Environmental, Social and Governance

Statement on the ESG Approach, Article 173 of the French Act on Energy Transition

I.      Information on the Management Company

1.       ESG Approach

Cathay Capital Private Equity (CCPE) firmly believes that accounting for Environmental, Social and Governance (ESG) stakes in its activities is fundamental to its role as an investor. Integrating ESG factors in investment decisions is vital in determining risks and opportunities, and ensuring long-term, sustainable value creation for the company, for its portfolio companies, their management and employees, the environment, and society as a whole.

As such, CCPE formalised a responsible investment approach in 2017 by designing and implementing its ESG Management system. The approach which was decided upon strengthens CCPE’s consideration of ESG issues in all stages of the investment process, and also allocates Cathay’s roles and responsibilities with regard to accompanying portfolio companies in adopting sustainable practices and in implementing continuous improvement with regards to these issues.

CCPE implements France Invest’s recommendations regarding ESG disclosure.

2.      Implementation of the ESG Management system to CCPE funds

In addition, CCPE plans to implement the ESG Management system to future funds raised from 2018 onwards.

II.    Information regarding ESG criteria in the investment policy 

1.       Reference ESG criteria

The ESG Management system defined CCPE’s commitments and sets out the criteria taken into account in investment decisions:

• Safeguarding its activities from risks posed by ESG matters, thus minimizing any subsequent negative externalities;
• Promoting good practices and encouraging positive externalities on all stakeholders;
• Encouraging the efficient use of natural resources, reducing greenhouse gas emissions in portfolio companies’ value chains, and protecting the environment;
• Complying with ESG-regulations and standards, such as the International labor Organization Core Labor Standards, and aligning with good industry practices;
• Encouraging portfolio companies’ in seizing the potential for positive impacts and opportunities in their business activities, such as strengthening their supply chain structures and management.

As CCPE’s investments are carried out on a wide scope of activities and countries, notably in Europe and in China, the ESG criteria cover an exhaustive perimeter.

Internationally recognised referentials were considered in determining the criteria:

• The United Nations’ Global Compact
• The United Nations’ Principles for Responsible Investment
• The Commonwealth Development Corporation standards
• The ILO conventions

2.      Integration of ESG criteria in the investment policy

CCPE’s management system approach focuses on ensuring that ESG issues are accounted for at all stages of the investment process, from the pre-qualification to the exit stage.

In the initial stages of investments (deal qualification and LOI stages), potential portfolio companies’ activities are screened to ensure none figure on CCPE’s Exclusion List (see Appendix). A report on any material ESG matter the company is associated with is also formalised, based on the initial review and investigation of public information regarding any adverse impact on local communities or the environment. The findings from the ESG report are discussed at the Local Executive Committee Level to identify any potential no-go decision.

During the transaction stage, CCPE launches an ESG due diligence which is performed by qualified, independent, external experts in order to assess the ESG risks and impacts of the proposed Portfolio Company’s operations. This report notably contains an assessment of operations into high, medium and low risks, based on the Commonwealth Development Corporation (CDC) criteria and sector profiles.  The ESG due diligence includes:

• An assessment of the prospective company’s compliance with Cathay Capital’s ESG requirements and of potential non-compliances;
• A detailed action plan if appropriate.

The due diligence is presented to the Global Partners and Advisory Committee. No investment can be finalised unless the portfolio company has accepted the proposed action plan.

During the holding stage, the deal team follows up on the relevant Action Plan and more generally on continuous improvements on a regular basis, and ESG topics are addressed by the company’s Board on a minimum yearly basis. In addition, CCPE has implemented an annual ESG reporting framework in order to publish the consolidated ESG performance of portfolio companies. This reporting provides additional disclosure on the ESG impacts of portfolio companies and continuous improvement actions.

Lastly, at the exit stage, the Exit Memorandum for the Portfolio Company will contain an overview of the ESG improvements made along the investment period.

III. Investor information

For the funds in the scope of the ESG Management system, CCPEP provides its investors with:

• An annual report on the fund’s ESG performance;
• Upon request, information on the implementation of the ESG management system, the ESG analysis performed during ESG due diligences, and the action plans validated with portfolio companies.

IV.  Appendix: Exclusion list

• Production or trade in any product or activity deemed illegal under host country laws and France or regulations or international conventions and agreements
• Production or activities involving forced labour or child labour
• Trade in wildlife or wildlife products regulated under CITES
• Drift net fishing in the marine environment using nets in excess of 2.5 km in length
• Destruction of Critical Habitat and any forest project under which no sustainable development and managing plan is carried out.
• Production or use of or trade in hazardous materials such as asbestos fibres and products containing PCBs
• Production, use of or trade in pharmaceuticals, pesticides/herbicides, chemicals, ozone depleting substances and other hazardous substances subject to international phase-outs or bans
• Cross-border trade in waste and waste products unless compliant to the Basel Convention and the underlying regulations.
• Production or trade in (a) weapons and munitions, (b) tobacco, (c) hard liquor for human consumption.
• Gambling, casinos and equivalent enterprises
• Any business relating to pornography or prostitution.
• Any activity involving significant altercation, damage or removal of way critical cultural heritage
• Production and distribution of racist, anti-democratic or with the intent to discriminate part of the population.