Notice on Sustainable Finance Disclosure Regulations (SFDR)SFDR
eCAPITAL ENTREPRENEURIAL PARTNERS AG (“eCAPITAL”) is an alternative investment fund manager within the meaning of the German Investment Code (Kapitalanlagegesetzbuch, KAGB) and the EuVECA-Regulation and as such publishes the following information in light of the consideration of sustainability-related aspects in accordance with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27. November 2019 on sustainability disclosure requirements in the financial services sector (SFDR).
Article 3 SFDR – Sustainability risk policies statement
eCAPITAL addresses sustainability risks in its investment decision-making process insofar as relevant. ‘Sustainability risk’ means an environmental, social, or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment. When identifying a sustainability risk during the due diligence on potential investments, eCAPITAL decides in light of the specific situation taking due account of the proportionality principle whether it gives up on the investment or proceeds with the investment alongside appropriate measures to mitigate the relevant sustainability risk. eCAPITAL regularly reviews its policies to ensure that they address new and emerging risks as well as investors’ concerns.
Article 4 SFDR – No consideration of principal adverse impacts at entity level
eCAPITAL does currently not consider adverse impacts of investment decisions on sustainability factors (i.e. environmental, social and employee concerns, respect for human rights and the fight against corruption and bribery) within the meaning of Art. 4 SFDR. Currently, eCAPITAL is not in a position to positively assume it will in all cases be able to always obtain sufficient information from portfolio companies to satisfy the disclosure obligations of Art. 4 SFDR as further detailed in the RTS. Furthermore, the Sustainable Finance Disclosure Regulation (EU 2019/2088) is new and untested, there is no or only very limited practical experience with the application of its provisions. If and to the extent a practicable market practice and administrative practice evolves ensuring a sufficient flow of information, eCAPITAL will assess anew whether to consider sustainability adverse impacts.
Article 5 SFDR – Renumeration Disclosure
As a registered alternative investment fund manager within the meaning of the German Investment Code (Kapitalanlagegesetzbuch, KAGB) and the EuVECA-Regulation, eCAPITAL 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 determination of remuneration. Nevertheless, the financial renumeration of the investment team is linked to the attainment of impact targets for the financial product Fund V.
eCAPITAL Technologies Fonds V GmbH & Co. KG
Article 10 SFDR – Promotion of environmental or social characteristics
eCAPITAL is the alternative investment fund manager of Fund V within the meaning of the German Investment Code (Kapitalanlagegesetzbuch, KAGB) and the EuVECA-Regulation and as such publishes the following information in light of the consideration of sustainability-related aspects in accordance with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability disclosure requirements in the financial services sector (SFDR).
The financial product – Fund V – promotes environmental or social characteristics but does not have as its objective a sustainable investment (Article 8 fund).
No reference benchmark has been designated for the purpose of attaining the environmental or social characteristics promoted by Fund V.
Environmental characteristics promoted by Fund V
Based on the six environmental objectives of the EU Taxonomy, Fund V aims to promote activities to support (1) climate change mitigation, (2) climate change adaptation, and (3) the transition to a circular economy. The focus on supporting these three objectives has been derived from Fund V’s sector-specific investment focus, which puts an emphasis on sustainable technologies, new materials and production technologies, as well as software, hardware and cyber security in general as enabling technologies. Beyond that, Fund V has also defined business activities it shall not invest in (see following section I) and developed an ESG process to identify and mitigate potential sustainability risks (see section III).
