Environmental, Social and Governance Policy

This policy document outlines Prefequity LLP’s (“Prefequity”) approach to integrating Environmental, Social and Governance (“ESG”) factors within its investment risk management framework. It applies as standard to all investments made by funds managed or advised by Prefequity and forms an intrinsic part of Prefequity’s investment strategy. This policy was developed by the Management Committee of Prefequity.

The policy is reviewed on a regular basis. It is updated where necessary to reflect changes in circumstances and actual practice.

Prefequity is an Investment Manager/Advisor to private credit funds.

1.       ESG Principles

As an organisation, we engage in responsible investing for a number of compelling reasons including to create both financial and non-financial value for all stakeholders including, but not limited to, our investee companies and our investors. We have a fiduciary duty to act in the best long-term interests of our beneficiaries. We believe incorporating ESG risks into our investment decision-making is an important for achieving this goal. By considering the goals of internationally recognised sustainability frameworks in our investment decision-making, we are seeking to reduce the impact to financial returns due to sustainability risks, while also seeking to align our investors and our UK-centric private credit strategy with the broader goals of society.

As an investment manager, our focus since inception has been on owner-managed businesses in the SME market. We understand the contribution well-governed and functioning social, environmental and economic markets make towards the long-term sustainable growth of this area of the market. By incorporating ESG risks into our investment analysis we are supporting this goal. As an investor, we are committed to encouraging companies to adopt policies and practices that will support sustainable financial performance and have a wider positive impact on numerous factors including, but not limited to, job creation, employee health and wellbeing, strong governance and business ethics, and the environment.

Our policy goals are primarily guided by the six principles of the UN PRI (the “PRI Principles”):

1.     We will incorporate ESG issues into investment analysis and decision-making processes.

2.     We will be active owners and incorporate ESG issues into our ownership policies and practices.

3.     We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4.     We will promote acceptance and implementation of the PRI Principles within the investment industry.

5.     We will work together to enhance our effectiveness in implementing the PRI Principles.

6.     We will each report on our activities and progress towards implementing the PRI Principles.

In addition to the above PRI Principles, our responsible investment strategy aims to consider the ten principles of the UN Global Compact and the UN Sustainability Goals.

Our ESG policy sets out the steps which are applied by the investment team in order to align with the principles set out before. The strategy is pragmatic, taking account of our position as a debt provider and not outright owners of investee companies. However, we always seek to positively influence and shape our investee companies’ ESG impact and position. As a debt provider, we understand the importance of the pre-deal due diligence to identify any ESG risks and to establish possible mitigants before any final investment decision is made.

We believe in a transparent approach with investee companies to understand ESG risks and try to collectively agree on practices that will reduce risk and enhance the sustainability characteristics and impact of the business for the long term. By setting ESG objectives at the beginning of an investment, our strategy is to remain engaged with companies throughout the life of the investment, to monitor and to report to our investors on the progress of the business towards achieving these objectives.

2.       ESG Investment Guidelines

ESG covers a broad agenda, including issues relating to the workplace, community, marketplace, environment and governance. Prefequity recognises that ESG factors can have a positive impact on the value of an investment. We also understand the risk of value destruction if ESG risks are not adequately considered and measured as part of the investment decision.

Environmental

Climate or environmental risks can cause a material negative impact on the financial value of a business and a harmful impact on the environment. We try to influence companies to adopt practices that can reduce environmental risks and to generally aim to make a positive contribution towards sustainable environmental goals. These goals can include but are not limited to:

− Reduction of toxic emissions, fluids and other materials

− Sustainability of resources

− Efficient energy consumption

− Prevention of natural habitat destruction

− Responsible disposal of hazardous materials

While we acknowledge that companies at all levels can make a positive environmental contribution with their business practices, our approach is practical given the relatively small size of companies in the SME market.

Social

We acknowledge that social factors can affect the long-term financial performance of a business. Addressing social concerns within a company can both enhance the financial performance of the business and benefit multiple stakeholders including employees, investors, suppliers, customers and communities. During Prefequity’s due diligence process we particularly look at the impact a company has on its staff, local community and society as a whole.

The main areas of consideration are:

−      Avoidance of any complicity in human rights abuses

−      Health and safety

−      Avoidance of child labour and similarly harmful business practices

−      Diversity,  equality and inclusion

−      Non-discriminatory practices

−      Avoidance of exploitative business practises

Corporate Governance

Strong governance practices are the foundation for a successful business. It increases the possibility of long-term sustainable growth and promotes trust among all relevant stakeholders. Ensuring effective governance practices is of particular importance for SMEs seeking to embark on long-term growth initiatives.

The main areas of governance considered by Prefequity are:

− Management structure and effective boards including independent oversight

− Transparency around roles and responsibilities

− Incentive structures and executive remuneration

− Reliable and transparent financial reporting and audit independence

− Compliance with relevant laws and regulations

− Corporate codes of conduct and governance documentation

3.       ESG Investment Strategy

Prefequity implements an integrated approach with ESG considerations forming part of the investment decision process for all our funds.

Overall, our ESG-integrated investment strategy aims to address risks at four levels:

− Company: Analysis at company level. What is our ESG credit risk at a company level? What risks could arise going forward? This usually comprises a fundamental analysis of the various ESG risks and opportunities of the business with the investment team sourcing qualitative and quantitative data through interviews with management, credit due diligence, third-party support etc.

− Sector/industry: What are the key ESG issues in the respective industry? What can be done to mitigate the risks identified? The sector analysis generally consists of a macro-level analysis of trends and developments relating to political, economic, social, technological and legal aspects. Our main sources of information are third-party due diligence providers, industry experts and proprietary analysis conducted in-house.

− Portfolio/team: How do identified risks compare and correlate to other elements of the portfolio?

− Group: How would the investment impact the overall investment strategy of Prefequity?

As a private credit investor with a focus on the SME market, our ESG investment strategy and ability to collect relevant data is practical and constantly evolving in nature. By striving to implement this strategy, we feel we can identify material ESG risks, influence management to consider ESG in their policy and practices, and deliver benefits to all stakeholders relevant to the transaction. While ESG risks are addressed at each investment committee, Prefequity investment committee members are cognisant of the fact that there may be certain information gaps around specific ESG risks owing to the size of the companies in our investment universe and the varying quality of information available and reported within potential investee companies. Therefore, investment committee members take a pragmatic approach to formal decision-making incorporating this point.

 The table below was prepared by the PRI with tailored adjustments made to reflect how ESG considerations are integrated into Prefequity’s investment strategy at each phase of a transaction. The steps described in the table below incorporate the principles and guidelines described in this ESG policy.

ESG Negative Screening

This is one of the first steps implemented by the investment team when analysing a new investment, in addition to ensuring we follow all applicable laws, regulations, and economic sanctions. We apply negative screening for potential investments in all funds. The screen is produced, based, and centred on excluding corporate issuers’ involvement in a number of products and industries which we believe can have a negative impact on the principles of this ESG policy. The scope of the restrictions is reviewed on a regular basis and decisions to change the scope are approved by the Management Committee.

The list below provides an overview of industries or businesses that are excluded from investments as part of the negative screening process:

−      an illegal economic activity (i.e. any production, trade or other activity which is illegal under the laws or regulations applicable to the funds, including without limitation, human cloning for reproduction purposes);

−      the production of and trade in tobacco and related products;

−      casinos and equivalent enterprises including online gambling;

−      pornography;

−      the financing of the production of and trade in controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons); and

−      the exploration, mining, extraction, production, processing, or refining of fossil fuels. Businesses exposed to any of these fossil fuel sub-industries that can demonstrate a clear net zero or sustainability strategy to offset or mitigate fossil fuel exposure will be exempt from this exclusion criteria.

4.       Stewardship and Engagement

As a private credit investment manager, we believe it is our fiduciary duty to our investors to try and influence where possible our investee companies to adopt policies and procedures to achieve long-term sustainable growth. Our approach to stewardship is pragmatic as debt providers, as we do not have ownership control of the businesses that we invest in. Nonetheless, we believe in collaborative and proactive engagement with investee companies in addressing ESG risks and identifying areas of potential improvement. Any conflicts of interest with the investee company are notified to the investment committee at the pre-deal phase.

During the due diligence phase of any transaction, we seek to identify all ESG risks. It is generally at this phase that we can maximise our influence with investee companies by recommending changes to the ESG policy and practices in the business. Specific ESG conditions and/or recommendations can at this point be included in the loan agreement providing Prefequity as a lender with greater control and influence over the life of the investment in addressing these potential ESG issues.

We take an active role in monitoring and reporting on each investee company throughout the life of the investment. Fulfilling this reporting obligation to our investors requires frequent engagement with management to understand the performance of the business. We achieve this usually through holding a board seat on our investments. This ensures proximity and effective ongoing dialogue with management. Our engagement might intensify based on specific events that may occur over the course of the investment which may be linked to covenant breaches or some other risk event. Given the correlation between ESG risks and business performance, by actively monitoring ESG risks throughout the investment we are in a favourable position to anticipate potential negative impacts to the investment.

Finally, as a lender, we continuously try to improve the ways to perform effective ESG engagement to maximise the impact and make the most efficient use of resources, including involving investors and other stakeholders.

5.       ESG Responsibility and Reporting

Prefequity regularly reviews ESG matters in order to:

−      Maintain the ESG policy and ensure it is up to date and reflects the best practices of Prefequity on an ongoing basis.

−      Ensure all team members receive appropriate training on ESG-related matters.

−      Ensure the investment team follows the ESG guidelines and strategy in its investment process.

−      Keep up to date on relevant regulation and ensuring Prefequity meets its regulatory obligations.

Promote best practices, both internally developed within Prefequity and specific guidance from recognised industry bodies to external stakeholders and reporting to investors on the ESG strategy within relevant investment documents.