Regulation (EU) 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”)
Transparency of sustainability risk policies (SFDR Art. 3)
We acknowledge that ESG-related events or conditions could potentially have a negative impact on the value of our investments. At Expon Capital, we do not formally integrate an assessment of sustainability risks in our decision-making process in accordance with article 3 of the SFDR.
That being said, Expon Capital is focused on investing responsibly through its funds in (i) companies that solve the world’s greatest challenges and unmet needs in a profitable, scalable and measurable way and (ii) companies that contribute to the development of the Luxembourg startup ecosystem. We do carefully select potential portfolio entities for investments, as well as the sectors that they are active in. In addition, through the long-term investments that our funds take in portfolio entities, we may influence such portfolio entities’ activities and policies and thereby diminishing (sustainability) risks for our investments.
As set out in the documentation governing our funds, no investments will be made in entities active in certain ‘restricted sectors’ (which, among others, are sectors that may entail sustainability risks). Also for potential investments in portfolio entities active in other than the restricted sectors, a careful selection is made. Prior to making any investment, we conduct a thorough due diligence research on target entities. The outcome of the due diligence findings is taken into consideration when an investment decision is taken by us.
Transparency of adverse sustainability (SFDR Art. 4)
The SFDR requires Expon Capital to make a “comply or explain” decision whether to consider the principal adverse impacts (“PAIs”) of its investment decisions on sustainability factors, in accordance with a specific regime outlined in the SFDR.
Expon Capital has carefully evaluated the requirements of the PAI regime in Article 4 of the SFDR, and in the final report on draft Regulatory Technical Standards which were published on February 2nd, 2021 (the “PAI regime”). Expon Capital is supportive of the policy aims of the PAI regime, to improve transparency to clients, investors and the market, as to how financial market participants integrate consideration of the adverse impacts of investment decisions on sustainability factors. However, Expon Capital is concerned about the lack of readily available data to comply with many of the reporting requirements of the PAI regime, as Expon Capital believes that companies and market data providers are not yet ready to make available all necessary data for the PAI regime. Furthermore, companies in their early stages of development, especially, may not be able to provide the required data as it is not applicable to them in these stages and could only be estimated and scaled up to represent potential future adverse impacts of their business models.
Taking these considerations into account, at this stage Expon Capital has opted not to comply with that regime, both generally and in relation to the Funds. However, Expon will continuously seek to obtain relevant information on potential sustainability risks and evaluate to which extent this information can fulfill the PAI requirements. Therefore, Expon Capital will keep its decision not to comply with the PAI regime under regular review.
Transparency of remuneration policies in relation to the integration of sustainability risks (SFDR Art. 5)
Expon Capital’s compensation policies are structured to incentivize investment managers to promote sustainable growth within investments. Consequently, the remuneration model includes a variable component that qualitatively and quantitatively takes into account compliance with the Firm’s sustainability principles.
Funds managed by Expon Capital are remunerated by means of a management fee calculated on capital commitments and are subject to a cap. Such a mechanism does not encourage excessive risk taking and is thus consistent with the integration of sustainability risks into the investment decision-making process. Through co-investments in funds portfolio companies, Expon Capital’s team is entitled to participate to the capital gains generated which are dependent on the financial returns of the venture capital funds managed by it. The risk management process in place regarding the investment decision-making process ensures that excessive risk is not encouraged (including as regards sustainability risks).