Contrarian Ventures Net Zero 2022 KUB (the “Partnership”) managed by Contrarian Ventures, UAB (the “Management Company”).
Transparency and disclosure under Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”).
SFDR governs the transparency requirements regarding the integration of sustainability risks into the investment decisions, the result of the assessment of the impacts of sustainability risks on the returns of the Partnership, the consideration of adverse effects, and disclosure of environmental, social, and governance (“ESG”), as well as sustainability-related information. The Partnership discloses below its sustainable and ESG risk management processes in compliance with the new European Regulation on sustainability-related disclosures in the financial services sector.
INTRODUCTION TO SUSTAINABLE RISKS
Sustainability risks are ESG events or conditions that, if they occur, could cause an actual or a potential material adverse impact on the value of the Partnership’s investments. Sustainability risks can either represent a risk of their own or affect or contribute to other risks such as market, operational, liquidity, and counterparty risks. Accordingly, integrating sustainability risks in the Partnership’s investment operations is critical in ensuring the generation of sustainable long-term risk-adjusted returns for investors.
The Partnership is a venture capital fund that focuses on driving the success of technology-enabled climate tech businesses, which will accelerate the transition to a net-zero future. In addition, the Partnership focuses and proactively works on creating value and supporting founders, thereby highlighting the importance of sustainable activities at the Partnership and Portfolio Companies levels.
Preventing the risk of negative impact is the basis for the Partnership’s climate impact investments; hence, the Management Company designed processes to assess the climate relevance of the potential investments. Thoughtful management and consideration of ESG risks and opportunities will drive long-term value creation for the Partnership’s Portfolio Companies. Therefore, in addition to ensuring that the Partnership’s investments are consistent with its investment thesis, the Partnership should strive, where practicable, to generate value beyond financial returns by continuously enhancing its ESG risk management processes and incorporating these within its investment decisions.
Sustainability-related risks are at the core of the Partnership’s Investment Policy. Accordingly, the Partnership considers these risks by selecting or excluding certain investments based on that investment’s objective, such as its impact on the environment or climate.
The Partnership has committed to:
- Incorporate ESG issues into investment analysis and decision-making processes.
- Incorporate ESG issues into internal policies.
- Ensure transparency on ESG issues at the level of Portfolio Companies.
- Report and track the progress towards implementing an Investment Policy incorporating sustainability aspects at the Partnership Level.
IMPACT & ESG MANAGEMENT PROCESS
The Management Company’s processes incorporate sustainability across the lifecycle of the Partnership’s investments. The Partnership has a Climate Impact Framework that includes a Climate Impact Thesis and a Climate Impact Measurement Methodology, which discloses the list of targets that Portfolio Companies should track. The Investment Policy and processes related to managing environmental risks are the safeguards of the Climate Impact Framework.
INTEGRATION OF SUSTAINABILITY RISKS INTO THE INVESTMENT DECISIONS OF THE PARTNERSHIP
Pre-Investment (Due Diligence Phase)
Before making an investment decision regarding a new Portfolio Company, the Partnership thoroughly assesses the alignment of the potential investment with its investment thesis. During the due diligence process, the Partnership conducts an ESG risk assessment via checklist and questionnaire and further analyzes the expected climate impact of the Portfolio Company. These analyses are part of the investment decision. However, as the Partnership invests in early-stage companies, it is common for these companies to lack an ESG framework at the time of investment. Therefore, the Partnership assesses the company’s ESG baseline at the time of acquisition and analyzes the risks of negative impact. The investment memorandum summarises the findings of these assessments. As a result, the Investment Committee’s investment decision incorporates the review of ESG factors. The Partnership does not proceed with the investment when the Portfolio Company cannot mitigate ESG-related risks to a satisfactory extent.
Investment (Onboarding Phase)
Once the Investment Committee approves the investment decision, the Partnership identifies and defines, during the discussions on the terms of the investment with the future Portfolio Company, the selected impact targets to be monitored and reported on throughout the holding period. In addition, the Portfolio Company also has to consider, monitor, and report on ESG risks.
Post-Investment (Monitoring Phase)
During the holding period, the Management Company monitors the impact data reported by the Portfolio Company at the agreed-upon frequency. The Management Company may carry out additional in-depth climate impact analyses upon data availability and resources. If the Management Company identifies specific ESG risks, the Management Company evaluates the progress reported by the Portfolio Company in monitoring and mitigating those risks. As an investor, the Management Company strives to oversee and contribute as much as possible to the Portfolio Companies Climate impact performance alongside financial matters. Throughout its portfolio of investments, the Partnership collects, analyzes, and consolidates the impact metrics of Portfolio Companies. The Partnership informs investors of any development that can affect the impact of portfolio investments.
Divestment (Exit Phase)
The Partnership seeks to divest to trustworthy and like-minded investors with an aligned interest in reducing carbon emissions. Investors that will allow and enable the Portfolio Company to pursue its mission and vision while providing support to the founders. The Partnership aims for organized, simple, fair, and transparent divestment processes. The Management Company will quantify the impact creation from investment date to exit.
CONSIDERATION OF PRINCIPAL ADVERSE IMPACTS
The Management Company considers the principal adverse impact of investment decisions on sustainability factors, namely:
- Greenhouse gas emissions
- Carbon footprint
- Greenhouse gas intensity
- Fossil fuels sector exposure
- 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 production
- Violations of UN Global Compact principles and OECD guidelines for Multinational Enterprises
- Lack of processes and mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises
- Unadjusted gender pay gap
- Board gender diversity
- Exposure to controversial weapons
- Excessive CEO pay ratio
Through its Climate Impact Framework, the Partnership assesses and considers its investments’ negative impacts and adverse effects. Such consideration forms an integral part of the Partnership’s investment thesis. Given that the Partnership’s investments are very early-stage venture capital investments, often just consisting of a team and idea or early proof-of-concept, impact forecasting involves assumptions and predictions which may or may not materialize as the company develops and matures.
SUSTAINABILITY RISK LINKED TO RENUMERATION
At the Management Company level, the whole investment team coordinates ESG activities. Each investment team member is responsible for ensuring that ESG criteria are integrated into an investment decision and implemented by the Portfolio Company. The Partners validate the final assessment during the Investment Committee, where a compliance officer supervises the decision.
The Management Company’s compensation policies are designed to incentivize the investment team to promote sustainable growth within the Portfolio Companies, which they supervise and represent from the company’s perspective. Consequently, the compensation model includes a variable component that qualitatively takes into account the Management Company’s sustainability principles (e.g., successfully attending internal training on these principles, application of processes and methodologies in the investment process, as well as the regular monitoring and communication of sustainability measures to the Portfolio Companies).
Furthermore, the remuneration mechanism of all Management Company’s teams comprises a carried interest component linked to the sustainability performance of the Portfolio Companies.