The Sustainable Finance Disclosures Regulation (the “SFDR”) requires that a financial market participant that markets a product which promotes environmental or social characteristics should publish and maintain on that financial market participant's website certain information in respect of that product.
This disclosure is made in respect of the European Buyout Offshore Feeder Fund, Ltd., a Cayman Islands exempted company (the “Company”). The Company has been established as a feeder fund that will invest substantially all of its assets in the limited partnership interests of EQT X (No.1) USD SCSp, a Luxembourg special limited partnership (société en commandite spéciale) (“EQT X”).
Descriptions of the Environmental and Social Characteristics
The manager (gérant) and alternative investment fund manager of EQT X (the “Fund Manager”) has determined that EQT X should be classified as an investment product that promotes environmental and social characteristics within the meaning of Article 8 of the SFDR. The Fund Manager does not commit to a minimum share of EQT X’s investments being in “sustainable investments” as defined in the SFDR (including sustainable investments with an environmental objective aligned with the European Union Regulation on the establishment of a framework to facilitate sustainable investment (2020/852) (the “Taxonomy Regulation”), nor does EQT X take into account the EU criteria for environmentally sustainable economic activities.
Since the Company's investment object is to invest substantially all of its assets in EQT X, Citi Global Alternatives, LLC (successor adviser to Citi Private Advisory, LLC as of 30 September 2022) (the "Investment Advisor) has determined that the Company should also be classified as an investment product that promotes environmental or social characteristics within the meaning of Article 8 of the SFDR.
The relevant characteristics promoted by EQT X consist of investing in, and scaling, solutions with positive societal impact as measured by sustainability indicators and promoting sustainable practices in the investee companies that EQT X invests into (the “Investee Companies”).
How the Environmental and Social Characteristics are Met
The Fund Manager intends to meet the environmental and social characteristics by integrating environmental and social aspects throughout the investment cycle, from deal sourcing to exit.
The Fund Manager’s thematic sourcing and investment approach is guided by EQT’s Sustainability Development Goals, evaluating where alignment exists and identifying Investee Companies that make a positive societal impact or have transformation potential. Through its thematic sourcing and investment approach, the Fund Manager will aim to avoid investing in companies whose products, services or practices cause environmental and social harm (in each case evaluated by reference to those material sustainability aspects that have been identified as having an impact on the ability of the contemplated investment to create or preserve economic or environmental value for itself, its stakeholders or society at large). Where there is no path to mitigate these negative impacts, the Fund Manager will instead promote the transformation of the business to become a positive contributor to society.
The Investee Companies are expected to adhere to the EQT Sustainability Blueprint which articulates the sustainability expectations, expressed in a set of key performance indicators (the “Sustainability Blueprint KPIs”), which Investee Companies are expected to report on annually. Examples of these Sustainability Blueprint KPIs include: environmental, social and governance (“ESG”) policy, materiality assessment, employee engagement survey annually, board gender diversity, management gender diversity, GHG emissions, proportion of renewable electricity, and waste to landfill. It is envisaged that the EQT Sustainability Blueprint will be materially revised over the course of 2022 as EQT launches new and enhanced tools to support investment advisory teams in the next phase of EQT’s purpose-driven journey. It is envisaged that such tools will over time link to regulation and emerging industry standards such as the SFDR, the Taxonomy Regulation, the WEF Stakeholder Capitalism Metrics and the ILPA ESG Data Convergence Project.
In addition to the Sustainability Blueprint KPIs, the Investee Companies are expected to develop roadmaps to reach these specific sustainability targets in three areas related to EQT’s sustainability ambitions:
(1) Renewable energy: The share of renewable energy of the total purchased electricity in the Investee Companies should increase to at least 85 percent.
(2) Board gender diversity: The long-term target of the share of female board members appointed by EQT in the Investee Companies should be at least 40 percent.
(3) Governance: The Investee Companies are expected to have a fundamental sustainability governance platform as well as a sustainability board champion to ensure strategic commitment to a sustainability strategy at the board level. Additional expectations include conducting a materiality analysis and having a strategy to achieve at least one ambitious target which is specific to the business model or material sustainability opportunities of the Investee Company.
