Sustainable Finance Disclosure Regulation
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Regulation (EU) 2019/2088, known as the Sustainable Finance Disclosure Regulation (“SFDR”), was adopted on 27 November 2019 and deals with sustainability-related disclosure in the financial services sector. The Regulation aims to improve transparency between financial market participants (“FMPs”) on how they integrate sustainability risks in their investment decisions, consider potential adverse impacts, promote certain environmental or social characteristics, or aim to achieve sustainable investment objectives.
PureTerra Ventures is a venture capital fund that provides commercialisation and growth capital to proven disruptive water technologies. Through our investments, we seek to achieve three distinct sustainable investment objectives:
Conservation of the water supply
Climate change mitigation and adaptation
Growth of the water capital market
As such, PureTerra aims to solely select sustainable investments across its fund portfolio. What follows from the SFDR is that we need to transparently communicate to potential investors on our website on:
Our consideration of sustainability risks in our investment decision-making process (“Article 3 SFDR”); and
Our policy on considering and mitigating potential negative impacts of our investment decision-making on sustainability factors (“Article 4 SFDR”); and
Our integration of sustainability goals within our remuneration policies (“Article 5 SFDR”); and
The processes within our Fund on how we measure the performance of our sustainable investment objective (“Article 10 SFDR”)
Our approach to impact investing
We invest across three target sectors (industrial water, agricultural water, residential and municipal water) in which we select investments that fit our proprietary Water Impact Framework and deliver outcomes that positively impact – at least – one of our three sustainable investment objectives[1].
We do this by providing commercialization and growth capital to businesses after putting them through a comprehensive process in which we review, among others, their impact thesis and potential pre-deal.
We set company impact targets, based on our impact framework, and actively support our investee companies in achieving them. We monitor this periodically[2]. Our remuneration is dependent on us all achieving our objectives.
We made our first investment in December 2019, with additional capital deployed across 2021, 2022 and 2023. The final close of Fund I took place at the end of 2023.
Our ambition is to develop and publish a first comprehensive Impact Report in 2024 and include the first full periodic disclosure on our sustainable investment performance in our Fund’s annual report over 2023.
Sustainability risk assessment [“Article 3 SFDR”]
Alongside the sustainable investment objectives we aim to achieve, our investment beliefs also include a view on responsible investing. To this end, we have developed a PureTerra RI_ESG Policy which details our own core objectives and commitments in the areas of Environmental, Social and Governance (“ESG”) issues, as well as how we expect our investee companies to manage their ESG risks in a considered way. We formalize these expectations in the term sheets we issue and the side letters we request our investee companies to sign next to the main investment agreement[3].
Throughout our pre-investment phase (selection and due diligence) and our post-investment phase (investment plan and monitoring) we have developed standards and processes applicable to ourselves and our investee companies. These are detailed in our proprietary PureTerraVentures_ESG Investment Manual.
This risk assessment is carried out by the investment director in charge of putting together the investment proposal. He or she may decide to bring in independent ESG experts when necessary.
For each potential risk identified, the investment director provides a rating [low to high], an explanation and suggested mitigants. The conclusions are then challenged by the Investment Committee. After an investment is made, one of our General Partners will serve on the Board of the investee company and be responsible for the continuous dialogue regarding ESG risks.
Considering potential negative impacts of our investment decision-making on sustainability factors [“Article 4 SFDR”]
In April 2022, the European Commission adopted the Regulatory Technical Standards [“RTS’] under the SFDR. This included a list of Principal Adverse Impact (“PAI”) indicators which a Fund must take into account to determine that an investment Does No Significant Harm [“DNSH’].
Although our above process on screening for potential ESG risks aligns with the requirements under Recital 17 SFDR [“the precautionary principle’] the assessment does not (yet) include a full pre-deal or periodic review of all indicators for adverse impacts provided in Tables 1, 2 and 3 of Annex 1 SFDR[4].
