Chenavari European Opportunities Fund III SCSp SICAV-RAIF

LEI : 549300Q3S809EUEFML80

(the “Fund”)

This section is to provide investors in the Fund with information required by the Sustainable Finance Disclosure Regulation (‘SFDR’).

More information about the Fund can be found in the private placement memorandum and limited partnership agreement of the Fund.

‘Sustainability-related disclosure’ section information:

(a) ‘Summary’;

(b) ‘No sustainable investment objective’;

(c) ‘Environmental or social characteristics of the financial product’;

(d) ‘Investment strategy’;

(e) ‘Proportion of investments’;

(f) ‘Monitoring of environmental or social characteristics’;

(g) ‘Methodologies’;

(h) ‘Data sources and processing’;

(i) ‘Limitations to methodologies and data’;

(j) ‘Due diligence’;

(k) ‘Engagement policies

(l) where an index is designated as a reference benchmark to attain the environmental or social characteristics promoted by the financial product, ‘Designated reference benchmark’.

 

(a) ‘Summary’ sub-section

The following is a summary of the way the Fund promotes environmental or social characteristics.  For more information on the sustainability characteristics of the Fund, investors should read the other sustainability-related disclosure sections below.

This Fund promotes environmental or social characteristics but does not have as its objective sustainable investment.

The Fund promotes the following environmental and social characteristics:

Environmental:

  • Promotion of low carbon transition

Social:

  • Protection against controversial weapons
  • Promotion of data privacy and security
  • Promotion of implementation of ESG policies
  • Promotion of fair lending practices

The investment team, in collaboration with Chenavari’s Head of ESG, is responsible for screening transactions from the perspective of the environmental and social characteristics promoted by the Fund. This is done through a mix of third-party ratings where available, answers to Chenavari ESG questionnaires by counterparts and independent research by the Investment Manager. The result of this screening is presented as part of the investment committee approval process. The Fund’s policy of responsible investment which sets out the various criteria to be taken into account in that process, is reviewed on at least an annual basis.

The environmental and/or social characteristics are monitored internally and where possible, externally in a variety of ways. The Investment Manager uses norms-based evaluation, business activity-based exclusions and active ownership to support the attainment of the promoted environmental and/or social characteristics and these are implemented on a continuous basis through monitoring of the binding commitments.

The Investment Manager uses the following sustainability indicators to measure the attainment of the environmental and social characteristics promoted by the Fund:

  • The % of holdings that are on Chenavari's Exclusion list as result of the application of Chenavari's Exclusion Principles
  • The % of holdings with transaction counterparts who have been classified as an ESG laggard by Chenavari’s own ESG Ratings
  • The % of holdings in specialty finance transactions with respect to which acceleration of an ESG agenda is achieved through the use of legal rights (e.g. board seat) or where amendments to ESG policies or lending practices have been made following engagement with Chenavari
  • The % of holdings which include a sustainability-linked feature in the loan documentation
  • The Investment Manager may develop further the components of the sustainability indicators over time.

The Investment Manager uses the following data sources to attain each of the environmental or social characteristics promoted by the Fund: sell-side research, company presentations and filings, issuance documentation, public databases and news articles, third-party ESG research firms, as well as information sourced directly from the respective originators/counterparts via direct engagement/proprietary questionnaires.

There are several limitations to the methodology used for measuring how the social or environmental characteristics promoted by Fund are met. Some of these limitations include: subjectivity, lack of standardisation, data availability and quality, and complexity. These limitations are mitigated primarily through the Investment Manager’s own in-house research and active engagement with counterparts/originators, as well as cross-referencing key metrics against different data providers where available.

Effective engagement and constructive dialogue with counterparts are critical to encourage them to pursue positive sustainability outcomes. The Investment Manager gives due consideration as to whether there is an opportunity for engagement on ESG issues and whether a counterpart/originator may be able to transition its business activities or practices to a more sustainable model.

