Sustainability-Related Disclosures

Summary

No significant harm to the sustainable investment objective

In order to ensure that the investments of the Fund do not significantly harm (“DNSH”) any environmental or social sustainable investment objective, the Fund will screen each investment against the 14 mandatory Principal Adverse Impact (PAI) indicator, after which compliance of the Fund’s investments with minimum “sustainability” safeguards of the OECD Guidelines are assessed and monitored. While the OECD Guidelines for MNEs do not apply due to the ultimate beneficiary of the investments of the Fund, the Fund applies other due diligence principles reflecting the transversal standards of the OECD guidelines through the in-house assessment tools and the Fund’s Exclusion List in line with international standards set forth by development finance institutions.

Sustainable Investment objective of the financial product

The Fund’s sustainable investment objective is creating jobs and livelihoods through supporting Inclusive Financial Institutions (IFIs) funding Micro, Small and Medium-sized Enterprises (MSMEs) and micro-entrepreneurs in Africa.

Investment strategy

All the investments of the Fund are subject to a comprehensive and systematic assessment and monitoring of social aspects, which is completed from the perspective of both measuring social performance and impact. In addition, the Fund applies an Exclusion List, which is benchmarked off Development Financial Institutions (“DFIs”) and IFIs. The Fund does not offer financing for new projects or purposes included in that Exclusion List. Furthermore, IFIs are required, in their respective agreements with the Fund, to make ESG representations towards the Fund, meet the Fund’s ESG requirements at the level of such IFI and provide a copy of their environmental and social management system (ESMS).

Proportion of Investments

The Fund will have a minimum proportion of 80% sustainable investments (#1 Sustainable). All these investments will be considered as socially sustainable. The remaining of the Fund (<20%) will be invested in cash and derivatives (#2 Not sustainable).

Monitoring of sustainable investment objective

The Fund has defined an extensive set of sustainability indicators which are used to measure the attainment of the sustainable investment objectives of the Fund. Further information on the tools used and approach taken can be found in the “Methodologies” section.

Methodologies

The Fund actively monitors investments via customer surveys and portfolio monitoring – including required reporting, periodic calls, and annual visits.

Any “amber” flags on social performance identified during post-investment monitoring (or pre-investment evaluation) will utilise a range of tools for mitigation and improvement, as outlined in the following table. External resources will be utilised as required in applying low- and high- touch interventions.

Data sources and processing

The Manager will typically consider client protection, information on which is usually retrieved directly from the investee companies. Alternatively, the Manager may instead consider external rating. The Manager will also consider other benchmarks if relevant to the specific business model of the prospective Portfolio Company.

Due diligence

The initial screening at the desktop due diligence stage involves checking the prospective investee’s activities against the Exclusion List set out below. The Manager will also apply its E&S Risk classification system at the outset of evaluating each prospective investee. Each prospective investee is classified into one of the following four risk categories in its E&S classification system, which are then appraised how to categorise each investment by considering a number of different factors.

Engagement policies

While the Fund uses engagement, it is not part of the sustainable investment objective of the Fund.

Attainment of the sustainable investment objective

No specific index has been designated as a reference benchmark to meet the sustainable investment objective of the Fund.


No significant harm to the sustainable investment objective

How have the indicators for adverse impacts on sustainability factors been taken into account?

In order to ensure that the investments of the Fund do not significantly harm (“DNSH”) any environmental or social sustainable investment objective, the Fund will screen each investment against the 14 mandatory Principal Adverse Impact (PAI) indicators of Table 1 Annex 1 of the Delegated Regulation (EU) 2022/1288. The analysis will be performed mainly qualitatively during the due diligence.

#PAIsConsideration
1GHG emissions1. Through its Exclusion List, the Fund commits not to offer financing for new projects or purposes related to the prospection, exploration and mining of coal; land-based means of transport and related infrastructure essentially used for coal; power plants, heating stations and cogeneration facilities essentially fired with coal, as well as associated stub lines.

