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Sylvan ESGI integrated investment process

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Sylvan ESGI integrated investment process

The Sylvan Group (“Sylvan”) integrates ESGI factors into the investment process to capture ESGI opportunities and reduce sustainability risks.
We consider ESG factors as potential risks in the operations and underlying businesses of our investee companies that can result in poor investment returns if they are not properly managed.
On the other hand, Impact factors are investment opportunities aligned with Sylvan’s mission. We believe ESGI integration will contribute to bringing fundamental solutions to important problems we face, and ultimately enhance our long-term returns. Therefore, the investment teams have a responsibility to identify ESGI risks and opportunities and examine positive/negative impacts on investment performance. Along with conventional financial analysis and business planning, ESGI factors are considered and incorporated into our investment philosophy. We consistently seek improvements for better integration of ESGI and commercial investment processes through active discussion and collaboration. This proactive involvement and support around ESGI concerns will help both investment teams and portfolio companies’ management teams to transform themselves into true ESGI-following groups and contribute to real double bottom-line returns on our client’s investment.

We incorporate ESGI factors into our investment process to different degrees depending on the type of fund (e.g., Article 6 funds versus Article 8 funds under SFDR) and classification of deals (e.g., according to the degree of importance of ESG in the deal). The ESGI integrated investment process below represents the strictest, most formal process of classifying main purpose deals under Article 8 fund of Sylvan.

01

Pre-investment phase

Initial Screening: Focuses on growth potential with positive environmental/social impact

  • Under the investment themes of ‘Innovation for Sustainable Life,’ ‘Inclusive Society,’ and ‘Climate Action,’ Sylvan focuses on industries and companies where we see strong growth potential and environmental/social impact along with global megatrends.
  • Sylvan conducts initial reviews on selected target companies prior to each investment by running ‘negative screening’ and UN SDG alignment. Negative screening is used to help the investment team avoid investing in or financing companies whose business causes significant environmental or social harm, including but not limited to discrimination, environmental damage, harm to individuals’ physical/mental health, animal welfare, and violation of labor laws. The UN SDG alignment process is used to determine if the target companies are creating or can create a meaningful positive impact.

ESGI Assessment: Due Diligence for ESG and Environmental/Social impact assessment

  • Target companies funneled through the screening process are further scrutinized under a DD process to assess their management of material ESG issues and impact potential through international standards such as IMP’s ‘Five Dimensions of Impact’ Framework and MSCI’s ESG rating methodology.
  • Sylvan uses Value chain issues screening, Environmental/Social impact potential assessment, and ESGI assessment questionnaires & rating system during the assessment process.
    In particular, Environmental/Social impact potential is evaluated with Sylvan’s own assessment methodology, “Impact Identification”, “Impact thesis”, and “Impact Verification”, leveraging international standards such as IMP, IRIS+, and 3PL analysis. ESGI rating and risk assessment are done through Sylvan’s ESGI DD questionnaires and management interviews. DD questionnaires are directly aligned with the MSCI ESG Industry Materiality Map, selected for corresponding sub-industries.
  • Findings developed from the DD process, including ESG-related risks and/or opportunities, will subsequently be presented to the investment review committee for discussion and consideration.
    Upon completion of the assessment, the Investment Committee will thoroughly review the result and reflect on the investment decision, and will ultimately propose suggestions to the portfolio management team.

Sylvan’s Impact Assessment Methodology

Our Impact Assessment consists three steps

Impact Identification

key Questions

  • Do we have an impact?
  • What is our impact?
  • What is the social problem we are trying to solve?
  • What solutions do we have?

Framework/convention

  • 3PL Analysis
3PL(Problem/People/Product) analysis enables us to identify the social problems we are trying to solve and our solutions
Impact Thesis

key Questions

  • How can we defineour impact?
  • How can we measure our impact?

Framework/convention

  • IRIS+. SDGs
Impact thesis includes impact statement, objectives, outcomes, indicators, which enables us to clarify impact concretely.
Impact Verifiaction

key Questions

  • How to prove the impact we are creating?
  • Do we generate enough impact?

Framework/convention

  • IMP
Verifying our assumptions using company data and evidence-based research ensures that we generate enough positive impact.
  • We define ‘social impact’ as impacts that contribute to social well-being and an inclusive culture under our investment themes of ‘Innovation for Sustainable Life’ and ‘Inclusive Society’, following the ‘Social characteristics by SFDR.’ ‘Innovation for Sustainable Life’ typically targets companies that seek to solve social problems but it may include solutions to environmental issues. ‘Environmental impact’ means that it contributes to reducing carbon emissions and reacts to global warming under our investment theme of ‘Climate Action,’ based on ‘Environmental characteristics by SFDR.’
  • Under these goals, we identify social and environmental impacts with an impact thesis and quantify them through IMP and IRIS+ standards, concretely verifying the potential impacts our portfolio company can contribute to our goals.
  • After impact verification, we conclude the impact assessment potentials with 3 categories: “Act to avoid harm,” “Benefit People & Planet,” and “Contribute to Solutions”, and encourage our target companies to maximize impact potential by providing various tools and support.
  • Sylvan assesses the ESG risks and opportunities, leveraging global ESG rating standards such as MSCI and SASB, and reflects on the investment decision. The ESG risks assessment system is aligned with the ESG rating outcome from Sylvan’s ESG DD questionnaires.