It is also envisaged that EQT X will include financing structures with an ESG-linked credit facility. The applicable interest rate for the ESG-linked credit facility will be linked to the timely fulfillment of specific targets in the areas identified above. The results from the Investee Companies’ ESG efforts as compared with the key performance indicator targets will also impact the overall interest rate charged by such facility.
Further, EQT X will seek to set and validate science-based targets at the level of the Investee Companies where EQT X has an ownership of equal to or greater than 25% of the fully diluted shares and board seat(s). In preparation and working with investments in prior EQT funds, a detailed execution plan has been developed. The plan includes the training of investment advisory professionals in carbon literacy in October 2021, offering similar training to the Investee Companies, as well as supporting a first wave of Investee Companies to set and validate science-based carbon targets at the investee company level.
The Fund Manager also seeks to ensure that the Investee Companies follow good governance practices by setting clear expectations with respect to transparency and accountability around sustainability, with regards to social, environmental and other business governance aspects.
These expectations include, amongst other things, a requirement that the relevant Investee Company adheres to the Ten Principles of the United Nations Global Compact, appoints a board member who is designated as responsible for the Investee Company’s ESG strategy, and shares reports on its sustainability progress.
Additionally, an essential part of EQT’s value creation, exercised through the governance model, is typically the appointment of the board of directors of the EQT funds’ investee companies. This allows EQT to support the acceleration of the EQT funds’ investee companies’ positive impact, sustainability performance and disclosure practices by setting clear expectations and providing strategic guidance and enhancing the investee companies’ governance model.
Methodologies Used to Assess, Measure and Monitor the Environmental and Social Characteristics
(a) Methodologies Adopted by the Company
The Investment Advisor will utilise the assessments, measurements and monitoring information provided by the Fund Manager regarding the impact of the investments selected for EQT X, the data sources and screening criteria for the underlying assets, and the relevant sustainability indicators used to measure the attainment of each of those environmental or social characteristics promoted by EQT X, and how the characteristics are being monitored throughout the lifecycle of the financial product and the related internal or external control mechanisms.
(b) Methodologies Adopted by EQT X
To assess, measure and monitor the environmental and social characteristics promoted by EQT X, the Fund Manager will require the Investee Companies to disclose and progress against the Sustainability Blueprint KPIs to track their journey and performance over the ownership period.
Additionally, the EQT investment professionals, and the sustainability team will work closely with the management team and board of directors of the Investee Companies to accelerate the Investee Companies’ positive impact, sustainability performance and disclosure practices by setting clear expectations and providing strategic guidance in the form of the integration of sustainability into the Investee Companies’ business and operational strategy.
A baseline will be set for the relevant Sustainability Blueprint KPIs during the first year of EQT X’s ownership of an Investee Company. During subsequent years, the indicators will be measured, evaluated and benchmarked against the baseline and potentially peer companies of the relevant Investee Company. The results of such evaluation will be reported to investors in the fund report. To the extent that there has been insufficient progress with respect to sustainability performance, the Investee Company will be required to carry out an analysis in order to determine and report the cause behind the lack of progress to the Fund Manager.
Integration of Sustainability Risks; Assessment of Likely Impacts of Sustainability Risks
(a) Integration of Sustainability Risks at the Company’s Level
The Investment Advisor has implemented a Sustainability Risk Standard in order to integrate the consideration and assessment of sustainability risks within the meaning of the SFDR into its investment selection process as described below. The Investment Advisor does not select funds to be offered based solely on their ESG status, credentials, reporting or disclosure.
“Sustainability risk” is defined in Article 2 of the SFDR as “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”.
