Article 10: Transparency of the promotion of environmental or social characteristics and of sustainable investments on websites
Summary
MPEP Fund SCA SICAV-RAIF - MPEP V North America (“Feeder Fund”) is a feeder fund of MPEP Fund V North America SCSp (“Master Fund” or “MPEP Fund V NA”). The Master Fund promotes environmental and social characteristics but does not seek to make sustainable investments within the meaning of Article 2 (17), SFDR
The Feeder Fund invests at least 85% of its assets in limited partnership interests of the Master Fund. The investment object of the Feeder Fund is to acquire limited partnership interests in the Master Fund. For this reason, the management company (“MPEP”) strives to invest the full assets of the Feeder Fund in the Master Fund. Hence, via its exposure to the Master Fund, the Feeder Fund’s assets are indirectly invested predominantly in assets that promote environmental and social characteristics.
The Master Fund is a Fund of Funds (“FoF”) that makes fund investments with a regional focus on North America, but do not have a specific industry emphasis. The financial product incorporates environmental and social considerations into all phases of its investment processes and applies an internal ESG framework with a defined set of criteria and supporting tools. The phases are defined as follows: i) Initial ESG Screening, ii) ESG Due Diligence, iii) ESG Consideration in Investment Decision, and iv) ESG Monitoring and Reporting.
The following paragraphs discuss the environmental and social characteristics promoted by the financial product as well as the overall ESG framework applied.
No sustainable investment objective
The Master Fund, and indirectly also the Feeder Fund, promotes environmental and social characteristics (within the meaning of Art. 8, SFDR) but does not seek to make sustainable investments (within the meaning of Article 2 (17), SFDR).
Environmental or social characteristics of the financial product
The Master Fund, and indirectly also the Feeder Fund, applies a holistic approach that acknowledges a broad set of environmental and social characteristics, while putting an emphasis on climate change and diversity related matters. For this, MPEP requires the fund managers to consider environmental and social characteristics in their investment activities. In addition, MPEP evaluates environmental and social-related criteria in its fund selection process by (i) excluding underlying investments that entail potential negative environmental and social impacts (through exclusion criteria*), (ii) applying its proprietary ESG scoring tool to identify and assess environmental and social aspects at fund manager level, (iii) requiring the fund manager to develop a formalized ESG strategy/policy in case such a strategy/policy does not yet exist, and (iv) making sure the fund manager uses reasonable efforts to annually respond to MPEP’s ESG update inquiries.
Furthermore, MPEP applies the UN principles for responsible investments (UN PRI) and reflects on additional frameworks and initiatives, such as the Task Force on Climate-related Financial Disclosures (“TCFD”), as guidance. While MPEP incorporates environmental and social (and governance) criteria alongside the entire multi-stage investment process, it is also aware of the limited direct influence as a FoF, which does not directly assess environmental and social characteristics of the underlying investments, as this should ultimately be done by its fund managers. Also, MPEP’s investment universe is not industry focused, which means it must rely on its underlying fund managers to provide the relevant environmental and social-related information, which can differ meaningfully by region.
Investment strategy
Pursuing its investment strategy by way of commitments to target funds, the Master Fund, and indirectly also the Feeder Fund, aims to yield attractive risk-adjusted financial return for its investors while also positively contributing to society through incorporation of ESG criteria in the investment process and overall investment lifetime. A focus is thereby placed on environmental and social aspects, specifically climate change and diversity in all its forms. On governance aspects, a strong natural alignment with the fund managers exists as helping portfolio companies to become larger, more professional, and transparent businesses is typically at the heart of private equity value creation initiatives.
ESG is considered throughout the four phases of the investment process and investment lifetime namely through i) Initial ESG Screening, ii) ESG Due Diligence, iii) ESG Consideration in Investment Decision, and iv) ESG Monitoring and Reporting.
Please refer to the following sections for details.
Proportion of investments
This Master Fund, and indirectly also the Feeder Fund, will invest in line with its investment strategy and investment restrictions, i.e., it will only make investments, which are aligned with its promoted environmental or social characteristics and its binding elements. The Master Fund, and indirectly also the Feeder Fund, does not indent to make sustainable investments within the meaning of Article 2 (17), SFDR.
Monitoring of environmental or social characteristics
Pre- and post-investment, MPEP monitors various environmental and social characteristics through defined indicators.
Pre-investment, the following indicators, rooted in the defined binding elements (see section “Due Diligence”), are monitored:
i. Adherence to MPEP’s unconditional and conditional exclusion criteria* (yes/no)
ii. Consideration of ESG aspects within future investment decisions (yes/no)
iii. Should the fund manager not have an ESG strategy/policy in place: implementation of an ESG strategy/policy within the first 18 months of investment (yes/no)
iv. Reasonable efforts to annually respond to MPEP’s ESG update inquiries (yes/no)
In case of a positive investment decision and subsequent commitment to an underlying fund, MPEP regularly monitors and tracks the above binding element indicators as well as ESG incidents, ESG developments and maturity of the fund manager and the underlying fund through its proprietary scoring tool on an annual basis over the investment lifetime. MPEP’s ESG assessment and fund manager scoring methodology serves as a tool to capture and analyse ESG information. The fund manager ESG score is updated annually based on the re-evaluation of ESG scoring criteria.
