Sustainability Related Disclosure


CONCERNING: Butterfly Venture Fund IV

The Fund is considered an ’Article 8’ fund type product under the Sustainable Finance Disclosures Regulation (“SFDR”). This financial product promotes environmental or social characteristics but does not have as its objective a sustainable investment. While our investment criteria have been set at ambition level that we believe would fulfil ‘Article 9’ fund type product requirements the regulation was not mature enough when the Fund paperwork was formulated and we therefore find the ‘Article 8’ classification more suitable for the Fund at this point.

Investment Strategy

The Fund is a seed entry technology fund focusing on science based deep tech and hardware. The investee companies are engaged in deep tech and hardware products or services, however, across multiple industry sectors. In addition, the companies are expected to fulfil certain criteria for positive contribution and sustainability (’promote environmental or social characteristics’ The Fund makes investments in the Nordics and Baltics.

Methodology

Monitoring of Environmental or Social Characteristics

Positive contribution of each investee company is evaluated and measured using a formal framework and methodology. As at seed stage the investee companies typically do not have significant revenues and the overall impact footprint whether positive or negative is small in absolute terms the primary goal is to establish the view of the impact opportunity once the company scales. Therefore, minimum criteria for such framework and methodology for seed stage companies is the ability to classify the type, direction, and the scale of the impact once scaled. From 4M€ of revenue onwards more detailed quantification of the investee company impact is required.

At the time of the Fund inception the framework and methodology to evaluate and measure the impact across all the stages is Upright Project net impact metrics. At the seed stage the results from the Upright Project net impact metrics are being augmented whenever needed by the Fund’s managers view of the impact opportunity using the same four primary dimensions as that the Upright Project net impact metrics uses. The dimensions are Society, Knowledge, Health and Environment.

Our criteria for positive contribution are:

  • The investee company has a significant existing positive impact in relation to the size of the company (i.e. +20% or greater net impact ratio if Upright Project net impact metrics is applied), OR
  • The investee company has a significant positive impact due to the mitigation of a negative impact compared to the currently best available alternatives in relation to the size of the company (i.e. +20% or greater net impact ratio improvement compared to currently available benchmarks if Upright net impact metrics is applied), OR
  • The investee company has a significant impact opportunity once scaled in at least one dimension as assessed by the Fund managers at the seed stage that clearly outweigh the expected negative impacts (i.e. the company net impact ratio is expected to be +20% or greater once scaled if Upright Project net impact metrics is applied), OR
  • The investee company taxonomy-aligned revenue, CapEx, or OpEx is greater than 10%

If the above criteria are not satisfied, the investee must have a credible plan to create a significant positive contribution to the environment or society in the future. We aim to invest only in companies that meet the criteria; however, quantifying the positive contribution or sustainability of early-stage companies with a novel, complicated technologies might sometimes be difficult – we could consider investing in such case if we saw potential for significant positive contribution in the future.

We are committed to steer and coach the companies to maximize their impact potential and minimize their negative impacts. Additionally, we hold an ESG workshop with each investee company after the first investment. All investee companies of the Fund must create an ESG policy and approve it in a Board meeting. The companies must re-evaluate and approve their ESG policies annually.

Furthermore, we are committed to the further development of ESG policies and procedures in a manner that has a positive impact on us and our investee companies. We are engaged to monitor and promote compliance with the UN Global Compact (e.g. respect for human rights) and to ensure that in our monitoring process, ESG is a part of our investment decision procedure, including appropriate consideration of environmental, social (including health and safety, employees, human rights, consumer and community issues) and governance issues.

Proportion of Investments

In line with the ESG methodology, the Fund promotes environmental or social characteristics but does not commit to making environmentally sustainable investments as defined in the Taxonomy Regulation. We focus on sustainability and impact on a broader range and do not want to set pre-requirements, which could limit our investment scope in areas that do not fall into the ‘environmentally sustainable’ category (such as medical technology).

The Fund aims to only make investments aligned with the investment strategy and plans not to allocate any capital to companies that have a significant negative impact on environment or society.

EU Taxonomy for ‘Environmentally Sustainable’ Investments

The Fund follows the development of the EU Taxonomy Regulation and applies technical screening criteria to evaluate whether an investment is ‘environmentally sustainable’ by considering the following aspects:

  1. Substantial contribution to at least one of the six environmental objectives
  2. Do no significant harm (DNSH) to the other five environmental objectives
  3. Meet minimum safeguards (e.g. OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights)

’Do No Significant Harm’ Principle

The ‘do no significant harm’ principle applies only to those investments underlying the financial product that take into account the EU criteria for environmentally sustainable economic activities. The investments underlying the remaining proportion of this financial product do not take into account the EU criteria for environmentally sustainable economic activities.

Within the investment process of this fund, this is ensured primarily by three separate screening criteria that ensure that negative impacts are minor in relation to the size of the investee company and the size of its positive impacts.