2. Additionally, the Fund commits not to offer financing for new projects or purposes related to nuclear power plants (apart from measures that reduce environmental hazards of existing assets) and mines with uranium as an essential source of extraction.
2Carbon footprint
3GHG intensity of investee companies
4Exposure to companies active in fossil fuel sector
5Share of non-renewable energy consumption and production
6Energy consumption intensity per high impact climate sector
7Activities negatively affecting biodiversity-sensitive areasThrough its Exclusion List, the Fund commits not to invest in MSMEs/ IFIs that could be associated with the destruction or significant impairment of areas particularly worthy of protection (without adequate compensation in accordance with international standards), and in commercial logging operations for use in primary tropical moist forest/ commercial logging operations or the purchase of logging equipment for use in a primary forest or forest areas with high biodiversity value, nor any other activities that lead to substantial clear cutting of such forests. Here ‘destruction’ is interpreted as (i) the destruction or severe deterioration of the integrity of an area caused by a major and prolonged change in the use of land or water or (ii) alteration of a habitat which leads to the inability of the affected area to perform its function.
8Emission to water
9Hazardous waste and radioactive waste ratio1. The Fund does not offer financing for new projects or purposes related to the production or trade in any product or activity subject to national or international phase-out or prohibition regulations or to an international ban, like for example:
1.1. certain pharmaceuticals, pesticides, herbicides, chemical and other toxic substances
1.2. prohibited transboundary trade in waste.

2. Additionally, the Fund commits to not offer financing for new projects or purposes related to the handling or treatment of toxic waste.
10Violations of UN Global Compact Principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises (MNEs)1. The Fund addresses these aspects both in its exclusion list and when using the SPI tool in the due diligence process.
2. Indeed, through the use of the SPI tool, the Fund analyses how business is conducted responsibly by the MSMEs/IFIs, including the level of transparency and accountability regarding employees, clients, business practices.
3. In accordance with the Fund’s Exclusion List, the Fund ensures that investments respect host country laws or regulations or international conventions and agreements and exclude production or activities involving harmful or exploitative forms of forces labour/ harmful child labour.
4. Then, through diverse indicators, as part of the following dimensions: “Treat Clients Responsibly” (Dimension 4), “Treat Employees Responsibly” (Dimension 5) and “Balance Social and Financial Performance” (Dimension 6) within the SPI tool, the Fund conducts a thorough due diligence of these aspects.
11Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact (GC) principles and OECD Guidelines MNEs
12Unadjusted gender pay gapThe Fund uses the SPI tool. Thus, during the due diligence, the Fund analyses Dimension 5 of the tool, entitled “Treat Employees Responsibly”. Specific indicators within this dimension address the issue of gender inequality and transparency about salary.
13Board gender diversityThe Fund uses the SPI tool. Thus, during the due diligence, the Fund analyses key indicators about the organization including the board composition, for which the number of women among board members should be specified. The Fund also complies with the 2X Challenge, which helps ensuring that gender diversity remains key in the investment decisions of the Fund.
14Exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons)In its Exclusion List, the Funds commits not to offer financing for new projects or purposes related to the production or trade in weapons and munitions (any investment associated with weapons and munitions, including sporting firearms, defence systems, military installations, military equipment including uniforms and the training and physical support of military personnel), in the production or trade in controversial weapons or critical components thereof (nuclear weapons and radioactive ammunition, biological and chemical weapons of mass destruction, cluster bombs, anti-personnel mines, enriched uranium) and in mining companies using mercury.

How are the sustainable investments aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights? Details:

Compliance of the Fund’s investments with minimum “sustainability” safeguards of the OECD Guidelines are assessed at due diligence stage and monitored thereafter. The Fund’s investment process ensures alignment with the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

The OECD Guidelines for MNEs do not apply due to the ultimate beneficiary of the investments of the Fund (micro-entrepreneurs and SMEs in Africa, served by MicroFinance Institutions (MFIs) and IFIs); however, the Fund applies other due diligence principles reflecting the transversal standards of the OECD guidelines such as human rights, employment, environment, combating bribery, consumer interests, through the in-house assessment tools and the Fund’s Exclusion List in line with international standards set forth by development finance institutions.