We believe that at present this is not yet possible, as we invest exclusively in small and early stage companies, which do not always have the capacity to report quantitively on all numerical PAI indicators (e.g. GHG emissions, hazardous or radioactive waste) or develop and implement fit-for-purpose policies on other indicators (e.g. human rights, water management). As such, we cannot state that we use PAI indicators as a fund manager.
However, last year we have issued a questionnaire to our portfolio companies, asking them to report back their 2023 performance on all 14 mandatory Principal Adverse Impact (“PAI”) indicators under Annex 1 Table 1, together with 1 environmental indicator of Table 2 and 1 social indicator of Table 3.
The results of this questionnaire are presented below.
| Adverse sustainability indicator | Metric | 2023 | Explanation | |
|---|---|---|---|---|
|
Greenhouse gas emissions |
1. GHG emissions |
Scope 1 GHG emissions (metric tons) |
11.6 |
Based on 4 (out of 10) companies in the Fund |
|
|
|
Scope 2 GHG emissions (metric tons) |
4.2 |
Based on 4 (out of 10) companies in the Fund |
|
|
|
Scope 3 GHG emissions (metric tons) |
22.5 |
Based on 4 (out of 10) companies in the Fund |
|
|
|
Total GHG emissions (metric tons) |
38.4 |
Equity stake per companytimes their total reported GHG emissions. |
|
|
2. Carbon footprint |
Carbon footprint (metric tons per 1 million Euro invested) |
1.3 |
Equity stake per company times their total reported GHG emissions. Divided by the Fund value. |
|
|
3. GHG intensity of investee companies |
GHG intensity of investee companies (metric tons per 1 million Euro invested) |
42.5 |
Provides the equity-stake-adjusted GHG intensity of 1 EUR million revenue of the company.
|
|
|
4. Exposure to companies active in the fossil fuel sector |
Share of investments in companies active in the fossil fuel sector |
0% |
Based on 8 (out of 10) companies in the Fund |
|
|
5. Share of non-renewable energy consumption and production |
Share of non-renewable energy consumption and non-renewable energy production of investee companies from non-renewable energy sources compared to renewable energy sources, expressed as a percentage of total energy sources |
29.8% |
Based on 5 (out of 10) companies in the Fund.
|
|
|
6. Energy consumption intensity per high impact climate sector |
Energy consumption in MWh per million EUR of revenue of investee companies, per high impact climate sector |
107.6 |
Based on 2 (out of 10) companies in the Fund |
|
Biodiversity |
7. Activities negatively affecting biodiversity-sensitive areas |
Share of investments in investee companies with sites/operations located in or near to biodiversity-sensitive areas where activities of those investee companies negatively affect those areas |
0% |
Based on a survey in which 8 (out of 10) companies in the Fund responded
|
|
Water |
8. Emissions to water |
Tonnes of emissions to water generated by investee companies per million EUR invested, expressed as a weighted average |
0.0 |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
|
9. Investments in companies without water management policies |
Share of investments in investee companies without water management policies |
93% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
Waste |
10. Hazardous waste and radioactive waste ratio |
Tonnes of hazardous waste and radioactive waste generated by investee companies per million EUR invested, expressed as a weighted average |
0.03 |
Based on a survey in which 8 (out of 10) companies in the Fund responded
|
|
Social and employee matters |
11. Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises |
Share of investments in investee companies that have been involved in violations of the UNGC principles or OECD Guidelines for Multinational Enterprises |
0% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
|
12. Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises |
Share of investments in investee companies without policies to monitor compliance with the UNGC principles or OECD Guidelines for Multinational Enterprises |
93% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
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|
|
or grievance /complaints handling mechanisms to address violations of the UNGC principles or OECD Guidelines for Multinational Enterprises |
100% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
|
13. Unadjusted gender pay gap |
Average unadjusted gender pay gap of investee companies |
25.1% |
Based on a survey in which 6 (out of 10) companies in the Fund responded
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14. Lack of a human rights policy |
Share of investments in entities without a human rights policy |
37.4% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
|
15. Board gender diversity |
Average ratio of female to male board members in investee companies, expressed as a percentage of all board members |
20.1% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
|
|
16. Exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons) |
Share of investments in investee companies involved in the manufacture or selling of controversial weapons |
0% |
Based on a survey in which 8 (out of 10) companies in the Fund responded |
The results point to several things:
- Our overall response rate of 80 percent is equal to last year. Our portfolio increased in 2023 from 6 to 10 companies at the end of the year, so it required significant onboarding on ESG/Impact matters. GHG emission and energy data are most challenging, with a relatively low response rate.