The criteria are as follows:

  • The investee company has a non-negative impact as a whole (i.e. the net impact ratio of the investee company is non-negative, if Upright Project net impact metrics is applied), AND
  • The investee company does not have a large negative impact to the environment in relation to the size of the company (i.e. the relative negative score of the Environment dimension should not be less than -8.0, if Upright Project net impact metrics is applied), AND
  • The investee company does not have a significant negative impact to society in relation to the size of the company (i.e. the relative negative score of the Society dimension should not be less than -2.0, if Upright Project net impact metrics is applied)

If all of the above criteria are not satisfied, the investee company must have a credible plan to address the issues in the future.

Any supplementary layer of assurance that sustainable investments do not significantly harm any environmental or social objective, Principal Adverse Impact indicators (part of Regulation (EU) 2019/2088) are take into account as described in the following section.

Principle adverse impacts are considered separately for each individual investment according to the following process:

  1. Identification of relevant adverse impact indicators for an investment. This step is skipped for indicators that are considered ”mandatory” in the Regulation (EU) 2019/2088 and its regulatory technical standards, as such indicators are always treated as relevant.
  2. Assessment of the scale of possible adverse impacts related to an investment, in relation to the scale of its positive impacts. The assessment is done based on disclosed and modeled data for individual principal adverse indicators and relevant correlated indicators. Correlated indicators that would be relevant to consider. Used correlated indicators include, but are not limited to, Upright net impact metrics and UN Sustainable Development Goals (SDG) alignment metrics.
  3. Based on the assessment, a conclusion is made whether:
    • The potential harm related to the investment in insignificant
    • There is insufficient data to conclude on whether there is significant harm related to the investment

Deal Sourcing

Negative Screening

The Fund will not invest to companies:

  1. whose activities illegal economic activity (i.e. any production, trade, or other activity, which is illegal under the laws or regulations applicable to the company); or
  2. operating related to:
    • the production of and trade in tobacco and distilled alcoholic beverages and related products;
    • the financing of the production of and trade in weapons and ammunition of any kind;
    • casinos, gambling and equivalent enterprises;
  3. that have a predominantly negative impact on environmental or social characteristics.

Due Diligence

All our investment decisions are made based on financial, legal, commercial, and ESG due diligence as well as estimated return and key risk components. We conduct a standard due diligence on investee companies, including financial, legal, governance, business and other appropriate issues. Investee company’s legal compliance and compliance to other applicable standards and practices is evaluated for each investment. This consideration includes ESG factors as well as potential future regulation and marketplace factors anticipated at that time.

Furthermore, during due diligence, we re-evaluate that each potential investee company does not have a predominantly negative impact on environment or social characteristics nor does significant harm on any of the six environmental objectives categorized in the EU taxonomy. The evaluation and assessment are done by using both formal and heuristic methodologies and depending on the case, for example, by utilizing public databases, requesting information from the company, and applying schematic frameworks.

A summary of due diligence, including any material findings, is included in the investment documentation for our investment decisions. The summary is complemented with further details regarding possible ESG issues or markings when necessary. An investment proposal with its appendices is the summarized information for the evaluation of the attractiveness of an investment opportunity as well as the investment decision. Based on the due diligence findings we may exclude investing in businesses, including such that contain ESG risks.

Data Sources and Processing

Investee companies report their financial performance quarterly and ESG-related updates annually. Each investment manager in the Fund is responsible for reviewing the data and following up on the progress towards achieving ESG-related targets. ESG and the financial performance of the portfolio are reported to our investors on a quarterly basis.

All investee companies’ net impact is reassessed annually, and we keep track on the results and changes. Part of the annual monitoring consists of a questionnaire, which is used to collect impact-related information from the companies. We also conduct an annual case-by-case evaluation to define whether it is needed to conduct a new DNSH (‘Do no significant harm’) assessment.

Engagement Policies

Active Ownership

We invest in startup companies in their early stages; usually, the companies are in a pre-market phase and the teams consist of founders only. Thus, we often take an active role in assisting and coaching the entrepreneurs: for example, in finding a product-market fit, creating a profitable business model and go-to-market strategy, as well as in implementing and maintaining ESG and corporate responsibility.

While we engage ourselves in the processes and policy-creations, we require each portfolio company to take an active ownership of their ESG and corporate responsibility matters, and to implement them a way that best serve value-creation in the company. They must adopt a corporate governance policy which advances good governance and a Code of Conduct based on the company’s values.

Requirements and expectations may vary with respect to other ESG aspects depending for example on the sector, geography, and business model of the portfolio company in question. Possible violations or noted issues related to ESG or Code of Conduct are brought forward and discussed with founders by the investment manager or managing partner of Butterfly Ventures.

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This document was last updated on 21st June 2022. Our contact person for this Sustainability Disclosure is the managing partner of Butterfly Ventures.