Our approach to sustainability is based on a thorough alignment with international regulations, as well as leading global standards and metrics for measuring and reporting impact. This ensures that CS Capital’s Fund I qualifies as a ‘dark-green fund’ under Article 9 of the EU’s Sustainable Finance Disclosure Regulation (SFDR). Through our active ownership and sustainability-related requirements for our investments, our ambition is to position our portfolio companies as clear impact champions.
On the spectrum of capital, CS Capital falls into the category of impact investing, which aims to have a positive impact outcome from a specific investment. As impact investors, this means that it is essential for us to consider environmental, social, and governance (ESG) factors in our investment decisions and use positive screening strategies to select companies or projects that are expected to produce measurable positive impact as well as financial returns.
The distinction between impact investing strategies and other types of investments is exemplified in the figure below.
Source: Adapted from Brandstetter and Lehner (2015)
We have developed an in-house impact investing framework which allows us to meticulously identify, assess and measure impact in investment opportunities. Our framework ensures that an investment must align with various impact criteria based on relevant regulations, reporting frameworks and global goals.
The framework allows us to screen for positive impact opportunities and value creation by incorporating tools like the EU Taxonomy, definitions under the SFDR, alignment with SDGs, net impact score through the Upright Project, and the Global Impact Investors Network, among others.
Sustainability-related risks are then identified through a thorough risk-based approach incorporating tools such as the SASB Standards, GRI, the Taskforce on Climate-related Financial Disclosures (TCFD), Impact Frontiers and the Principal Adverse Impact indicators from the SFDR, among others.
The preliminary screening of the identified opportunities and material risks forms the base and scope for the ESG workstream in the due diligence phase. In addition to the tools applied in the screening framework, the due diligence phase also considers a full EU Taxonomy alignment assessment, risk-based ESG metrics, and indicative Scope 1, 2, and 3 greenhouse gas measurements, among others.
The findings from the screening and due diligence phase are integrated into an in-depth ESG Addendum to the Shareholders’ Agreement, which establishes ESG-related value-creating and mitigating actions for the duration of the holding period led by CS Capital. For credit investments, we seek to embrace active ownership through other various sustainability-related initiatives.
We seek to exercise our active ownership through board seats or other relevant auditing roles and ensure that the right ESG competencies are implemented to support the actions set forth and support continued financial performance.
Companies must commit to a Net Zero target, as well as a commitment to measuring, reporting and reducing Scope 1, 2, and 3 through the Greenhouse Gas Protocol. Companies further commit to incorporating the OECD Guidelines for Multinational Enterprises and the UN Global Compact principles into policies.
Quarterly ESG reports culminate in a detailed yearly sustainability report done by the company applying various tools and frameworks, as well as knowledge-sharing from other portfolio companies.
Sustainability-related considerations will be central for eventual exit options, in which the ambition is to nurture a ‘green premium‘ for valuation optimization.