- Based on the reported data, we have no investments in the fossil fuel or controversial weapons sectors, or investments which negatively impact biodiversity-sensitive areas or have been involved in violations of UNGC principles or OECD Guidelines for Multinational Enterprises.
- Based on the data and companies’ qualifying statements, most will opt for renewable energy when given the opportunity – and where it is available – but several are locked-in to tenant arrangements.
- The majority of our investee companies don’t have formal water management or human rights policies in place, nor formal policies to monitor UNGC compliance or associated grievance mechanisms.
- The unadjusted gender pay gap in our portfolio decreased with 25.1% in 2023 (34.9% in 2022), but still appears above long time averages measured in the U.S. (18%), the European Union (12.7%) or the Netherlands (13.5%)[5]. Board gender diversity was also better in 2023 (20.1%) compared to 2022 (17%) but still seems below long-term reported trends in mature markets and companies[6]. However, reported data is based on take home pay and does not include equity or options, which is a standard component within start- and scale-ups.
- Measuring emissions across all Scopes remains challenging for our investee companies. Reported data does not seem complete and especially value chain emissions through Scope 3 are a big challenge.
In 2023 and the first half year of 2024 we took the following actions:
- Assisted our portfolio companies with further maturing their data collection, calculation and quality for material PAI indicators – leveraging the SASB Standards to determine materiality;
- Reviewed our current ESG risk assessment to include PAI considerations;
- Analysed whether we should adjust our policy settings and escalation processes to further inform our investable universe and our active ownership approach;
- We updated our impact policy and implemented this with our portfolio companies.
We intend to work across the remainder of 2024 and the first half of 2025 on three actions:
- Assist our portfolio companies with low-barrier methods which help them simplify GHG emission measurement;
- Implement portfolio-specific measures based on the outcome of the 2023 assessments;
- Create our first water impact report.
Integration of sustainability goals within our remuneration policies [“Article 5 SFDR”]
All Partners are shareholders in the Fund and their compensation is tied to its financial and sustainable investment performance. Our carried interest is specifically tied to the impact targets of the portfolio companies.
The sustainable investment objectives of the PureTerra Fund [“Article 10 SFDR”]
We manage one venture capital fund, named PureTerra Ventures I Coöperatief U.A. (Fund I).
Fund I secured a first close in the summer of 2021 and undertakes new investments. The Fund invest exclusively in businesses that meet our impact criteria as described above in our approach to impact investing. As such, the Fund seeks to achieve a sustainable investment objective and is therefore categorized under Article 9 SFDR.
The objective of the Fund is to invest in start- and scale-ups that impact – at least – one of our three sustainable investment objectives:
- Conservation of the water supply
- Climate change mitigation and adaptation
- Growth of the water capital market
The Fund is managed according to the investment strategy and process detailed in this statement. No other investments are managed by PureTerra Ventures.
This statement was published on 30 June 2024.
[1] Our impact measurement framework is based on the shared norms developed by the Impact Management Project (“IMP”)
[2] Either quarterly or yearly, depending on the investee company’s reporting capacity
[3] Some of our own investors have requested additional (monitoring, visiting and auditing) rights in order to meet their mandate, as well as require our investee companies to comply with additional sustainability proofing requirements
[4] We are aware that the mandatory list of PAI indicators is likely to expand as markets mature and market consultations give direction on priority factors
[5] Pew Research and Eurostat
[6] “Based on data covering a sample of listed companies from 50 jurisdictions, women represent 25.1% of board directorships in 2021”. See: https://www.oecd.org/publications/enhancing-gender-diversity-on-boards-and-in-senior-management-of-listed-companies