In relation to integrating sustainability risk into its selection process for deciding whether to establish the Company in order to participate in EQT X, the Investment Advisor implemented a two-tier assessment covering both the Fund Manager and EQT X. At the manager level, the relevant investment research and operational due diligence teams assess how far ESG and in particular the sustainability risk is embedded into the organisation, its governance, the day-to-day running of EQT X and the Fund Manager’s investment decision-making process. At the fund level, the investment research team assess the extent to which the Fund Manager has integrated sustainability risk into its investment decision-making process for EQT X. The manager and fund level sustainability risk assessments are then combined to produce an overall sustainability risk profile.
As part of the Investment Advisor’s selection process, the overall sustainability risk profile of the Fund Manager and EQT X is considered along with other factors, including the depth and breadth of experience within the investment team, a consistent and disciplined investment approach, track record, market opportunity, and other risk factors. Accordingly, sustainability risk is considered in the round on an integrated basis, along with these other factors, which collectively drive an overall assessment of EQT X by the Investment Advisor.
(b) Integration of Sustainability Risks at EQT X’s Level
Prior to any investment decisions being made on behalf of EQT X, the Fund Manager undertakes a process to identify material risks (including sustainability risks) associated with a proposed investment. As part of the due diligence, the target company’s management and performance of ESG-related opportunities and risks as well as related organisation and resources are assessed and analysed. An assessment of these risks forms part of the overall investment proposal. Any material sustainability risks identified are considered alongside other relevant factors set out in the investment proposal. As with any due diligence, ESG and sustainability findings may impact investment selection and transaction process, including valuation and transaction documentation. Sustainability factors may also lead to the abandonment of an investment opportunity.
The assessment of sustainability risks as part of the Fund Manager’s investment decision-making process with respect to EQT X is part of EQT’s wider policies and procedures relating to the integration of sustainability risks in assessing investments applicable to EQT funds generally, such as the EQT Responsible Investment & Ownership Policy (the “RI&O Policy”). The RI&O Policy describes EQT’s view on sustainability throughout the investment process and is aligned with key international conventions and standards, including the Ten Principles of the United Nations Global Compact.
The RI&O Policy is available.
Moreover, sustainability risks will be monitored on an ongoing basis to accelerate EQT X’s Investee Companies’ positive societal impact, sustainability performance and disclosure practices. The sustainability expectations on Investee Companies are further developed in the EQT Sustainability Blueprint.
The identification and assessments of risks, including sustainability risks, will take place on an investment-by-investment basis in accordance with relevant considerations under the RI&O Policy. Notwithstanding the above, it is recognised that sustainability risks may not be relevant to certain non-core activities and investments (for example, hedging).
The Fund Manager will follow applicable policies and procedures to identify and mitigate sustainability risks, although there can be no guarantee that it will successfully identify and mitigate all such risks.
On a materiality assessment for EQT X, the Manager considers material sustainability risks for Investee Companies to include:
- Greenhouse gas emission and energy management risks related to the environmental impact of energy consumption;
- Waste and hazardous materials during manufacturing or during customer use and disposal;
- Physical and transition risks stemming from climate change (e.g. rising sea levels, extreme weather conditions) that could result in additional costs and/or lower asset value;
- Employee wellbeing and employee engagement;
- Diversity and inclusion (both for direct employees and customers);
- Product and service quality and safety;
- Governance and business practices;
- Data privacy and security risks related to collection, retention, and use of sensitive, confidential, and/or proprietary customer or user data, and the ESG or impact-related risks of any exposure of personal data via data breaches or otherwise;
- Accessibility and affordability, specifically in the context of healthcare and pharmaceutical Investee Companies;
- Responsible marketing, specifically in the context of healthcare and pharmaceutical Investee Companies; and
- Patient welfare, specifically in the context of healthcare and pharmaceutical Investee Companies.
If any of these risks or uncertainties actually occur with respect to an investment, the business, operating results and financial position of the investment could be materially and adversely affected, which ultimately could affect EQT X’s performance and its ability to fulfil its investment objectives.
Sustainability ReportingAs the Company and EQT X are newly formed, the periodic reporting is not currently available. Once the periodic reporting has been conducted for the Company and EQT X, information about such reporting will be made available here to the extent that is required under the SFDR and the Taxonomy Regulation.