considered at every stage of the investment process with measurable KPIs and SDG alignment identified at the moment a deal enters our pipeline. We simply do not consider a deal unless we know that a company has the potential to make a significant and measurable impact. Once a company joins our portfolio we identify areas where impact can be improved and then make it happen, while measuring and reporting our progress at every stage.
1. What is the sustainable investment objective of this financial product?
ETF is driven by the desire to demonstrate that technological innovation offers compelling answers to one of the most pressing problems of the world, achieving sustainable prosperity. It is what we call ‘Sustainability through Innovation’.
We invest in innovative growth companies whose products and services have the potential to have a huge positive environmental impact. We evaluate impact potential, and then help make it happen through active impact management.
Please see section 1 above for more details on the sustainability indicators. In addition to the details provided above, the potential investments of ETF Fund 4 may fall into any of the following categories detailed in the Taxonomy Regulation:
(a) climate change mitigation;
(b) climate change adaptation;
(c) the sustainable use and protection of water and marine resources;
(d) the transition to a circular economy;
(e) pollution prevention and control;
(f) the protection and restoration of biodiversity and ecosystems.
2. How will the sustainable investment objective of this financial product be attained?
ETF now includes our impact KPI measurements in our quarterly reporting, bringing impact measurement in line with our financial measures. This allows our LPs to feed this data directly into their frameworks, addressing a diverse array of regulatory requirements, including evidencing their net-zero commitments. This drives improvements in impact measurement and reporting not just at the portfolio company level, but helps our LPs as well.
ETF now includes impact and ESG terms on every one of our term sheets. These terms make clear our expectations from our portfolio companies, locking in environmental impact objectives and reporting. By accepting an ETF term sheet, our portfolio companies must commit to adopt best efforts policies to achieve net neutrality within the next 12 months, and implement ESG oversight and reporting in a manner acceptable to ETF Partners. This gives us significant clout when improving the ESG standards at our portfolio companies.
We have brought our annual impact reports in line with the emerging standard of the Impact Measurement Project. As new standards emerge in the marketplace, we felt it incumbent upon us to take our bespoke methodology but keep pace with best practice while remaining in all ways “standards plus.” For 2020 we reported in parallel, showing how our ESG framework maps onto the IMP framework and how we will continue to improve this going forward.
3. Does this financial product take into account principal adverse impacts on sustainability factors?
Please see above for further details on our principal adverse impacts policy.
4. What investment strategy does this financial product follow?
ETF Fund 4 will seek to make venture capital investments in private companies. It will seek investment in companies that, in the judgement of the Manager:
(a) are relevant to the themes of:
(i) future mobility,
(ii) energy transition,
(iii) green connectivity,
(iv) responsible consumer, or
(v) sustainable food;
(b) deliver innovative product or services;
(c) demonstrate commercial success;
(d) display evidence of strong growth; and
(e) possess a durable competitive advantage.
5. What are the binding elements of the investment strategy used to select the investments to attain the sustainable investment objective?
The elements (a) to (e) in 4. above are included in the Investment Policy of ETF Fund 4 and are therefore binding on the Manager. Investments made by ETF Fund 4 must fall under these criteria and at least one of (a)(i) – (v).
6. What is the asset allocation and the minimum share of sustainable investments?
ETF intends that ETF Fund 4 will, so far as is practicable, only invest into sustainable investments.
In relation to the proportion of investments in ETF Fund 4 that will be fully aligned with the Taxonomy Regulation, the fact that the regulatory technical standards under this regulation have not yet been finalised means it is difficult for financial market participants to gauge exact compliance with the details of such Regulation. ETF will update investors in ETF Fund 4 through its reports as secondary legislation in this area develops.
7. To which objectives do the sustainable investments contribute to and how do they not cause significant harm?
The sustainable investments made by ETF Fund 4 will contribute to sustainable investment objectives outlined in this Section 4 paragraph 1. above. In identifying whether any relevant indicators “significantly harms” any sustainable investment objective, ETF will determine the severity of the potential harm and whether ETF can address the potential harm during its period of ownership. This may result in ETF seeking changes to practices at the portfolio company or not proceeding with the investment.
8. Is a specific index designated as a reference benchmark to meet the sustainable investment objective?
No. An index has not been designated as a reference benchmark to meet the sustainable investment objective. ETF’s will use its internally developed process for monitoring and measuring the impact of our investments in line with the indicators mentioned in section 1.
9. Where can I find more product specific information?
Other sections of ETF’s website contain further details around ESG and our Impact Policy.