ESG Report 2021

The question relating to the UN Sustainable Development Goals shows that more and more of the managers in Argentum’s portfolio are aware of these goals.³¹ Many also actively use the SDGs in their sustainability strategy. A total of 56 managers report on specific sustainable development goals relevant to activities of the fund and/or portfolio company. This is an increase of six since 2020 and 17 from 2019, which was the first year in which we requested information about the sustainable development goals.

The six goals that are highlighted in the graph above are the same as in the previous two years, even though SDG 13 on Climate action is now the second most relevant. This increase can, in part, be explained by there being six more managers reporting on sustainable development goals compared to last year.

Goal 8 on Decent work and economic growth is the sustainable development goal that most managers commit to, and here there has been an increase from 32 to 40 managers from the 2020 report. There was also a big increase in the number committed to SDG 13 about stopping climate change, rising from 28 to 34 managers. There has been a sharp increase in the number of managers that consider SDG 5 on Gender equality to be important: From 23 managers in 2020 to 30 managers in 2021. The greatest increase could be found among the managers that focused on SDG 3 on Good health and well-being: From 20 managers in 2020 to 30 managers in 2021.

For the question related to climate risk, the reporting from the managers shows that this largely depends on the investment focus and the industry the portfolio companies operate in. For the majority of managers, the climate risk is considered low because of their investment focus.

At the same time, it is clear that more and more managers are taking climate risk into account and analysing this before investing where they consider it necessary. In most cases, the analysis will focus on individual companies that are particularly exposed to climate risk, while some managers have established routines for mapping climate risk both in general in the DD process and in the existing portfolio.

On the whole, the managers are keen to reduce climate-related risk in the portfolio, and to look out for possible opportunities in this area. Several managers have also come up with examples of portfolio companies exploring new business opportunities related to this.

In response to the question of climate risk as part of the portfolio companies’ governing documents, most managers have not included this. This is primarily due to low climate risk in the portfolio because of the investment focus. In many cases, this is followed up at board level where appropriate, while some managers have also established more formal governing documents and initiatives which take account of climate risk.

The questions relating to the EU Taxonomy and the TCFD show that the managers are generally aware of these measures. With regard to the EU Taxonomy, the work here will depend on where managers are based, as this is primarily relevant to managers operating in the European market.

The managers operating in the European market have updated their websites and documentation in accordance with the Sustainable Finance Disclosure Regulation (SFDR). Due to the investment focus, portfolio companies will not be covered by the current taxonomy requirements in most cases. At the same time, we see that managers are still keeping abreast of the EU Taxonomy and some have also begun to map out how their existing portfolios will be classified.

We have also found that many managers intend to classify future funds as Article 8 funds under SFDR. Based on the responses we have received, no less than 37 managers state that their previous or next fund will be classified under Article 8. There are also several managers considering this approach but that have yet to make a final decision. Some managers also intend to create funds that will be classified under Article 9 by SFDR.

The managers that are not planning to create an Article 8 fund are largely managers that are no longer active or managers that are not covered by SFDR regulations.

Data security is still generally considered important by the managers. The trend seen in recent years’ reporting continues and we can see that more and more managers have a greater focus on cybersecurity, especially in those industries where this is most relevant. This is because the threat from such crime is increasing and because the portfolio companies are becoming more digital.

With regard to anti-corruption activities, the reports we have received indicate that managers of portfolio companies with operations in countries where corruption is widespread are aware of this and have established good procedures and guidelines to follow up and prevent this. The identified risk is largely related to the supply chain and to some extent to the portfolio companies’ own offices or industries with a higher corruption risk.

The work on developing KPIs linked to ESG continued in 2021. More managers have established ESG-specific KPIs related to each portfolio company, rather than general KPIs across the portfolio. Many of the managers have also started reporting selected ESG-related KPIs to their investors.

In general, the reporting to the investors is steadily improving, and several managers have included ESG reporting as part of the standard quarterly reports. More and more managers are also publishing their own ESG report, and more have also planned to do so in future.

