EU sustainability regulations
Sustainability Regulations impacting Polaris
On March 10, 2021, the EU Commission’s Sustainable Finance Disclosure Regulation (EU) 2019/2088 (“the SFDR”) entered into force. As an AIFM, Polaris’ funds fall under SFDR as a financial market participant and Polaris Management A/S ensures compliance with this regulation on behalf of Polaris active funds.
The SFDR sets new standards as to how financial market participants should report on sustainability relating to their financial products. With the SFDR, financial products are divided into categories with respect to their level of promotion of sustainability. These categories are defined as Article 6, 8 and 9 financial products. Article 6 products do not consider sustainability as a goal. Article 8 products consider sustainability as a goal, amongst other things, whereas Article 9 products consider sustainability as their primary goal. Article 8 and article 9 products are also termed as “light green” and “dark green” products, respectively.
The EU Taxonomy aims to establish a uniform framework as to how environmentally sustainable economic activities are defined. The SFDR specifies how to report on sustainability in the financial sector. When published in 2020, the EU Taxonomy made amendments to the SFDR, which means that parts of the disclosure regulation refer back to the EU Taxonomy. Hence, the two regulations are interrelated.
SFDR categorization of Polaris active funds
Polaris’ current approach to sustainability is applied to Polaris active funds, their portfolio companies and our investment process. Based on our recent assessment of the SFDR, and the expected interpretation of this regulation, and our sustainability claims, we believe our active funds fall under the following categorization:
- Funds managed under Polaris Private Equity strategy (“PPE”)
- PPE IV (Polaris Private Equity IV K/S): SFDR – Article 8
- PPE V (Polaris Private Equity V K/S) and co-investment vehicle Polaris V F&F Co-invest K/S: SFDR – Article 8
- Funds managed under Polaris Flexible Capital strategy (“PFC”)
- PFC I (Polaris Flexible Capital I K/S) and investment vehicle PFC I Debt Aps: SFDR – Article 8
- Funds managed under Polaris Public Equity strategy (“PPU”)
- Polaris PPU Feeder Fund SICAV: SFDR - Article 8
Polaris Management A/S will therefore align disclosures on behalf of Polaris Private Equity ("PPE") funds PPE IV and PPE V (including co-investment vehicles), Polaris Flexible Capital ("PFC") fund PFC I (including co-investment and investment vehicles) and Polaris Public Equity ("PPU") fund Polaris PPU Feeder Fund SICAV, with the requirements for SFDR - Article 8 funds.
Polaris sustainability claims – how we promote environmental and social characteristics
Polaris main investment objective is to create financial return for our investors by investing in good companies with great potential. When seeking to realize our main objective and execute our strategy, we have a responsibility towards our many stakeholders are we are committed to promoting sustainability characteristics throughout Polaris to honor this responsibility.
Our commitment to sustainability is executed broadly throughout Polaris and affects our activities throughout our investment process, ownership and exit and covers all our investments.
The material sustainability related risks and opportunities for each of our investment opportunities and portfolio companies are unique. Which environmental and social factors that should be promoted and improved upon, and how these improvements should be measured, is therefore unique, and will be established on a case-by-case basis, for each portfolio company. We have however identified three focus areas within sustainability which we will work with across Polaris: Climate change, Employer Responsibility and Gender Equality. These focus areas are also aligned with the Sustainable Development Goals (*SDG’s”) adopted by the United Nations in 2015. For each of these three areas, we will follow-up and report on progress and action taken.
We have not identified any general indices to measure our progress against, as our portfolio companies are active in a broad range of industries and geographies.
The EU Taxonomy offers a definition of what constitutes sustainable economic activities, and this definition is expanding to include more areas/sectors. As part of our work on sustainability, we will report on the EU Taxonomy eligibility and alignment of our portfolio companies as required by regulations and integrate this into our work. We have however not yet set any specific investment criteria or performance targets related to the EU Taxonomy.
Pre-contractual disclosures and product information
The opportunity to invest in Polaris financial products, funds, is by invitation only. Complete current and historic fund-raising material for Polaris’ funds is therefore not made publicly available by Polaris but only made available to prospective investors in Polaris funds, regulators and potential other stakeholders on special request.