No index has been designated as a reference benchmark to attain the environmental or social characteristics promoted by the Fund.

 

(b) ‘No sustainable investment objective’ sub-section

This Fund promotes environmental or social characteristics, but does not have as its objective sustainable investment.

 

(c) ‘Environmental or social characteristics of the financial product’ sub-section

The Fund promotes the following environmental and social characteristics:

Environmental:

  • Promotion of low carbon transition

Social:

  • Protection against controversial weapons
  • Promotion of data privacy and security
  • Promotion of implementation of ESG policies
  • Promotion of fair lending practices

The Fund seeks to achieve this through:

  1. Exclusion criteria with regards to certain sectors (including controversial weapons, tobacco, coal, tar sands)
  2. Exclusion criteria with regards to issuers which Chenavari believes have breached global norms (such as environmental norms, bribery, money-laundering) or do not follow good governance practices
  3. Limiting investments in organisations which have not integrated ESG factors in their business practices including fair lending practices
  4. Promotion of ESG matters with specialty finance partners to encourage strong ESG policies and procedures
  5. Where possible, implement sustainability-linked loan creation

All investments go through the ESG screening process in order to assess the promotion of the above environmental and social characteristics. Aside from the SRT/portfolio acquisition exception (described below), the Investment Manager will not make investments that do not meet the Chenavari exclusion principles – as defined in Chenavari’s Policy of Responsible Investment available at https://www.chenavari.com/sustainability/policy-of-responsible-investment/. The Investment Manager will limit investments with transaction counterparts that have an elevated sustainability risk profile as measured by Chenavari’s ESG Rating.

For SRT/portfolio acquisition transactions where the sector exclusion may be harder to apply due to the granularity and volume of underlying loans, there is a tolerance measured at the time of investment where underlying loans in excluded sectors must represent less than 2% of the underlying loan portfolio financed by the Fund (calculated on a static basis at the time an investment is made by the Fund).

 

(d) ‘Investment strategy’ sub-section

The investment strategy of the Fund focuses broadly on the following three sub-strategies:

  • Investments in bilateral SRT (Significant Risk Transfer) transactions on European banks’ core credit exposure (primary and secondary)
  • Acquisitions of mainly performing European credit portfolios from banks
  • Financing of newly originated loans, through warehouse investments, forward flow agreements and secured financing to specialty finance lenders

The Investment team, in collaboration with Chenavari’s Head of ESG, is responsible for screening transactions from the perspective of the environmental and social characteristics promoted by the Fund. This is done through a mix of third-party ratings where available, answers to Chenavari ESG questionnaires by counterparts and independent research by the Investment Manager. The result of this screening is presented as part of the investment committee approval process. The Fund’s policy of responsible investment which sets out the various criteria to be taken into account in that process is reviewed on at least an annual basis.

The Investment Manager assesses governance practices of investee companies by incorporating requirements in its due diligence process with regards to sound management structures, employee relations, remuneration of staff and tax compliance. This analysis is done either through the use of external third party ratings, Chenavari questionnaires sent to counterparts and/or on-line research. The Fund applies exclusionary screens to particular issuers based on the Investment Manager’s assessments and/or third party ESG data where available.

Good Governance assessment framework

Picture1

  • Employee relations: Good governance ensures the absence of high or severe conflict or controversies in the workplace. Companies should not be in structural conflict with their employees.
  • Business ethics: Business ethics relate to how a business should act in the face of ethical dilemmas and controversial situations. Good governance practices ensure there are no high or severe controversies.
  • Accurate reporting: Companies should have reporting structures that provide the investing public with information regarding the most relevant business activities throughout the year and financial statements, which should be subject to external audit/review.
  • Oversight: Where applicable, companies should have a supervisory board that oversees management activities on behalf of shareholders and other stakeholders in the company. The supervisory board should have at least one independent board member.
  • Tax compliance: As a minimum, companies must adhere to local tax laws and be aware of and observe the applicable state, federal, and international tax laws and requirements set forth by local government officials and other taxing authorities. It is important for companies to have a tax policy and to be transparent on both the tax principles applied and the tax contribution that is paid in the jurisdictions they operate.
  • Remuneration: Companies that receive a significant ‘against’-vote from shareholders on their executive remuneration, are assessed as to whether basic remuneration safeguards are in place.
  • Shareholder rights: Companies should respect basic shareholder rights, including applicable company law and the basic rules of shareholder meetings.