Potential IFI investees that are found to be in breach of one of these standards will not be eligible for investment by the Fund.


Sustainable investment objective of the financial product

What is the sustainable investment objective of this financial product?

The Fund’s sustainable investment objective is creating jobs and livelihoods through supporting Inclusive Financial Institutions (IFIs) funding Micro, Small and Medium-sized Enterprises (MSMEs) and micro-entrepreneurs in Africa.

In particular, the Fund aims to invest in best-in-class operators implementing best-practices and available technologies, to originate, distribute and risk-manage their financial services offering.

It is believed that creating jobs and livelihoods provides Africans at the “bottom of the pyramid” with an opportunity to provide developmental outcomes, including nutrition, health, water and sanitation, education, and gender equality.

Therefore, the Fund’s investments contribute to the development objective of creating economic opportunities and jobs through MSMEs aligned with the United Nations Sustainable Development Goal (SDG) 8: Decent Work and Economic Growth- Where such contribution cannot be ensured, investments should contribute to at least one of the following development objectives aligned with the United Nations Sustainable Development Goals (SDGs):

  1. Increasing educational opportunities (SDG 4: Quality Education)
  2. Increasing female employment and educational opportunities for girls , SDG 5: Gender Equality, SDG 4 : Quality Education)
  3. Alleviating rural poverty (SDG 1: No Poverty, SDG 2: Zero Hunger)
  4. Increasing youth employment (SDG 10: Reduced inequalities, SDG 8: Decent Work and Economic Growth)
  5. Access to renewable energy (SDG 7: Affordable and Clean Energy),
  6. Use of new technologies to increase access to financial services (SDG 9: Industry, Innovation and Infrastructure).

Investment strategy

What investment strategy does this financial product follow?

All the investments of the Fund are subject to a comprehensive and systematic assessment and monitoring of social aspects as well as other relevant development aspects. This evaluation is completed from the perspective of both measuring social performance and impact. The Fund’s methodology is summarised in the following workflow chart, including post-investment portfolio monitoring and reporting and – if necessary – value-add initiatives.

Verdant Capital

In an effort to attain its sustainable investment objective, the Fund uses the following tools during its analysis:

  1. Verdant Capital Hybrid Fund ESG Questionnaire: designed to collect information on a financial institution’s potential impact in ESG areas.
  2. SPI: used to measure the level of an IFI investee’s implementation of the Universal Standards for Social and Environmental Performance Management, developed by CERISE+SPTF.

In addition, the Fund applies an Exclusion List, which is benchmarked off Development Financial Institutions (DFIs) and IFIs. The Fund does not offer financing for new projects or purposes in the following sectors:

  1. Production or trade in any product or activity subject to national or international phase-out or prohibition regulations or to an international ban, for example:
    1. Certain pharmaceuticals, pesticides, herbicides, chemical and other toxic substances (under the Rotterdam Convention, Stockholm Convention and WHO “Pharmaceuticals: Restrictions in Use and Availability”)
    2. Ozone depleting substances (under the Montreal Protocol) and products containing PSBs
    3. Protected wildlife or wildlife products (under CITES/ Washington Convention)
    4. Prohibited transboundary trade in waste (under the Basel Convention) investments which could be associated with the destruction or significant impairment of areas particularly worthy of protection (without adequate compensation in accordance with international standards).
  2. Production or trade in controversial weapons or critical components thereof (nuclear weapons and radioactive ammunition, biological and chemical weapons of mass destruction, cluster bombs, anti-personnel mines, enriched uranium).
  3. Production or trade in radioactive material. This does not apply to the procurement of medical equipment, quality control equipment (measurement) equipment and any equipment/application where Verdant Capital considers the radioactive source is insignificant/trivial and/or adequately shielded.
  4. Production or trade in unbound asbestos. This does not apply to the purchase or use of cement linings with bound asbestos and an asbestos content of less than 20%.
  5. Destructive fishing methods or drift net fishing in the marine environment using nets exceeding 2.5 km.
  6. Nuclear power plants (apart from measures that reduce environmental hazards of existing assets) and mines with uranium as an essential source of extraction.
  7. Prospection, exploration and mining of coal; land-based means of transport and related infrastructure essentially used for coal; power plants, heating stations and cogeneration facilities essentially fired with coal, as well as associated stub lines.
  8. Non-conventional prospection, exploration and extraction of oil from bituminous shale, tar sands or oil sands.
  9. Production or trade in any product or activity deemed illegal under host country laws or regulations or international conventions and agreements.
  10. Production or trade in:
    1. Weapons and munitions (any investment associated with weapons and munitions, including sporting firearms, defence systems, military installations, military equipment including uniforms and the training and physical support of military personnel)
    2. Production or trade in alcoholic beverages (excluding beer and wine)
    3. Production or trade in tobacco
    4. Gambling, casinos and equivalent enterprises
  11. Production or activities involving harmful or exploitative forms of forced labour5/ harmful child labour.
  12. Commercial logging operations for use in primary tropical moist forest/ commercial logging operations or the purchase of logging equipment for use in a primary forest or forest areas with a high biodiversity value, nor any other activities that lead to substantial clear cutting of such forests.
  13. Production or trade in wood or other forestry products other than from sustainably managed forests.
  14. Any investment associated with the handling or treatment of toxic waste.
  15. Mining companies using mercury.
  16. Real estate (except for commercial and industrial real estate to be made available through long leases).
  17. Pornography.
  18. Public administration.
  19. Social welfare.
  20. Professional and trade bodies, trades unions, etc.

All financial intermediaries (FIs), except those engaged in activities specified below*, must apply the following exclusions, in addition to the Fund’s Exclusion List:

  1. Production, trade, storage or transport of significant volumes of hazardous chemicals or commercial scale usage of hazardous chemicals. Hazardous chemicals include gasoline, kerosene and other petroleum products.
  2. Production or activities that impinge on the lands owned or claimed under adjudication, by Indigenous Peoples, without full documented consent of such peoples.

When investing in microfinance activities, FIs will apply the following items in addition to the Fund’s Exclusion List.

These tools, including the Exclusion List, aim to ensure that the Fund invests in IFIs aligned with its sustainable investment objective and that it does not significant harm to other sustainability factors.

The binding elements of the investment strategy used to attain the sustainable investment objective of the Fund are:

  1. Exclusion List: the Fund shall not invest in any of the activities as part of the Exclusion List described above.
  2. ESMS at IFI level: IFIs are required, in their respective agreements with the Fund, to make ESG representations towards the Fund, meet the Fund’s ESG requirements at the level of such IFI and provide a copy of their environmental and social management system (“ESMS”), commensurate with the IFI’s risk profile and to notify the Fund of any amendments to their ESMS. Whilst the Fund does not exclude IFIs that do not yet have a full ESMS, it actively engages its IFIs to ensure that they have minimum standards in place, assesses the ability of the IFIs to comply with the Fund’s ESG requirements, takes corrective actions to the extent applicable, and puts in place or monitors the implementation of ESMS in accordance with agreed schedules. The social performance of the Fund’s investment in IFIs is periodically evaluated based on evolving social performance standards.
  3. Monitoring and covenants: the Fund monitors and reports on ESG external factors with respect to its IFIS, or their underlying clients, that could reasonably materially impact the IFIs’ compliance with the Fund’ requirements and the IFI’s profitability and risk profile. The loan covenants between the Fund and the IFIs notably requires IFIs to implement corrective measures in case underlying client activities are inconsistent or in breach of the Fund’s ESG requirements.
  4. The average investee MSME percentage shall not be less than 33%. This is considered an absolute minimum and does not include loans supporting other sustainable investment objectives, such as access to clean energy.
  5. The Fund’s investments should at least have a SPI score of 60% or either:
    • Have at least a BB rating for Social Rating by MFR (ranging from AA to D) or the equivalent rating by one of the other established social rating agencies; or
    • Have at least a bronze client protection accreditation as per the SPTF / Cerise certification methodology from a rating agency accredited by SPTF / Cerise.

