Impact

Disclosure on sustainability in the financial services sector pursuant to Article 10 of Regulation (EU) 2019/2088

Summary

Opes Italia Sicaf EuVECA S.p.A. (“Opes” or “Sicaf”)  invests in companies that generate social impact and promote good governance practices.

The Sicaf was founded with the specific aim of investing patient capital in high-impact enterprises capable of generating not just economic value, but also fostering positive social  and environmental impact, while fully adhering to the most advanced policies in terms of transparency and inclusion of corporate processes.

The strategy is focused on attaining social impact objectives, which are delineated through a systematic process as follows:

• Evaluation of companies that generate intentional and measurable impact and do not cause harm to the environment and the community.
• Definition of qualitative and quantitative indicators that account for the enterprise’s social performance, and setting specific targets for each indicator according to the company’s business plan.  Should the enterprise also generate intentional environmental impact, pertinent KPIs and targets are identified.
• Discussion, comparison, and endorsement of indicators and targets within the Advisory Board.
• Annual assessment of the extent of achievement of specific enterprise social objectives within the portfolio.

Opes’ primary mission is to foster social impact targets, hand in hand with economic sustainability’ones.

Defining and monitoring companies’ social performances serve as instruments for offering a straightforward and verifiable measure of the impact of investments made.

Ensuring minimal adverse impact on sustainable investment goals

Opes upholds a strict commitment to social impact and the integrity of internal business operations as its core principles. Although the Sicaf does not exclusively pursue sustainable investments as defined by environmental regulations and taxonomy, it conducts an early-stage evaluation, utilizing a dedicated questionnaire, to verify that potential investments do not harm the environment or communities. Consequently, the Sicaf has incorporated the compulsory completion of this questionnaire into its Investment Process, with responses scrutinized and analysed by the Unique Control Function (Funzione Unica di Controllo).

Environmental or social characteristics of the financial product

As part of its operational procedures and in compliance with internal regulations, Opes conducts a preliminary screening of investments, guided by criteria that involve the exclusion of sectors and business practices posing notable concerns regarding ESG sustainability factors. Following the principles of impact investing, investments must align with OPES’ impact framework and yield deliberate and measurable effects, specifically in terms of social impact.

Opes employs internal selection, due diligence, and investment management procedures to assess risk profiles, ensuring investment alignment with sustainability policies and attributes, particularly regarding social impact. Additionally, these processes aim to mitigate and manage financial and reputational risks associated with exposure to ESG risk areas and sectors.

To provide a comprehensive yet concise overview, here below a framework outlining the ESG risk factors that Opes takes into account:

E (Environment) – These factors encompass all aspects of environmental degradation and alteration resulting from both human activities and natural phenomena, primarily centered on risks associated with climate change. These risks for a targeted investment company may range from direct impacts of climate change to risks stemming from policy shifts towards environmentally sustainable practices (ecological transition), as well as risks related to liability for damages. Although not explicitly within Sicaf’s impact framework, data and statements are gathered from targets to assess risks and eliminate non-compliant exposures.

S (Social) – This domain that is frequently less delineated within the industry, draws Opes’ careful attention, covering a spectrum of issues including health, social equity, equitable access to opportunities, inclusive services delivery, diversity awareness, community relations, and more.

Basic criteria revolve around upholding human and fundamental rights for workers, adhering to sound workplace health and safety practices, fostering diversity and inclusion, and maintaining positive relationships with employees and stakeholders. Aligned with its impact framework, the Sicaf actively pursues distinct social impact goals by investing in companies that seamlessly integrate their impact model into their business models.

G (Governance) – This pertains to elements concerning the structure and organization of the company, including principles of independence, diversity, administrative body composition, executive compensation guidelines, directors’ rights, transparency protocols, fairness in decision-making and financial processes, anti-corruption measures, and all efforts to ensure legality and compliance with regulatory frameworks. Opes’ approach is enhanced by its dedicated focus on the “gender lens and migrants lens,” embracing an inclusive and comprehensive stance toward diversity, recognized as a core component for effectively managing a company deemed “ESG compliant”.

Given the pivotal role of sustainability factors to the Sicaf’s operations and the on-going evolution of this subject matter, Opes is actively engaged in updating its policies in response to regulatory and market dynamics. This commitment is underscored by its intrinsic commitment to Impact Investing, aiming to consistently lead in the prevention, management, and mitigation of adverse impacts on sustainability factors. Information and updates on these matters will be provided through its website. Additionally, two team members have been assigned specific responsibilities for overseeing the ESG strategy.

Investment Strategy

The Sicaf’s objective is to identify, develop, and endorse solutions to social problems and challenges, thereby contributing to the fulfilment of the Sustainable Development Goals (SDGs)1 and advocating for exemplary practices in the ESG domain, with a particular focus on social impact and good governance.