 

(e) ‘Proportion of investments’ sub-section

The Fund does not make sustainable investments.

The below diagram gives the percentage of investments meeting the environmental and social characteristics described under point (c) that the Fund aims to attain.

 Picture2

The #2 Other investments comprise investments that fall within the “laggard” or “limited” categories of Chenavari’s internal ESG Ratings; meaning that they raise ESG concerns in terms of their lending practices or ESG policies.

It also includes with respect to the Chenavari sector exclusion list, the tolerance for SRT and portfolio acquisition transactions in excluded sectors that can represent up to 2% of the underlying loan portfolio financed by the Fund (calculated on a static basis at the time an investment is made by the Fund).

 

(f) ‘Monitoring of environmental or social characteristics’ sub-section

The environmental and/or social characteristics are monitored internally and externally in a variety of ways. The Investment Manager uses norms-based evaluation, business activity-based exclusions and active ownership to support the attainment of the promoted environmental and/or social characteristics and these are implemented on a continuous basis through ongoing compliance with, and monitoring of, the binding commitments.

The following monitoring elements are employed by the Investment Manager:

  1. The Chenavari ESG Rating will be updated on an annual basis for every transaction in the Fund’s portfolio.
  2. The ESG performance of investee companies will be monitored throughout the life of the investment by using external ESG data from reputable providers (where available) or Chenavari’s proprietary ESG questionnaires.
  3. The Investment Manager gives due consideration as to whether there is an opportunity for engagement with investees on ESG issues and whether a counterpart/originator may be able to transition its business activities or practices to a more sustainable model. Insights from the engagement process can therefore result in changes to the Chenavari ESG rating assessment of a counterpart/originator.
  4. Where the counterpart/originator implemented a sustainability-linked loan, the Investment Manager will monitor the progress and attainment of sustainability-related targets and metrics throughout the investment’s life.
  5. The monitoring process can lead to a decision to participate in a new issuance, increase or reduce exposure, or place a counterpart/originator on a monitoring list until more progress is made on the specific E, S, or G issue of concern.

 

(g) ‘Methodologies’ sub-section

The methodology to measure how the environmental and social characteristics promoted by the Fund are met is as follows:

  1. Compliance with Chenavari’s Exclusion Policy that is based on exclusion criteria of certain sectors (for the time being, thermal coal, tar sands, tobacco, controversial weapons, pornography, prostitution, human trafficking, child labour, forced labour, sexual violence) and certain practices that Chenavari believes are detrimental to society and incompatible with investment strategies that promote environmental and social characteristics (breach of money laundering or bribery or sanctions, human right violation, labour force issues, environmental damage). For SRT and portfolio acquisition transactions where the sector exclusion may be harder to apply due to the granularity of the portfolio, there is a tolerance measured at the time of investment where underlying loans in excluded sectors must represent less than 2% of the underlying loan portfolio financed by the Fund (calculated on a static basis at the time an investment is made by the Fund).
  2. The Investment Manager will include the Chenavari ESG Rating in the ESG Due Diligence Section of every investment proposal. The Chenavari ESG Rating outcome is the result of a holistic, rather than normative analytical process, combining both top-down and bottom-up elements across the four key pillars: Controversy Scan, Integration of ESG Factors, Engagement (where feasible), Sustainable Finance Instruments (where feasible).