I. Investment Restrictions:
Fund V shall not invest in companies which engage in, or that directly or indirectly control another entity which is engaged in, prohibited activities. The following business activities, alternatively or cumulatively, shall be deemed prohibited business activities:
|a)||Business activities considered as illegal according to the legislation applicable in the country of the respective company or entity;|
|b)||Business activities excluded as referred to in Article 19 of the Regulation (EU) No. 1291/2013 of the European Parliament and of the Council regarding:|
|(1)||research activity aiming at human cloning for reproductive purposes;|
|(2)||research activity intended to modify the genetic heritage of human beings which could make such changes heritable (excluding research relating to cancer treatment of the gonads);|
|(3)||research activity intended to create human embryos solely for the purpose of research or for the purpose of stem cell procurement, including by means of somatic cell nuclear transfer|
|c)||Business activities substantially focusing on|
|(1)||the production of and trade in tobacco and distilled alcoholic beverages and related products;|
|(2)||the production of and trade in weapons and ammunition of any kind and financing of these activities, it being understood that this restriction does not apply to the extent such activities are part of or accessory to explicit European Union policies;|
|(3)||casinos and equivalent enterprises; or|
|(4)||the research, development or technical applications relating to electronic data programs or solutions, which;|
|a.||aim specifically at|
|i.||supporting any activity referred to under (1) to (3) of this paragraph c),|
|ii.||internet gambling and online casinos; or|
|iii.||pornography; or which|
|b.||are intended to enable to illegally|
|i.||enter into electronic data networks, or|
|ii.||download electronic data.|
|d)||In addition, Fund V shall ensure through corporate governance or otherwise that portfolio companies continue to comply with the above restrictions during the term of Fund V’s investment. In particular, when providing support to the financing of the research, development or technical applications relating to (x) permitted business activities pursuant to b) above or (y) genetically modified organisms (“GMOs”), Fund V will require appropriate specific assurance on the control of legal, regulatory and ethical issues linked to such permitted business activities pursuant to b) above and/or GMOs.|
II. Impact Carry
With respect to Fund V, eCAPITAL will make 20% of the potential carried interest allocations from Fund V subject to the achievement of certain impact goals. Under the system to be put in place within a reasonable time after the final closing at the latest, 20% of the carried interest payment will only be released if certain pre-defined impact goals are met – if such goals are not met, this portion of the carry payments will be donated to non-profit organizations.
In line with the overarching investment philosophy of Fund V, eCAPITAL believes that considering sustainability risks within the investment decision has the ability to improve investment returns – both by downside operational risk reduction, and increased value potential. ‘Sustainability risk’ means an environmental, social, or governance (ESG) event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.
To this end, the Manager has committed itself to introduce a comprehensive ESG due diligence in its investment operations and therefore developed criteria that define when an investment of Fund V may present a sustainability risk.
Within the due diligence process, eCAPITAL categorizes the risk within the three classes high risk, medium risk, and low risk in the areas environment, social, and governance. The Manager currently includes the following factors within its definition of ESG:
Environmental factors: the pollution and contamination of land, air and water, and related legal and regulatory compliance; waste management; management of scarce natural resources and climate change impacts, carbon emissions, circular economy, responsible procurement
Social factors: the treatment and wellbeing of employees including their pay; health and safety; labor conditions; human rights and any form of discrimination, harassment or victimization, diversity and inclusion
Governance factors: anti-bribery and corruption measures; business ethics; accountability; transparency; conflicts of interest; whistle-blowing; control mechanics; data governance; cyber security and the governance of environmental and social factors.
The ESG factors listed above are not exhaustive and eCAPITAL will continue to revisit, refine and add to the list. If the assessment by eCAPITAL results in a high-risk categorization in the areas environment or human and labor, an external ESG expert might be involved for an independent and in-depth ESG analysis. Moreover, eCAPITAL is a member of the non-profit initiative Leaders for Climate Action (LFCA) and hence includes provisions promoted by LFCA into contracts for (prospective) portfolio companies. In particular, Fund V’s investment contracts state that each portfolio company shall, within a reasonable time following the signing, adopt and thereafter maintain in effect an ESG policy.
Such policy and measures shall be discussed with and reported to the portfolio company’s supervisory/advisory board. Any uncovered risks will be mitigated through an individual ESG action plan as part of our 100-days plan after realizing an investment, monitored and reported over the whole lifecycle of our investments on at least an annual basis. This information can be found in the quarterly reports for limited partners.
With this dedicated process, eCAPITAL can ensure that sustainability risk, both internal and external, is integrated from the initial investment decision through to the exit process.
No reference benchmark has been designated for the purpose of attaining the environmental and social characteristics promoted by the Partnership.
