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responsAbility and ESG

Environmental, Social & Governance

What is ESG?

ESG or "Environmental, Social and Governance" is an assessment to ensure that the investment will do no harm. Improving a company's ESG score generally also improves the company's performance, making ESG not only the basis for sustainable investment, but also good for business.

(E) ENVIRONMENTAL CRITERIA

Environmental criteria are used to evaluate how a company performs as a steward of the natural environment. Companies are expected to conduct an environmental impact assessment to identify risks linked to the loss of biodiversity, the emission of greenhouse gases, the degradation of water quality and air quality, etc

(S) SOCIAL CRITERIA

Social criteria examine how a company manages relationships with employees, suppliers, customers and the communities where it operates. For instance, our portfolio companies are, among other things, expected to pay wages that meet or exceed industry or legal national minimums, treat their employees fairly, and create structures that give employees the opportunity to present their views to the management.

(G) GOVERNANCE CRITERIA

Governance criteria deal with leadership, executive pay, audits, internal controls and shareholder rights. Here, our portfolio companies are expected to, among other things, distribute the rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders, and stakeholders.

ESG Process and Performance at responsAbility

Screening

Reputation check & Compliance Exclusion List
Anti-Money Laundering & Corporate Governance
Human Resources & Labour Policies

The ESG exclusion lists for each responsAbility investment product covers, at minimum, the industries and activities listed in the IFC exclusion list, and often much more. Prior to any investment, all potential portfolio companies are screened against these exclusion lists. No investments will take place for any product if the potential borrower is engaged in excluded activity (e.g. involved in harmful or exploitative forms of forced labour or harmful child labour; production or trading of weapons and munitions; involved in money laundering and terrorism financing; not respecting human rights, etc.).

Potential portfolio companies are screened against a set of investment criteria outlined in the product’s Eligibility Guidelines. These guidelines also include specific requirements regarding the borrower’s commitment to environmentally and socially sound practices.

Categorize ESG & Investor Risk

Proposed Investment Category

Each proposed investment is categorized as ‘low’, ‘medium’ or ‘high’ as regards its ESG risks. This classification is equivalent to the IFC’s proposed risk categorization. All environmental and social risks are considered in the context of inherent sector risks, the scale of the company’s operations and whether the investment involves new or continued operations and locations.

As we are sector thematic, we invest in 3 overall sectors: Financial Inclusion, Sustainable Food and Climate Finance, where the type of risks linked to environmental, social and governance criteria are intrinsically very different. Regardless of the risk category, all portfolio companies must meet applicable national laws and regulations concerning ESG issues.

Carry out ESG Due Diligence

Environmental & Social Due Diligence
Client Protection Evaluation

Even if a potential investment appears to comply with the ESG criteria that have been set out for each fund, responsAbility’s investment teams must verify this compliance, normally during the due diligence (DD) visit carried out before disbursement. This ESG DD entails active engagement with each potential portfolio company, collecting and analyzing their status on ESG performance.

responsAbility’s investment universe mostly consists of mid-size companies that are rarely listed on capital markets. Consequently, almost no ESG information is publicly available. This means that ESG data must be collected and assessed by the investment teams. Due diligence of ESG issues is carried out by responsAbility’s investment teams and ESG experts. This active ESG approach allows responsAbility to ensure that the appropriate values are integrated into investment strategies.

Investment Decision

Investment Decision
Record ESG Assessment and Action Plan in Investment Memorandum
Due to the importance of ESG analysis in the overall investment process, responsAbility has put in place internal metrics to ensure correct implementation. We have developed an internal ‘traffic light’ system that summarizes the status of any ESG issues in our portfolio companies. The methodology is based on IFC’s internal scoring system for ESG aspects, which has been integrated into an internal ESG scoring tool.

Monitor ESG Mitigation Action

Periodic review of ESG Performance
A range of inputs generates a simple ESG rating to rate each investment. The ESG rating is calculated by responsAbility’s ESG team during appraisal (initial investment). Progress is regularly checked via monitoring reports and onsite visits, after which the rating is reviewed. This approach allows responsAbility to track how investments improve their ESG status from appraisal to project close.

How Impact and ESG add up in one equation

For responsAbility, the application of ESG criteria is only one selection criteria within the investment process. For the portfolio, responsAbility targets high impact companies defined by a set of measurable impact themes. Careful ESG assessment and monitoring then guarantees no unforeseen risks arise in the areas of environment, social and governance.

No High-Risk Investments in the responsAbility Portfolio

Because of responsAbility’s endeavor to actively engage with portfolio companies to encourage the adoption of better management practices when risks are identified, roughly 70% of all investments within the responsAbility portfolio score low on ESG risk. The remaining 30% of responsAbility’s portfolio is classified as medium ESG risk.

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