The Investment Manager will use the Chenavari ESG rating outcomes as a proxy to limit exposure to elevated sustainability risk investments. The assessment and limitation of sustainability risk disclosure involves a subjective assessment on the part of the Investment Manager which may be informed by the use of external ESG data. Whilst the Investment Manager intends to use the outcome of the Chenavari ESG rating in its investment decisions, the Investment Manager will consider sustainability risks alongside all other risks relevant to the portfolio and take a holistic view on the composition of the portfolio or the holding of specific investments from a risk perspective. In line with existing risk management processes.

  1. The Investment Manager may tilt the Fund’s portfolio towards transactions that screen better on the Chenavari ESG rating metric, and so are likely to be less exposed to sustainability risks. In doing so, the Investment Manager may exclude ‘Laggards’ from its investment universe or limit the Fund’s exposure to ‘Laggard’ and ‘Limited’ transactions.

The Investment Manager will use the following sustainability indicators to measure the attainment of the environmental and social characteristics promoted by the Fund:

  • The % of holdings that are on Chenavari's Exclusion list as result of the application of Chenavari's Exclusion Principles
  • The % of holdings with transaction counterparts who have been classified as an ESG laggard by Chenavari’s own ESG Ratings
  • The % of holdings in specialty finance transactions with respect to which acceleration of the ESG agenda is achieved through the use of legal rights (e.g. board seat) or where amendments to ESG policies or lending practices have been made following engagement with Chenavari
  • The % of holdings which include a sustainability-linked feature in the loan documentation

The Investment Manager may develop further the components of the sustainability indicators over time.

 

(h) ‘Data sources and processing’ sub-section

(a) The Investment Manager uses the following data sources to attain each of the environmental or social characteristics promoted by the Fund: sell-side research, company presentations and filings, issuance documentation, public databases and news articles, third-party ESG research firms, as well as information sourced directly from the respective originators/counterparts via direct engagement/proprietary questionnaires.

  • ESG profile of the originator/counterpart. The ESG profile evaluation of an originator/counterpart may be satisfied by using external ESG data provided by a recognised ESG data provider. When external ESG data/research is available for a particular originator, the non-financial characteristics, ESG metrics, factors, or criteria that are looked at are as follows: corporate governance research and ratings, controversy research and ratings, global standards screening. ESG ratings are relative and subjective and are not absolute standards of quality. In situations where external ESG rating is not available for a particular originator/counterpart, the Investment Manager together with the Head of ESG, will perform an internal ESG rating assessment and will use a proprietary ESG Questionnaire for this purpose. The internal ESG rating assessment will include a review of the originator’s/counterpart’s overall sustainability strategy, its policies and procedures for material topics (data privacy and security, lending practices, treatment of customers), as well as a scan for any potential controversial activities via a standardised set of six Y/N questions.
  • ESG analysis of the underlying loan portfolio. the Investment Manager will initiate bilateral conversations with originators/counterparts as part of prospective transactions, to facilitate deeper, portfolio-level ESG analysis. While the standardisation of ESG processes and documentation has improved significantly over the past decade, the securitisation and specialty finance sectors are still in the early stages in terms of providing ESG transparency and disclosure.

 (b) There are several measures taken by the Investment Manager to ensure data quality:

  • Clear and consistent data definitions: This helps to ensure that all data is consistently collected, stored, and interpreted in the same way.
  • Validating data input: This involves checking data as it is entered to ensure that it is accurate and complete. This is normally done through manual checks by Investment Manager personnel for all transactions.
  • Implementing data quality control processes: This involves regular checks and audits of sample data by the Head of ESG to identify any errors or inconsistencies.

 (c) The Fund uses a combination of internal research (informed by publicly available sources disclosed by investee companies) and third-party data sources to attain each of the environmental and/or social characteristics promoted by the Fund. Where data is extracted from third party providers, the Investment Manager evaluates their methodology and coverage at the outset (initial due diligence) and then carries out spot checks of the data, escalating issues to the third-party provider where necessary. Once the data has been collected for a specific transaction, it is processed and analysed to determine the Chenavari ESG rating. The specific methods and algorithms used to process and analyse the data can vary, depending on whether the data is sourced from a reputable ESG data provider or from the originator/counterpart via direct engagement. Chenavari may use a weighted scoring system, where certain aspects of an originator’s/counterpart’s ESG performance are given greater importance than others.