The EU regulations thorugh the SFDR stipulates that certain mandatory pre-contractual disclosures and product disclosures related to sustainability are made available to potential investors about each of the funds managed by Polaris.
Integration of sustainability risks
A sustainability risk means “an environmental, social or governance (“ESG”) event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment”. Sustainability risks are integrated into the investment decisions of Polaris and are taken into account during the investment process in a manner proportionate to each product’s investment objective and in the same way as Polaris approaches other forms of risk management in relation to its products. This is done primarily as part of the due diligence process, whereby should an investment have a material exposure to a sustainability risk, Polaris may choose not to make an investment on this basis and in accordance with the relevant investment and risk management policies.
Statement of Principal Adverse Impacts on Sustainability Factors
Polaris considers the principal adverse impact on sustainability factors ("PAI") that our investment decisions have. Polaris’ investment process consists of several pre-defined “gates”. The due diligence in the final gate consists of several aspects that are to be investigated for the target company. This includes an analysis of the investment from a sustainability perspective. The process is supported by reputable advisors in the area.
The principal adverse impacts are evaluated alongside all other risks and opportunities of a potential investment. If a particular investment fulfills our investment criteria, all risks and opportunities, hereunder sustainability related risks and opportunities, are then fully included in the business plan, the financial forecast and the overall valuation of the company.
In the portfolio management process, we continue to evaluate and follow-up on sustainability-related risks and opportunities for the company hereunder principle adverse impacts .
Our portfolio companies shall, at a minimum, establish governance structures to meet the requirements embedded in our sustainability principles. These principles are founded on the UNGPs and the OECD’s guidelines and consist of a policy commitment, a sustainability policy, sustainability due diligence processes, and grievance mechanisms. The key objective for Polaris is to create value and build a stronger company by active ownership through a structured value creation process, combined with an effective corporate governance structure. Our governance structure also ensures responsible management of sustainability related risks and opportunities at the company level hereunder also principle adverse impacts on sustainability factors.
Polaris will annually publish a PAI statement which discloses the status and progress of the principle adverse impacts on sustainability factors at Polaris level and at the level of each individual fund managed by Polaris.
How our private equity investments consider climate change mitigation and adaptation
Climate change mitigation means avoiding and reducing emissions of heat-trapping greenhouse gases into the atmosphere to prevent global warming. Climate change adaptation means altering our behaviour and systems to protect ourselves from the impacts of climate change (source: WWF).
Combating climate change is a focus area in our commitment to sustainability and as a part of this focus we attempt to consider both climate change mitigation and adaptation. To address mitigation, we measure and work to reduce greenhouse gas emissions throughout Polaris as part of our sustainability commitment.
To address climate change adaptation, we consider which investments that are, or will be, materially impacted by climate change and analyze their potential future climate-related risks and opportunities and how these can be addressed. We do this analysis based on the principles provided by the Task force on Climate related Financial Disclosures (“TCFD”), which we integrate into our sustainability strategy. We however not do TCFD reporting. The analysis of the climate-related risks and opportunities, based on the TCFD principles, are included into our overall assessment of potential investments, as part of our due diligence process, and it is part of Polaris Sustainability Program, which is implemented in our Portfolio Companies in the portfolio management phase.
Remuneration and sustainability risks
The boards of our portfolio companies must establish policies and systems that ensure board oversight with executive management, performance and remuneration reviews. Further, it must ensure legal compliance with respect to books, records, and accounting standards, effective internal controls, and solid risk management processes. Specifically, it is important that the remuneration of the management team and employees in the portfolio company does not encourage risk taking, including sustainability risks, beyond acceptable levels.
Reporting on sustainability
Polaris reports on sustainability according to the regulations for the annual financial statements of Polaris Management A/S, Polaris’s funds and Polaris portfolio companies. Polaris will also include the required Periodic Reporting related to sustainability, as stipulated in the SFDR, in the annual reports of each of Polaris funds.