Besides the active engagement through the described ESG monitoring and tracking, MPEP will also encourage each fund manager to collect and report a set of ESG KPIs derived from the ESG Data Convergence Initiative and/or the Principle Adverse Impact (“PAIs”) indicators. Given its limited influence as a FoF, however, MPEP cannot guarantee the availability and quality of these data points and consequently cannot make an all-embracing PAI KPI reporting commitment in this regard.
Nevertheless, MPEP will report PAI KPIs which can be derived from its exclusion criteria* and binding investment elements, namely:
MPEP also reserves the option to disclose more PAI KPIs depending on data availability and quality.
Methodologies
As mentioned above, ESG is considered throughout the four phases of the investment process and investment lifetime namely through i) Initial ESG Screening, ii) ESG Due Diligence, iii) ESG Consideration in Investment Decision, and iv) ESG Monitoring and Reporting.
For methodological details on i), ii) and iii) – please see section “Due Diligence” below.
For methodological details on iv) – please see section “Monitoring of environmental or social characteristics” above.
Data sources and processing
ESG data is predominantly derived from, and processed through, the (i) Initial ESG screening (i.e. screening of marketing information, private placement memorandum, website of fund manager etc.), (ii) the ESG due diligence (in particular through the application of MPEP’s ESG assessment and scoring tool and further documents typically provided in the course of the due diligence incl. ESG policy, etc.), and (iii) continuous monitoring and engagement process with the fund manager.
MPEP will also encourage each fund manager to collect and report a set of ESG KPIs derived from both the ESG Data Convergence Initiative and/or the PAI indicators. Given its limited influence as a FoF, however, MPEP cannot guarantee the availability and quality of these data points. Nevertheless, MPEP reserves the option to disclose a number of ESG KPIs depending on data availability and quality.
Limitations to methodologies and data
Due to the Master Fund’s, and indirectly also the Feeder Fund’s broadly diversified approach with regard to geographies and sectors, , MPEP is heavily dependent on data shared by the fund managers and the underlying portfolio companies, respectively. Although MPEP makes reasonable efforts to ensure data quality, data reliability and data availability, some fund manager and/or portfolio companies may still be limited in their possibilities in collecting relevant ESG-related data. In these cases, MPEP will work closely with the fund manager to promote increased capacity for data collection and reporting.
Due Diligence
The due diligence process comprises the phases i) Initial ESG Screening, ii) ESG Due Diligence and iii) ESG Consideration in Investment Decision.
In the first step of the initial ESG screening phase, MPEP conducts an ESG quick check to gain an initial overall understanding of the fund manager’s approach to ESG and the elements that an underlying fund manager will have to comply with should the investment materialize. As part of this first assessment, the envisioned fund investments are screened against MPEP’s ESG exclusion criteria*. The ESG exclusion screening aims to identify investment targets that entail potential negative environmental and social impacts, and which go against MPEP’s ESG commitment and beliefs.
When an investment opportunity enters the ESG due diligence phase, MPEP applies its propriety ESG Due Diligence assessment framework, which was developed according to MPEP’s ESG beliefs and specific requirements. In order to generate a comprehensive view of all ESG aspects that are relevant for the financial product’s ESG considerations, the targeted fund manager is assessed according to predefined ESG elements and an ESG scoring methodology is applied to determine the fund managers ESG maturity on those elements.
In case MPEP decides to progress with the investment, MPEP will ensure that a defined set of ESG related requirements (“Binding Elements”) with the underlying fund manager are sufficiently complied with at the time of the investment. For more details about the Binding Elements, please refer to MPEP’s ESG policy, which can be reviewed upon request.
Engagement Policies
MPEP engages with targeted fund managers on ESG topics throughout the entire investment lifetime. However, a specific engagement focus is given post-investment through at least annual monitoring and tracking of agreed-upon binding element indicators as well as ESG incidents, ESG developments and maturity of the fund manager.
MPEP’s ESG assessment and fund manager scoring methodology thereby serves as tool to capture and analyse ESG information. The fund manager ESG score is updated annually based on the re-evaluation of ESG scoring criteria.
Besides the active engagement through the described ESG monitoring and tracking, MPEP will also encourage each fund manager to collect and report a set of ESG KPIs derived from both the ESG Data Convergence Initiative and/or the Principle Adverse Impact (“PAIs”) indicators.
*For more details about exclusion criteria, incl. relevant thresholds, please refer to MPEP’s ESG policy, which can be reviewed upon request.