ESG report 2024

The annual survey evolves in line with current regulations and trends. This year’s ESG survey builds on the questions from the previous year, with some adjustments based on the results of the double materiality assessment. The goal of the survey is to gather information on developments in the managers’ ESG guidelines, climate risks and opportunities, data security, and the measures taken to prevent corruption. Questions on how the funds are preparing for the EU taxonomy for sustainable activities, SFDR, CSRD, and how they relate to the UN Sustainable Development Goals were repeated in this year’s survey.

In 2023, questions about the value chain were added to gain insight into whether this is a focus for the managers in their portfolio. This was further followed up in 2024. Additionally, the survey included questions about corporate culture for the first time. This was included based on the identification and assessment of the topic as significant for the company in the double materiality assessment.

As a participant in the ESG Data Convergence Initiative (EDCI), Argentum also examines whether the managers’ report according to EDCI. The managers are invited to share their EDCI datasets.

Below are the questions posed to the managers as part of this year’s ESG review of the portfolio:

1. Policies and guidelines

• What guidelines has the manager established to ensure a good corporate culture, and how are potential violations handled?
• Please state whether you changed ESG policies/guidelines in 2024 and whether you plan to make changes in the future.
• Comments on ESG policies
• Please state if there have been any breaches of ESG policies/guidelines in the reporting year.
  • We kindly ask you to inform us of any breaches as soon as possible.

1. During the due diligence processes/ pre-investment phase

• Please state whether there have been any recent developments regarding the evaluation of ESG factors in the due diligence process.
• Were any specific ESG issues discovered in DD processes during the reporting year?

1. Climate risk and opportunities

• Please comment on how portfolio companies are exposed to physical climate risks and the opportunities to reduce such risks.
• Have you identified any climate-related risks or opportunities that could significantly impact the return of your fund or individual portfolio companies?
• Have you developed a net zero strategy and defined science-based targets for the portfolio companies, or do you have concrete plans for doing this in the future?
• Please comment on net zero strategy
• Have you identified risks related to biodiversity and ecosystem services in the portfolio companies?

1. EU regulatory changes

• Which measures have been taken to prepare for the EU taxonomy for sustainable activities and the upcoming CSRD regulation?
• Do you plan for current or future funds to comply with articles 8 and/or 9 of the Sustainable Finance Disclosure Regulation (SFDR)?
• What guidelines/practices are used to ensure that the most significant negative consequences (so-called 'principal adverse impacts' or PAI) that investments have on sustainability factors are assessed and taken into account?

1. UN Sustainable Development Goals

• Do you integrate the UN Sustainable Development Goals (SDGs) in your ESG work?
  • If no, please comment on why not and if you have any plans on doing so.

1. Data security

• To what extent have specific measures been taken to ensure adequate data security in the portfolio companies

1. Anti-corruption

• Do any of your portfolio companies have operations in areas where corruption is typically widespread?

1. Reporting on ESG factors

• comment on the development of the reporting from your portfolio companies on ESG-related issues, especially regarding ESG-related key performance indicators?
• Do you plan to make future changes to your ESG reporting to your LPs in the future?

1. Value creation related to ESG

• To what extent do you see that ESG efforts have had a positive financial impact on any of your portfolio companies?

1. Circular economy

• Where relevant, do you optimize the use of raw materials in production to extend their lifecycle, minimize waste, and ensure sustainable end-of-life solutions in your portfolio companies?

1. Value chain

• How does the company proactively monitor and manage ESG-related risks across its entire value chain, and what mechanisms are in place to ensure accountability and transparency in addressing potential ethical, social, and environmental issues throughout the various stages of production, distribution, and consumption?

1. Emissions

• Does your company report to EDCI?
• Does your company measure emissions in the portfolio?
  • Please comment on your emission data collection

Argentum would first like to take this opportunity to commend the managers for their thorough and detailed responses in this year's ESG survey. The survey is extensive and requires a lot of information. Argentum appreciates that the managers prioritize this, even under substantial other reporting pressures.

In summary, this year's survey does not show significant changes from previous years. The managers in Argentum's portfolio maintain a strong focus on robust ESG practices. The main findings from the survey are listed below.

In preparation for CSRD, company culture was identified as a significant risk for Argentum. Besides the fact that poor corporate culture can harm the potential returns of the manager, unwanted incidents can also attract substantial media attention and damage both the manager's and Argentum's reputation. A question about this was included in the 2024 survey. Responses show all managers have established ethical guidelines for their employees. It is positive that managers prioritize and monitor good corporate culture.

When asked about whether there have been any changes or significant developments in the managers' ESG routines, the responses indicate that there is a continuous development of these guidelines. The managers are consistently refining their methods for ESG work within portfolio companies, and this work is being continuously streamlined and professionalized.

No breaches were reported from the portfolio in 2024. However, one deviation was identified. This has been followed up with the relevant manager, and Argentum is satisfied with how the deviation has been handled and addressed. This incident is not considered to have a negative impact on Argentum.

The survey includes several questions about how managers conduct their ESG due diligence and whether any specific incidents or themes were identified in ESG DD processes in 2024. Some managers report that they have changed their practices around ESG due diligence and are now following more criteria than previously. There is an increasing focus on identifying opportunities related to ESG, such as energy efficiency, rather than solely uncovering risks. This is viewed in connection with the requirements of CSRD, which stipulate that companies should report on both risks and opportunities (Risks and Opportunities - ROI). This might have led to climate-related issues being assessed from a new perspective.

Generally, the survey responses indicate that the managers adhere to solid and recognized standards in ESG due diligence. As a direct consequence of SFDR, several managers report that they now also consider Principal Adverse Impacts (PAI) in the ESG due diligence phase. PAI indicators constitute a reporting requirement under SFDR for funds classified as Article 8 and 9.