Sylvan’s ESG risk assessment system

Score High ESG risk (ESG-related risks cannot be mitigated to a satisfactory extent) Significant sustainability risks identified, but the level of risk remains overall low or medium Low to medium ESG risk
Details* (ESG rating) Significant issues identified (More than 5 gray color ratings at ESG DD questionnaires) A few major issues identified (1~5 gray color ratings at ESG DD questionnaires) No major issues identified (No gray color rating on ESG DD questionnaires)
Action The investment will not proceed A clear ESG risk mitigation strategy with a timeline and action plan may be requested as a prerequisite for investment, and regular progress updates reporting The results of the ESG due diligence are included in the Investment Memorandum presented to the Investment Committee, and shared with portfolio company executives
  • If Sylvan is confident that the sustainability risks identified during the DD process are acceptable or manageable over time, and ESGI potential is sufficient and well-aligned with UN SDGs, we may proceed with the investment with a strong belief in the achievement of a double bottom line: financial returns and impact realization.

ESGI planning & risk management: Management planning including ESG and impact implementation

  • Prior to finalizing the investment, the Sylvan team develops a tangible and coherent ESG and impact mission, in addition to setting relevant KPIs to measure and manage the ESGI factors on a regular basis. The KPIs will be presented in a quantifiable manner which will help the company effectively communicate with external stakeholders and implement them within their internal impact management.
  • Additionally, we will monitor major ESG indexes identified through ESG risk assessment, especially the core metrics under PAI RTS guidelines’ ‘Adverse sustainability indicator’. Core metrics under PAI will be applied to all portfolio companies, and we are preparing to acquire proper solutions to measure and track the core metrics, targeting to do so by the end of 2023.

Investment agreement: consensus build-up

  • Sylvan team will stipulate the representative’s pledge for social impact, articles of association, and reporting obligations to strengthen the connection between the investee company’s impact creation and business model. These steps will help the investee companies to gain a sense of duty to create social impact and manage risks with continued consideration of sustainability factors.

THE SYLVAN GROUP ETHICS PLEDGE

A Commitment to Ethical Business Practices

Corporate sustainability starts with a company’s value system and a principles-based approach to doing business. This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labor, environment and anti-corruption. Responsible businesses enact the same values and principles wherever they have a presence and know that good practices in one area do not offset harm in another. By incorporating the ethical principles into strategies, policies and procedures, and establishing a culture of integrity, companies are not only upholding their basic responsibilities to people and planet, but also setting the stage for long-term success. The Sylvan Group’s Ethics Pledge abides by the Ten Principles of the United Nations Global Compact(UNGC), which are derived from: the Universal Declaration of Human Rights, the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.

Human Rights

Principle 1
Businesses should support and respect the protection of internationally proclaimed human rights; and
Principle 2
make sure that they are not complicit in human rights abuses

Labor

Principle 3
Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
Principle 4
the elimination of all forms of forced and compulsory labor;
Principle 5
the effective abolition of child labor; and
Principle 6
the elimination of discrimination in respect of employment and occupation.

Environment

Principle 7
Businesses should support a precautionary approach to environmental challenges;
Principle 8
undertake initiatives to promote greater environmental responsibility; and
Principle 9
the effective abolition of child labor; and

Anti-Corruption

Principle 10
Businesses should work against corruption in all its forms, including extortion and bribery.
Date
(DD) / (MM) / (YYYY)
Company Name
(Name)
Chief Executive Officer
(Name) (Signature)

*This pledge is irrelevant to formal UNGC participation.

02

Post investment phase

Engaging and monitoring process: ESGI management

  • Following the investment decision, the Sylvan team will monitor impact KPIs and major ESG indexes with implementation status on a regular basis. Periodic interviews, on-site visits, and management seminars will help portfolio companies reach their established impact creation goals. Furthermore, investors will be updated with an annual impact report
  • Not limited to ESGI assessment and supervision, the Sylvan team actively contributes to the portfolio company’s ESGI transformation. The team will work closely with the portfolio company’s management teams to set up a baseline for ESGI performance and develop ESGI targets and action plans to mitigate key ESGI risks and/or leverage opportunities for sustainable value creation.

Contribution to portfolio company’s impact realization

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Engaging and monitoring process
What
  • What outcome(s) do business activites drive?
  • How important are thses outcomes to the people (or planet)experiencing them?
Who
  • Who esperiences the outcome?
  • How underserved are the stakebolders in relation to the outcome?
How Much
  • How much of the outcome occurs across scale, depth, and duration?
Contribution
  • What is the enterprie’s contribution to what would likely happen anyway?
Risk
  • What is the risk to people and planet that impact does not occur as expected?

Exit process: ESGI reassessment & partner build-up

  • Before the sale of the portfolio company, Sylvan confirms the magnitude of impact and ESG at the operational level and looks for partners who understand the importance of ESGI realization.
    We will continue to build up ESG and impact for the community in this market.