Overall, the goal of data processing in the construction of the Chenavari ESG rating is to provide a consistent and transparent assessment of ESG performance, which can be used to make informed decisions.

(d) There is sometimes a reliance on estimated data when it comes to business activity-based exclusions. Third party-providers occasionally make estimates of revenue exposures relating to business activity-based exclusions where disclosure is lacking.

 

(i) ‘Limitations to methodologies and data’ sub-section

There are several limitations to the methodology described in point (g) for measuring how the social or environmental characteristics promoted by the Fund are met. Some of these limitations include:

  • Subjectivity: Many of the criteria used to assess social or environmental characteristics are subjective and open to interpretation, which can lead to inconsistency and bias in the measurement process.
  • Lack of standardisation: There is currently no widely accepted set of standards or guidelines for measuring the attainment of social or environmental characteristics, which makes it difficult to compare and evaluate different investment opportunities on a like-for-like basis.
  • Data availability and quality: Accurate and comprehensive data is essential for effective measurement, but data on the social and environmental characteristics is often limited or of low quality, which can hinder the measurement process.
  • Complexity: Social and environmental characteristics can be complex and multifaceted, making it challenging to measure and evaluate using a single methodology or approach.
  • Samples: the due diligence may be limited to a certain number of loans in the underlying portfolio(s). There is no guarantee that the selected loans are representative of the portfolio.
  • Assessment is based on internal questionnaire and methodology: data is essentially coming from the counterpart/originator itself for specialty finance transactions where there is no external third party data available.

These limitations are mitigated primarily through the Investment Manager’s own in-house research and active engagement with counterparts/originators, as well as cross-referencing key metrics against different data providers where possible. Due to this mitigation, the Investment Manager believes that the promotion of the environmental and social characteristics is not appreciably altered.

 

(j) ‘Due diligence’ sub-section

Before the Fund makes any investment, the Investment Manager will conduct such due diligence as it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. The objective of the due diligence process is to identify material issues in connection with the investment in order to determine how attractive the investment opportunity is, based on the prevailing facts and circumstances. When conducting due diligence and making an assessment regarding an investment, the Investment Manager will necessarily rely, for the purposes of its own structural analysis and modelling, on available resources, in particular information provided by the relevant counterparty/originator.

The Investment Manager may engage associated and unassociated third parties to conduct due diligence on prospective investments.

In conducting due diligence, the Investment Manager will use publicly available information as well as information from consultants and investment bankers if available.

The due diligence may be limited to a representative sample of loans or other assets comprising a potential Investment.

The risk management team may also assist the investment team with due diligence identifying potential risks.

 

(k) ‘Engagement policies’ sub-section

Effective engagement and constructive dialogue with counterparts are critical to encourage the   pursuit of positive sustainability outcomes. The Investment Manager gives due consideration as to whether there is an opportunity for engagement on ESG issues and whether a counterpart/originator may be able to transition its business activities or practices to a more sustainable model.

Insights from the engagement process can therefore result in changes to the assessment of the issuer. This may in turn lead to a decision to participate in a new issuance, increase or reduce exposure, or place an issuer on a monitoring list until more progress is made on the specific E, S, or G issue of concern.

The Chenavari team may use its legal rights and/or its softer influence to accelerate the ESG agenda of its specialty finance partners. Where applicable, this may include exerting board influence or to ask borrowers to cover progress on ESG matters (e.g. on ESG action plan implementation) at Board meetings.

 

(l) where an index is designated as a reference benchmark to attain the environmental or social characteristics promoted by the financial product, ‘Designated reference benchmark’ sub-section

No index has been designated as a reference benchmark to attain the environmental or social characteristics promoted by the Fund.