Princeville Climate Partners II Ltd: Sustainability‐related disclosures at entity level
In accordance with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”), Princeville Climate Partners II Ltd (“Princeville”), in its capacity as a non-EU alternative investment fund manager (“AIFM”) to certain fund(s) registered for marketing under Directive (EU) 2011/61 on alternative investment fund managers (“AIFMD”) in the EU, is required to disclose information about the integration (or not) of sustainability risk in its investment processes, as well as details regarding the consideration (or not) of adverse impacts on sustainability factors.
(i) Integration of sustainability risks in the investment process
Under SFDR, Princeville is defined as a “financial market participant”. Article 3(1) of SFDR requires financial market participants to publish information about their policies on the integration of sustainability risk in their investment decision-making processes.
Sustainability risk is defined under SFDR as an environmental, social or governance event or condition that, if it occurs, Princeville considers could cause an actual or potential material negative impact on the value of one or more investments.
Princeville robustly considers sustainability risk in its investment process, formalized in a Responsible Investment Policy, which is available on request and was last updated in June 2024. Princeville conducts thorough sustainability risk-related due diligence assessing companies’ positive and negative environmental, social and governance outcomes during pre-investment due diligence, annually and as needed during the investment holding period, and at exit. Such factors directly affect Princeville’s investment decisions as well as targeted interaction with potential portfolio companies via engagement activities.
Sustainability risks are integrated into the following stages of the investment decision-making process:
- Pre-Investment Due Diligence:
- Princeville’s Exclusion Policy covering sectors or activities with potential negative impacts which Princeville Capital does not finance. The policy is applicable firmwide and is available upon request. Princeville’s Exclusion Policy defines and formalizes both strict exclusions and investment restrictions with thresholds for companies operating in sectors or engaging in activities with potential negative impacts. Strict exclusions refer to companies whose direct or indirect negative impacts are incompatible with Princeville Capital’s Responsible Investment Policy or cannot be overcome by transforming the business through engagement or other means.
- Princeville Capital’s pre-investment due diligence process requires a comprehensive assessment of sustainability risks with a focus on factors that are likely to be material for each investment. Materiality is informed by the Sustainability Accounting Standards Board (SASB) and other industry-specific frameworks, and varies by company, sector, and geography. A key consideration in the approval of any investment opportunity is whether the business operates in a manner consistent with the applicable environmental and social requirements.
- Investment Holding Period:
- After making an investment, Princeville Capital investment team members develop an engagement strategy for each portfolio company based on the potential areas of ESG improvement identified during due diligence, and we include ESG and climate related KPIs into a standalone section of our term sheets and communicate our expectations for improvement within 12- months of initial investment. This strategy informs our long-term approach to engaging with portfolio company senior leadership and allows us to monitor progress on key KPIs. We annually distribute an ESG questionnaire to portfolio companies based on the Invest Europe framework and we conduct an annual review of portfolio companies on material ESG topics to ensure compliance with our policies.
- If at any point during the investment holding period, we identify a risk that we believe to be financially material or value destructive, we have practices in place to address the issue by various means. We may attempt to engage portfolio company senior leadership and suggest changes ranging from minor process improvements to a change in strategy. In rare circumstances, after exhausting all attempts at remediation, we may seek to divest if improvements are not made in areas of material importance. If a portfolio company violates our Exclusion Policy at any point during the investment period, we evaluate the violation on a case-by-case basis and determine the best course of remediation. If a portfolio company is non-compliant with our list of strict exclusions, we may seek to divest, otherwise, we will conduct additional due diligence and apply a materiality threshold to determine the level of non-compliance.
- Exit:
- During the divestment phase, depending on the materiality of ESG issues, a review of the company’s ESG progress may be carried out and made available to potential buyers. This report is mainly based on the results of the ESG reporting carried out annually by the company. For buyout activities, ESG information is systematically made available in a data room. In some cases, Princeville Capital may have specific ESG vendor due diligence performed by an external third-party.
(ii) Sustainability Risks Related Remuneration Policy
Princeville has defined principles relating to remuneration for all employees. Princeville’s remuneration practices (i) promote sound and effective risk management and (ii) discourage excessive risk taking, including, but not limited to, sustainability risks, as defined above. Princeville’s approach to remuneration aligns with its practice of integrating sustainability risks into the investment decision-making process. Recognizing that sustainability risks can constitute financial risks, Princeville acknowledges that neglecting these risks could negatively affect investment performance. Consequently, in the event that sustainability risks adversely impact fund performance, it is likely to be reflected in the overall level of variable remuneration awarded to employees.
(iii) Consideration of Adverse Impacts on Sustainability Factors
Article 4(1)(a) of SFDR requires financial market participants to publish and maintain on their websites information on the manner in which principal adverse impacts (“PAIs”) on sustainability factors have been considered in their investment decisions. PAIs are potential adverse effects of investment decisions on sustainability factors. Sustainability factors are environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.
Princeville does not formally consider PAIs of investment decisions on sustainability factors within the meaning of Article 4(1)(a) of SFDR.
Meaningful consideration of PAIs is not currently possible due to the difficulty in obtaining the requisite data on which Princeville would be obligated to report on in accordance with SFDR, given the early-stage investments and the lack or quality of ESG reporting in specific jurisdictions. This is predominantly due to the fact that the investee companies, which are at the early stages of their growth, do not sufficiently report data to accurately assess adverse impacts. Should any adverse impacts be identified during the investment process, those impacts will be evaluated and if deemed material, Princeville will conduct an enhanced assessment of the specific impact before making any investment decision.
Notwithstanding the aforementioned barrier to the identification and prioritization of PAIs, Princeville will re-evaluate this position on a periodic basis, giving due consideration to market developments.