What is the policy to assess good governance practices of the investee companies?

During the pre-investment due diligence phase, the Fund pays particular attention to conditions of employees, as well as ensuring the safety of employees and visitors within its premises. Therefore, it evaluates the IFI’s internal human resource policies and workplace safety policies and procedures as well as the ESMS of the IFI and its capacity to measure and mitigate E&S portfolio risks. The Fund will require the IFIs to address any identified gaps in line with its ESMS.


Proportion of investments

What is the asset allocation and the minimum share of sustainable investments?

The Fund will have a minimum proportion of 80% sustainable investments (#1 Sustainable). All these investments will be considered as socially sustainable. The remaining of the Fund (<20%) will be invested in cash and derivatives (#2 Not sustainable).

#1 Sustainable covers sustainable investments with environmental or social objectives.#2 Not sustainable includes investments which do not qualify as sustainable investments.

Monitoring of the sustainable investment objective

How are the sustainable investment objective and the sustainability indicators monitored throughout the lifecycle of the financial product and what are the related internal/external control mechanisms?

The sustainability indicators used to measure the attainment of the sustainable investment objectives of the Fund are:

UN SDGsSustainability indicator (Impact Metric)
SDG 1: No Poverty, SDG 8: Decent Work and Economic Growth, SDG 10: Reduced Inequalities1. Number of MSMEs, active borrowers reached;
2. Number of jobs created annually via MSMEs financed;
3. Number of clients of Fund investees living in rural areas;
4. Percentage of investees operating as non-banks, and serving a smaller-sized market;
5. Number of investees offering voluntary deposit saving products to clients;
6. Percentage of investment into countries that are Low Income (“LI”).
7. Number of active financial/ non-financial products designed by the investees to serve economically disadvantaged groups of MSMEs.
SDG 5: Gender Equality1. Unweighted average of female active borrowers (%);
2. Unweighted average of female management, staff, board members (%);
3. Unweighted average of investees’ female full time employees (%);
4. Number of investees providing credit products designed for women.
5. Number of active financial/ non-financial products designed by the investees to serve women-led businesses.
SDG 2: Zero Hunger1. Percentage of lending by investee to agricultural sector;
2. Average percentage of client of Fund investees living in rural areas.
SDG 9: Industry, Innovation and Infrastructure1. Number of investees utilising technology driven product in field;
2. Number of investees with technology driven product, distribution channel in development (i.e. mobile banking).
3. Average of technology driven borrowers.
SDG 4: Quality Education1. Number of investees providing vocational training.
2. Average of Education driven borrowers.
SDG 7: Affordable and Clean Energy1. Number of investees providing credit products in renewable energy or energy efficiency;
2. Average number of solar home systems installed;
3. Average kWh renewable energy produced;
4. Average number of homes and businesses served.

A Fund’s investment might not provide data on all the sustainability indicators listed above. Nonetheless, it will be ensured that each investment contributes to the development objective of creating opportunities and jobs through MSMEs (SDG8: Decent Work and Economic Growth) or at least to one of the development objectives, and hence to the related SDGs as described further above. Further information on the tools used and approach taken can be found in the “Methodologies” section below.


Methodologies

What are the methodologies used to measure the attainment of the sustainable investment objective?

The Fund actively monitors investments via customer surveys and portfolio monitoring – including required reporting, periodic calls, and annual visits.

Any “amber” flags on social performance identified during post-investment monitoring (or pre-investment evaluation) will utilise a range of tools for mitigation and improvement, as outlined in the following table. External resources will be utilised as required in applying low- and high- touch interventions.

