Information based on the Sustainable Finance Disclosure Regulation (SFDR)
In response to the commitments taken on by the Sustainable Development Goals and the Paris Agreement ratified in November 2016 on climate change and the need to reduce CO2 emissions, the sustainability-related disclosures in the financial services sector regulation has emerged as one of the regulatory mechanisms to promote sustainable finance.
The purpose of the regulation is to reduce ‘information asymmetries in principal-agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and sustainable investment, by requiring financial market participants and financial advisors to make pre-contractual and ongoing disclosures to end investors’.
In light of the above and bearing in mind that Ship2B Ventures SGEIC, SA (hereinafter ‘Ship2B Ventures’ or the ‘Fund Manager’) manages impact investment funds, we are adhering to this new regulation.It merits mention that BSocial Impact seeks to produce a positive impact that is deliberate and measurable, in parallel with financial returns. Therefore, we are a step ahead of responsible and sustainable investment, as we not only consider ESG risks, but we also contribute positively to society through our investments in impact startups.
Article 3. Transparency of sustainability risk policies
Sustainability risks are defined as environmental, social or corporate governance events or conditions that, if they occur, could cause a negative material impact, either real or potential, to the value of an investment.
Since the Fund Manager was founded, it has established that both the impact created by investment opportunities and their ESG risks must be analysed in all investment analysis processes.To this end, we have designed a methodology whose overriding principle is to include the impact and ESG risks throughout the investment analysis process, from the initial screening to the exit. In view of the foregoing, the regulation and shareholders’ agreement and management agreement (LPA) for the different funds managed by Ship2B Ventures all specify that investments should be made in companies with the specific objective of creating a positive social impact, in parallel with garnering financial returns. Likewise, the Fund Manager shall not invest, guarantee or provide financial support to companies or other organisations whose main business is the production, marketing or sale of tobacco or alcoholic beverages, the production, marketing or sale of weapons and munitions of any type, casinos and similar businesses or pornography and related industries.
In addition to the restrictions set out in the regulations of different funds concerning ESG risks, in our internal due diligence phase, an in-depth analysis is conducted on the impact the startup expects to generate in the future, by employing the EVPA’s Five-Step Process and the Impact Management Project (IMP).This analysis provides us with knowledge on how likely it is that the actual impact could be different than expected, in which case we can construct mitigation strategies. Furthermore, as part of our external due diligence process, we conduct a due diligence of ESG risks to enable us to draft a mitigation plan for these risks that the companies we invest in must implement during the investment term. Finally, and with the aim of achieving external validation and certification as responsible companies, the companies we invest in have two years in which to obtain B-Corp certification.
Article 4. Transparency of adverse sustainability impacts at entity level
Ship2B Ventures considers the principal adverse impacts (PAI) on sustainability factors in its investments, focusing on the size, nature and scale of companies’ lines of business, as well as the type of financial products they offer.
This process is done by analysing ESG risks in the external due diligence for the investment method. This analysis ensures that we can identify the ESG risks for each investment opportunity and create the improvement plan that shall be implemented during the investment lifetime.
It merits mention that due to the fact that the regulatory framework is still being defined with respect to technical issues, Ship2B Ventures is adopting a gradual alignment to the SFDR regulation, with the goal of integrating the most suitable sustainability adverse impact indicators to comply with the regulation.
Article 5. Transparency of remuneration policies in relation to the integration of sustainability risks
Attaining impact targets is extremely important to the Fund Manager, which is why they are linked to the variable remuneration policy (or ‘carry’) for our management team. This means that if fund impact targets are not achieved, this performance compensation will be negatively affected.
The methodology we follow at Ship2B Ventures, which is applied at BSocial Impact, is that which is set out by the European Investment Fund. This methodology is based on defining between one and five impact indicators for each investee, as well as their respective forecasts for achieving these indicators during the investment period. Each investee company is averaged by the investment made and then we conduct quarterly monitoring to analyse the state of compliance with these indicators. We call this measurement the Social Impact Multiple (SIM). At the end of the investment period, this lets us calculate whether or not they have achieved the expected target that was forecast at the beginning of the investment. Depending on this result, the management team carry will vary.
It is important to stress that impact indicators are agreed upon with the entrepreneurs, endorsed by the general partners and approved by the Advisory Committee, made up of the main investors in the fund.
Article 10. Transparency of the promotion of environmental or social characteristics and of sustainable investments on websites
BSocial Impact is an impact investment tool that invests exclusively in social enterprises that comply with the definition established by the European Commission. Likewise and as established on the website, Ship2B Ventures focuses on three core investment areas: fighting climate change, improving quality of life and closing the gap in schools / education. Namely, our investees must be aligned with one of these challenges: i) improve the quality of life of the elderly, people with disabilities or chronic patients; ii) contribute to the fight against climate change by reducing CO2 emissions; or iii) improve the educational skills of children, as well as all people, with the aim of improving job placement.
The Ship2B Ventures website also has a section entitled News, which details the most important breaking news in the entrepreneurial ecosystem and, concretely, in the impact sector.
An annual report is published on a yearly basis on the Fund Manager’s website, which includes financial and impact information on investee companies, primarily the aforesaid impact indicators and their level of fulfilment.
We not only promote transparency by publishing information on social impact on our website, we also foster and encourage transparency on our investees’ websites and the achievement of the goals that are established on them.These targets must be set out in a section of their respective websites in which the impact objectives they are pursuing are detailed, as well as their main KPIs.
As set out in the section on adverse impacts, impact is present in the entire investment process, from the initial screening until the exit. During the screening stage, these factors are analysed: i) the startup’s alignment with the European Commission’s definition; ii) alignment with one of the three challenges that we aim to contribute to mitigating; and iii) the startup’s commitment to resolving the social or environmental problem. During the internal and external due diligence phases, an in-depth analysis is performed of the impact that the investment opportunity is expected to produce, as well as the risks associated with the impact and ESG via the IMP methodology and the ESG due diligence. When the transactions are executed, we create a working plan with the startup focused on business growth, assuring fulfilment of the impact and reducing ESG risks. Finally, we incorporate the ESG impact and risks into different clauses of the shareholders’ agreements of our investee companies.
Given that at present there is no market index that measures enterprises’ positive social and environmental impact, we have adopted the Social Impact Multiple (SIM) measurement.
Ship2B Ventures is also adopting a gradual alignment with the SFDR regulation and regulation technical standards (RTS) – since they are still being defined – with the aim of integrating the methodological and reporting frameworks of the fund to the regulation.