The majority of managers consider that the ESG work has a positive financial effect on the companies, even if it is difficult to isolate from other measures implemented in the company. Many managers also believe that this is something that will become clearer at a later stage of the ownership period and/or in the event of a sale. There is also increasing reporting by portfolio companies on climate measures that can contribute positive financial effects.

The managers also emphasise that throwing a clear spotlight on ESG has a positive impact on employees, customers and suppliers. Argentum has seen several examples of companies where the ESG work has had a positive financial effect or contributed to a higher market value. Several companies also contribute to society in other ways, both as major employers and through other social initiatives.

As a member of the ESG Data Convergence Initiative, Argentum issued the data form for the project to managers. We received a response from 43 of 97 managers (44%). The reason for the lower response rate here is often because the requested data is not available. This project is also new and several of the managers in the portfolio have not yet considered whether or not to participate in the project. Argentum believes that the response rate will increase over time, as more investors and fund managers join the project.

Some of the indicators for which data has been collected also constitute indicators for which Argentum has previously collected information. This relates to CO₂ emissions for the underlying portfolio companies. Argentum received reports for 179 underlying companies, corresponding to 21.7% of the companies that reported on risk, or 15.6% of the total underlying portfolio. This is 8% fewer than last year, when 195 underlying companies reported on emissions. Total CO₂ emissions of 1,288,849 tonnes were reported. (Scope 1) and 1,077,272 (Scope 2). The company responsible for the highest share of emissions accounts for 37% of the total emissions reported. However, some of the figures reported from 2020 are unchanged, since the emission figures for 2021 are not yet finalised.

The reports we have received show a small decrease in companies reporting emission data. At the same time, reporting via the ESG Data Convergence Initiative provides a better distinction between Scope 1 and Scope 2 emissions and will make it easier to map emission data over time going forward. Since the portfolio largely consists of smaller and unlisted companies, it will still be difficult to obtain full data for the portfolio as a whole. Nevertheless, Argentum will continue to request this data from managers in order to form a better picture of CO₂ emissions in the underlying portfolio.

Argentum has mapped developments in emissions for the companies that have been part of the portfolio for the last two years. Overall, we have obtained such data from 91 companies. For these companies, the total Scope 1 emissions have decreased by 9.7% (from 1,399,801 tonnes to 1,264,519 tonnes), while Scope 2 emissions have increased by 25.5% (from 868,931 tonnes to 1,090,091 tonnes). The reason for this increase is increased energy consumption in some companies with high emissions. Overall, we can see that median emissions (Scope 1) have increased by 5%. This must be viewed in the context of the fact that emissions in the previous year were often lower due to the COVID-19 pandemic.

With regard to the other KPIs we collected as part of the ESG Data Convergence Initiative, it is difficult to compare with previous years since the project is new and there is limited data available. Argentum will therefore provide a brief summary of the main points associated with the other KPIs:

• Renewable energy consumption: 121 companies have reported on renewable energy consumption. The mean share of renewable energy is 37%, while the median is 21% of total energy consumption.
• Diversity of board members: 290 companies have reported. The proportion of women on the board is generally relatively low, with an average proportion of 12%. Over half of the companies have no female board members, while only 4% have more than 50% women on the board of directors.
• Work-related injuries: 207 companies report on 1763 work-related injuries. A few companies account for the majority of these (six companies account for 69.8% of instances). The majority of companies do not report on work-related injuries. It is possible that injuries associated with ordinary absence due to illness have been included in some figures and therefore bring the total up.
• New employees: 326 companies report a total of 118,091 employees. 162 companies report 6944 new employees.
• Employee engagement: 252 companies report on whether or not they conduct employee surveys. 50% of the companies say yes (127 companies) and 50% of the companies (125 companies) say no.

Overall, the ESG Data Convergence Initiative has helped us obtain better insight into several of the KPIs in the portfolio. Since this is a new project, it will take some time before long-term data is available and it is possible to compare data over time. Erroneous reporting is also expected to be higher earlier in the project. Nevertheless, Argentum is positive about the project, which has been initiated by the industry itself, via leading investors and managers, and which will contribute to easing the reporting burden for managers and provide investors with greater insight into the companies in their portfolios.