Figure LVII: Overview of Post-Investment Monitoring tools

Tool or MechanismDescription
Customer Surveys• Mandatory, with Technical Assistance funding to be provided for third-party preparation;
• Important to confirm adherence to client protection principles;
• Important to understand use of loan and developmental outcomes, i.e., how the end-client is using the loan (i.e., for small business, housing, school fees, PAYGO home solar systems), and overall social performance;
• Surveys are also a valuable tool as investees look to refine their product design and risk management;
• Verdant Capital also believes it is important, where practical, that the actual surveys themselves are conducted by external consultants rather than employees of the investee institution.
Recommendations from the ManagerEven institutions performing strongly from a development and social performance perspective may benefit from specific recommendations from the senior team at the Manager, building on the extensive experience.
Portfolio Reporting• Includes the specific E&S reporting and loan portfolio segmentation;
• Typically reported annually;
• Social performance metrics and results of screenings from the SPI4 Audit Tool will also be contributed to CERISE and other industry networks like the GIIN/IRIS+, the GRI Standards and the SPTF for updating benchmarks ultimately used by investors and other stakeholders
Annual VisitsMandatory, and to include E&S due diligence checks.
Governance• For more equity-like investments from the Fund (i.e., AT1C and Holding Company Debt), the Fund will typically appoint a Board Observer.
• This will be used to monitor and influence appropriate social performance and development impact initiatives.

Data sources and processing

What are the data sources used to attain the sustainable investment objective of the financial product including the measures taken to ensure data quality, how data are processed and the proportion of data that are estimated?

The Manager will typically consider client protection parameters as part of the broader social performance measurement tool, SPI, which was designed by French NGO Cerise. Information on such client protection parameters is usually retrieved directly from the investee companies insofar that is feasible.

Where the Manager believes it is more appropriate, or internal resources are not available, the Manager may instead consider external rating (again, always ensuring that the above principals are adhered to), typically at least a BB- rating for Social Rating by MFR or the equivalent rating by one of the other established social rating agencies. The Manager shall also pay attention to the results of the client protection modules of the social rating.

The Manager will also consider other benchmarks if relevant to the specific business model of the prospective Portfolio Company. For example, the GOGLA Consumer Protection Code, which falls under the purview of GOGLA, the global association for the off-grid solar energy industry.


Due diligence

What is the due diligence carried out on the underlying assets and what are the internal and external controls on that due diligence?

The initial screening at the desktop due diligence stage involves checking the prospective investee’s activities against the Exclusion List (comprising the exclusion lists of IFC, KfW, EIB). This is conducted and (re)verified throughout the DD process; the Verdant Capital ESG DD Questionnaire helps facilitate this screening. If at any point the Fund investment team evaluates and verifies investee activities that overlap with the Exclusion Lists, then the prospective investment will be rejected, and the investment process will be stopped.

The Manager will also apply its E&S Risk classification system at the outset of evaluating each prospective investee. Each prospective investee is classified into one of the following four risk categories: “A” (high risk); “B+” (substantial risk); “B” (moderate risk), or “C” (low risk), according to the rating of the potentially adverse environmental and social impacts and risks of an IFI’s activities. The Manager team appraises how to categorise each investment by considering factors including the following:

  1. Detailed review of the business model, product mix, sector mix;
  2. Corporate control structure and the degree of oversight by senior management on higher risk activities;
  3. The outputs of the Verdant Capital ESG DD Questionnaire; and
  4. The IFC Environmental and Social Performance Standards.

These appraisal standards are modelled off KfW’s latest “Sustainability Guidelines”, as well as the IFC’s latest Sustainability Policy, each of which utilise a risk-rating approach to categorising investments. The IFC categorisation overlays with the Verdant Capital categorisation framework, as outlined in the table below. As with the Fund’s categorisation, the IFC also considers the type, size, and sector exposure of the FI’s existing and proposed portfolio in determining its sub-categorisation.

Where, during due diligence, the Manager identifies sub-standard adherence to the principals of responsible finance in a prospective investee company with adequate social performance and alignment to the developmental mission of the Fund, the Manager may invest subject to the Manager agreeing with the investee a specific turnaround plan supported by technical assistance.