Sustainability indicators used to measure the attainment of the environmental characteristics promoted by Fund V
Based on the Principle Adverse Impact indicators (PAIs) and supplemented by additional sustainability indicators, eCAPITAL is assessing its investments in the following dimensions:
- GHG emissions
- Energy management
- Water & waste water management
- Waste & hazardous materials management
- Customer privacy
- Data and cyber security
- Digital rights and digital truths
- Employee engagement, diversity & inclusion
- Business ethics
- Technology/digital/innovation ethics
- Governance processes & practices
- Competitive behavior
- Payment structure
eCAPITAL will continue to re-visit, refine and add to the list, if deemed necessary.
Intending to do no significant harm
During the investment process, the Fund screens potential investments against a list of exclusion criteria, which, for example, excludes certain business activities. Furthermore, the Fund excludes investments that do significant harm to any of the sustainable objectives of the EU Taxonomy or that are fundamentally misaligned with sustainability practices and/or fail to meet minimum thresholds for adverse impact indicators or minimum safeguards.
Consideration of principal adverse impacts on sustainability factors
eCAPITAL considers the principal adverse impacts of its investment decisions on
All mandatory indicators (see section above) for investee companies are tracked. The optional PAI metrics selected are:
- Share of investments in investee companies without carbon emission reduction initiatives aimed at aligning with the Paris Agreement
- Number of incidents of discrimination reported in investee companies expressed as a weighted average
- Share of investments in entities without policies on anti-corruption and anti-bribery consistent with the United Nations Convention against Corruption
We request PAI data from portfolio companies digitally via the Atlas Metrics ESG software and aggregate the results for the fund on an annual basis
We check during the initial due diligence process whether the companies comply with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights which is also part of the EU Taxonomy alignment conformity check.
Investment strategy of Fund V
The purpose of the Partnership is to build, hold and manage a portfolio of equity and equity-related investments in start-ups and growth companies in the areas of environmental sustainability, enterprise software including IT security, internet of things with the special emphasis on OT security (IT security and OT security aka cybersecurity), and advanced material and related processing technologies. At the beginning of our investment process, we screen our potential investment targets against a list of exclusion criteria, which, for example, excludes certain business activities. If a potential investment target meets a criterion from the exclusion list, eCAPITAL will not pursue any investment. The remaining investment process with regard to the dedicated ESG due diligence has been laid out in detail above.
Implementation of the strategy in the investment process
At the beginning of our investment process, eCAPITAL screens Fund V’s potential investment targets against a list of exclusion criteria, which, for example, excludes certain business activities. If a potential investment target meets a criterion from the exclusion list, eCAPITAL will not pursue any investment for Fund V. The remaining investment process with regard to the dedicated ESG due diligence has been laid out in detail above.
Policy to assess good governance practices of the investee companies
We conduct an ESG Due Diligence assessment prior to investment, which includes evaluating compliance with relevant laws, standards, regulations, and the effectiveness of anti-corruption & bribery, data security & customer privacy, and business ethics policies. We continue to review these factors on an annual basis throughout our ownership until we exit the company.
Planned asset allocation for Fund V
The Partnership will invest fully in line with its investment strategy and investment restrictions. The Partnership will not invest a portion of its capital in any other asset class. Therefore, 100% of the investments fall under #1B or #1A SFDR, whereas, we expect at least 40% of the investments to qualify for #1A SFDR (as shown below).
We do not establish a minimum requirement for socially sustainable investments in Fund V, primarily due to the ongoing development of the EU Social Taxonomy.
eCAPITAL considers the promoted ESG aspects when sourcing new portfolio companies for Fund V and during the due diligence on targeted portfolio companies. Fund V will not make any investment in the excluded sectors unless previously approved by the investor advisory board.
Data sources and processing and limitations to methodologies and data
Fund V is partly reliant on the information provided by portfolio companies during the due diligence process. Moreover, in the post-investment phase, Fund V is reliant on the company’s reported data. In both cases, complete data may not always be available due to the nature of investments. The information is verified only if and to the extent misrepresentations are suspected. As the fund’s investment is made for several years, eCAPITAL considers it a priority to establish and maintain a trustful working relationship with the fund’s portfolio companies to ensure compliance with the restrictions described in this section.
As part of the due diligence and ongoing investment management, the investment team for Fund V will initially and continuously monitor whether the investment restrictions are abided by and whether the investment falls within the investment policies.
Other than as mentioned above, eCAPITAL does not follow any specific ongoing engagement policies regarding Fund V and its portfolio companies.