Furthermore, several managers report that findings in ESG due diligence have led to the rejection of investments in certain companies. Other managers describe how ESG-related discoveries have increased focus, resulting in the establishment of dedicated ESG teams and action plans to address identified challenges.

When asked about climate risk and opportunities, a majority of managers indicate that the portfolio companies are located in regions with minimal direct exposure to climate risk. At the same time, it is emphasized that exposure to climate risk largely occurs indirectly through vulnerabilities in related value chains.

Managers report that climate risk is analyzed systematically, using recognized frameworks such as the TCFD (Task Force on Climate-Related Financial Disclosures). Managers who consider climate to be a high-risk are particularly exposed within the industrial, agricultural, and consumer goods sectors. Climate risk is communicated to portfolio companies, and joint plans are developed to address potential risks. It is observed that managers are working methodically on strategies and action plans to enhance resilience to climate risk. Physical climate risks, such as extreme weather events, droughts, and floods, are highlighted as areas receiving increased attention.

When it comes to risks related to biodiversity and ecosystems, only a few managers report that portfolio companies are directly exposed to such risks. Among those operating in areas considered sensitive to biological diversity, it is indicated that plans and measures are prepared to ensure that the company's activities do not negatively impact nature.

The theme related to the net-zero strategy is being monitored for the second consecutive year. In 2023, 15 percent of managers had a dedicated Net Zero strategy. By 2024, this number increased to 22 percent. Additionally, 36 percent report that such a strategy is either under planning or in process.

For Argentum, it is of crucial importance to follow the developments related to the EU's regulatory frameworks, particularly CSRD and SFDR. A limited number of managers report that they actively engage with CSRD, which is interpreted as an indication that the reporting obligations under CSRD are largely seen as inapplicable. This is evaluated in light of the proposed changes in the EU's Omnibus 1 package, which has reduced the relevance of the framework for several entities.

Among the managers who are in the process of establishing new funds, 60 percent state that the funds are classified as Article 8 funds in accordance with SFDR. This represents an increase of 5 percentage points compared to 2023 and is seen as a positive development. All of these managers report that they follow fund reporting in accordance with SFDR, including Principal Adverse Impacts (PAI).

The managers who do not plan to establish Article 8 funds are largely those who are initially outside the scope of SFDR.

Regarding the inclusion of the UNs’ Sustainable Development Goals in ESG work, 72 percent of managers report that these goals are integrated into their operations and actively monitored. This shows a slight increase from previous years and suggests that managers are familiar with and use recognized frameworks to organize and measure their ESG efforts.

In this year's survey, all managers report that they have a strong focus on, and routines for, data security. This aligns with a general trend where portfolio companies are increasingly digitalized, while the threat landscape related to digital crime becomes more complex and severe. It is very positive to note that 100 percent of the portfolio reports a significant and systematic focus on data security.

In order to map out the anti-corruption efforts, questions were asked about exposure in geographic areas where corruption is prevalent, which companies are affected, and what measures have been implemented to manage the risk. A total of 16 managers report exposure in such areas.

Monitoring occurs through the implementation of anti-corruption guidelines, regular (quarterly) follow-ups, physical presence at locations, employee training, and the use of external audits. Some managers also report collaboration with local legal advisors to ensure compliance with international regulations. It is viewed positively that, in cases where risk is identified, effective and systematic routines for managing corruption risk have been established.

As it is crucial for Argentum to keep track of the developments in ESG reporting within its portfolio companies, questions are asked annually regarding any changes in reporting or ESG KPIs. A vast majority of the managers in Argentum's portfolio have excellent routines for monitoring their own portfolio. This follow-up is carried out through self-developed ESG frameworks, the use of third-party actors, and systematic cooperation with the companies in the managers' portfolios. An increased scope of CO² emissions measurement is observed, along with an increase in managers reporting that they use both EDCI and PAI indicators as reporting standards.

Argentum aims to investigate whether ESG measures are considered to have a positive financial value for the portfolio companies managed by their fund managers. Several factors are highlighted; if companies perform well in ESG, they become more resilient to events such as natural disasters and may become more attractive by meeting client expectations. Additionally, it is emphasized that companies that achieve higher value at exit are those with robust ESG routines. Many managers also report that it is easier to sell companies with established ESG practices and strong ESG results. This also broadens the range of potential buyers when such ESG factors are in place.

Access to capital is also highlighted as an advantage, including the increased possibility of winning bids. By complying with EU regulations, potential fines are also avoided. Cost reductions through the implementation of energy-efficient measures or circular economy principles are also mentioned as important factors. Furthermore, employee welfare is highly valued within the portfolio, and social measures and a good corporate culture are considered to contribute to reduced absenteeism and higher employee loyalty, resulting in cost savings. Concrete measures, such as obtaining ESG certifications on consumer-marketed products, have become an important differentiation factor and increase attractiveness as a supplier or brand with a strong reputation, opening up more business opportunities. Although none of the managers quantify a positive financial effect of ESG, all confirm that proper implementation of ESG is crucial for achieving high valuations upon sale.

This year’s reports indicate that the fund managers have effective routines for monitoring their own value chain. Several managers mention that they are aware of high-risk countries, and those subject to Norwegian legislation report that they have conducted due diligence assessments in accordance with the Transparency Act.

For Argentum, it is important to understand how risk is distributed within the portfolio. Therefore, fund managers are asked annually to assess their portfolio based on low, medium, and high risk in the following areas:

• Labor Rights
• Human Rights
• Environment
• Corruption

For the reporting year 2024, 92 out of 99 fund managers provided such a risk assessment, covering 1,103 portfolio companies. The risk in Argentum's underlying portfolio, as assessed by responsible managers, is distributed as follows: