Lightsmith Climate Resilience Partners SCSp RAIF (“the Fund”) meets the qualifications outlined in the Taxonomy and is classified as an Article 9 financial product under the EU Sustainable Finance Disclosure Regulation (SFDR) through its support for climate mitigation and adaptation; assurance to do “no significant harm” to environmental or social objectives; and by requiring its portfolio companies to follow good governance practices, with respect to sound management structures, employee relations, remuneration of staff and tax compliance. Sustainability and ESG considerations are incorporated into every aspect of the investment process. The evaluation of individual employee and firm performance includes the sustainable performance of the Fund’s investments.
The strategy focused on growth-stage companies that offer technologies, products, and services that can help to assess and manage the risks and impacts of climate change globally contributes to climate adaptation and climate mitigation objectives. The Fund invests in technology-enabled business services and solutions in the areas of energy, water, food and agriculture, and climate resilience solutions and uses the ASAP Adaptation Solutions Taxonomy to ensure that the intervention builds resilience to a key climate vulnerability, risk, or impact.
Do No Significant Harm and Avoidance of Principle Adverse Impacts
Environmental, social, and governance risks that could have a negative impact on the financial performance of the investments will be assessed, managed, and incorporated into the investment process through the application of the Environment and Social Management System (“ESMS”). The ESMS precludes the Fund from investing in high-ESG-risk Category A transactions, and because implementation of the ESMS is expected to help to identify and manage potential ESG risks, the negative effects of ESG risks on financial returns of the Partnership’s investments is expected to be substantially mitigated. In addition, the Partnership’s portfolio is expected to be highly diversified across industry sectors worldwide. It is not anticipated that any single Sustainability Risk will drive a material negative financial impact on the value of the Partnership and of its investments.
Through the application of the ESMS the Fund considers the adverse impact of investment decisions on sustainability factors related to climate, environmental impacts, social and employee matters, respect for human rights, anti-corruption, and anti-bribery. Companies are screened early in the due diligence process to identify possible principal adverse impacts that could harm achievement of its environmental and social objectives, including by screening activities against the Partnership’s list of Excluded Activities to determine eligibility. Based on the environmental and social assessment, actions make be taken to mitigate the principal adverse impacts and ensure adherence to international best standards which are disclosed through the Annual ESG and Impact Report. Portfolio companies are required to maintain policies and procedures designed to ensure that it has no known principal adverse sustainability impacts as outlined in the EU Taxonomy Minimum Safeguards and SFDR.
Minimum Safeguards for Sustainability Risks
The ESMS identifies and manages environmental and social risks that could have a negative impact on the Fund’s investments. The Fund categorizes potential investments according to the environmental and social risks and the company’s capacity to effectively manage risks and impacts, including the ability to implement any required mitigation. Environmental and Social Action Plans (“ESAPs”) may be required when the assessment of the company’s business activities indicates that there are substantial environmental and social risks that should be addressed and/or mitigated. ESAPs define desired outcomes and actions to address the issues raised in the risks and impacts identification process with measurable outcomes and timelines. Action plans will prioritize and describe specific actions and deliverables that are required for the portfolio company to mitigate potential E&S risks to an acceptable level that align with international standards and best practice.
Environmental and Social Management System
The ESMS defines the Fund’s approach to integrating E&S safeguards and risk management and outlines the process for screening, categorizing, appraising, and monitoring the Sustainability Risks of investments. It adopts the IFC Performance Standards (2012) as its standard of assessment and incorporates the OECD Guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, the core conventions of the International Labor Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights. The ESMS includes policies and procedures for Lightsmith to follow regarding its own activities; roles and responsibilities for oversight and implementation; and integration of ESG factors into the investment process, including due diligence, investment decisions, investment agreement provisions, responsible ownership, and reporting.
Impact Measurement System
The Impact Measurement System (IMS) outlines the policy and process for tracking progress toward desired social, environmental, and impact objectives. IMS activities include selecting indicators, collecting, and analyzing data on indicators from investee companies, and using results in decision-making and reporting. Impacts will be measured against relevant SDGs, climate adaptation, climate mitigation co-benefits, gender, biodiversity, and economic development and use IRIS indicators where possible.
The IMS defines how, for each investment, the Fund will
- identify the climate change-related physical risks and impacts the investment will help to assess or manage and the theory of change for how the investment will help to reduce those vulnerabilities;
- identify other expected positive environmental and social impacts of the investment, such as GHG emissions reductions, contributions to the Sustainable Development Goals (“SDGs”), economic development impacts, and improvements in gender equity;
- define impact indicators to track these benefits and identify key performance indicators (KPIs) that the investee company can report; and
- collect ESG and impact reporting information from investee companies and analyze and report that information to investors in an annual ESG and impact report.
The IMS’ approach to measuring climate adaptation impact begins with defining “climate change adaptation” and “climate resilience” in relation to the risks and impacts of climate change. These risks and impacts of climate change (e.g., drought, storms, floods, heat waves, weather volatility) are identified in reference to research by recognized experts, such as the UN Intergovernmental Panel on Climate Change (“IPCC”). The IMS then sets guidelines for measuring climate adaptation impacts by assessing how an investment helps (1) identify, assess, and manage climate change-related impacts, and (2) reduce climate vulnerabilities experienced by users and other beneficiaries.
The ESMS and IMS incorporate ESG management and impact measurement into all stages of the Partnership’s investment process:
- Screening – All potential investments in the pipeline will be screened for “climate eligibility”: Does each investment help assess or address specific climate vulnerabilities? Populations, regions, and sectors whose vulnerability/ies will be assessed or addressed will be identified.
- Assessment – In due diligence, potential impacts will be estimated, KPIs defined, and ESG risks identified including governance practices, management structures, employee relations, remuneration of staff and tax compliance.
- Investment Decision – KPIs will be defined, a baseline established, and impacts will be mapped against SDGs; these will be included in the Investment Advisory Committee Memo and are considered in the investment decision.
- Investment Agreement – Definitions and data collection methods for reporting KPIs will be discussed and agreed with the portfolio company, including any parallel grant-funded activities to support vulnerable segments through portfolio company activities.
- Monitoring and Reporting – ESG risks and KPIs will be monitored during the holding period; companies will report through an Annual ESG and Impact Report. Periodic site visits will be conducted to verify reported information on both a routine and randomly selected basis. The Fund will track the proportion of its investments that are aligned with the SFDR and Taxonomy Regulation.
- Exit – the Fund will share impact and performance data with investors and the public (on a limited basis).