1 The SDGs, comprising 17 interconnected objectives, were formulated by the United Nations to pave the way for “a more sustainable and equitable future for humanity”. This comprehensive agenda, also known as Agenda 2030, is outlined in the document “Transforming our World: The 2030 Agenda for Sustainable Development,” recognizing the intrinsic connection between human welfare, the preservation of natural ecosystems, and shared challenges confronting nations worldwide.

For this reason, the Sicaf has formulated its own “impact strategy,” delineating key areas of concern within the nation. Its aim is to identify and support enterprises that have already tested effective solutions and seamlessly integrated impact into their business models. Alternatively, the Sicaf seeks to pinpoint the prerequisites for the social, economic, and financial sustainability of solutions. The Sicaf can either foster these solutions from scratch, with the involvement of suitable talents and the utilization of appropriate resources and industrial partnerships or support already established impact companies tackling critical societal pronlems. Priority areas encompass structural challenges facing the country, such as elevated youth unemployment rates and talent loss, persistent gender disparities and injustices, widespread barriers to inclusion and the marginalization of vulnerable groups from accessing services, products, or market entry. Additionally, the Sicaf addresses the systemic disparities in opportunities, including regional disparities (between north and south, as well as demographically isolated areas, suburbs, and inland regions), and the exclusion of migrants and diverse talents.

The Sicaf aims to back entrepreneurial ventures explicitly targeting the gaps and disparities within the country, encompassing those previously outlined. These areas often lack cohesive solutions, remaining fragmented, compartmentalized, or entirely absent. The Sicaf’s objective is to scale up existing promising initiatives, extending their anticipated impact, or to innovate and activate new solutions. Moreover, the Sicaf’s prioritized impact areas may widen in response to the dynamic economic and social landscape, notably impacted by the aftermath of the Pandemic crisis and recent geopolitical shifts. These developments have exacerbated the vulnerabilities of already marginalized population groups.

In terms of SDGs, Sicaf has been established with its priorities, impact areas, and expectations, aiming to make a tangible contribution directly to the following Sustainable Development Goals:

Specifically, SDG 1, with a particular emphasis on target 1.5.2 2, which addresses the direct economic losses caused by climate-related disasters. By intervening in the agricultural and food sectors – areas of significant interest for the Sicaf – where poverty pockets, widespread feelings of alienation and exclusion, and the exploitation of vulnerable individuals are prevalent, the Sicaf aims to enhance the resilience of those most affected by environmental disasters, thereby reducing their vulnerability and fostering paths towards greater social integration and justice.
2 For detailed information on the targets of individual goals, please refer to https://sdgs.un.org/goals

SDG 5, specifically concerning target 5.1, advocates for the eradication of all forms of discrimination against women and girls globally; target 5.4 acknowledges the importance of recognizing unpaid and informal domestic work (an area of special focus for the Sicaf, which prioritizes solutions that enhance and advocate for caregiving responsibilities primarily held by women, both formally and informally); target 5.5 aims to achieve and ensure the full and equal participation of women (a commitment the Sicaf supports by guiding all participants in implementing suitable policies to ensure comprehensive and fair female participation and representation); target 5.B promotes the adoption of empowering technologies to support women’s roles.

SDG8, focusing specifically on target 8.2, aims to boost economic productivity by diversifying, upgrading technology, and innovating within labour-intensive sectors; target 8.5 strives for full employment and respectable job opportunities for everyone men and women, including young generations and individuals with disabilities, ensuring fair wages for all; target 8.6 aims to significantly decrease the percentage of NEET (Not in Education, Employment, or Training) individuals, which has soared to the highest level in Europe, particularly in Italy; target 8.7 is dedicated to combating all forms of modern slavery and forced labour; target 8.8 aims to safeguard workers’ rights and ensure workplace safety for everyone, including migrants and those employed under precarious contracts.

SDG10, with specific reference to target 10.2, aims to strengthen and promote the inclusion of all individuals, regardless of age, gender, disability, ethnic background, faith, or economic status; target 10.3 pursues the objective of ensuring equal opportunities and reducing income inequalities.

SDG 3, with specific reference to target 3.8 aims to achieve universal health coverage, ensuring access to high-quality essential healthcare services, along with treatment and medication for everyone. In Sicaf’s impact model, there are further impacts to pursue, categorized as either direct or indirect depending on their magnitude, and these impacts directly relate to other SDGs.

SDG 9, with specific emphasis on target 9.3, aims to increase market access for small and medium-sized enterprises, another significant priority for the Sicaf.
The Sicaf aims to provide market access to marginalized supply chains and businesses on the fringes of large distribution channels.

Investment Allocation

Opes invests the entirety of its assets in social impact investments. The financial instruments involved include:

• Stocks, shares, and, in general, instruments representing equity capital, and
• Financial instruments representing “quasi equity”.

The SICAF does not manage liquidity, as the fund’s assets are only called upon in the event of investment agreements being concluded.

Therefore, the asset allocation of the SICAF’s assets is 100% in social impact investments. In terms of the minimum investment quotas necessary to achieve the objective in accordance with its investment strategy, the distribution is as follows:

100% of investments must promote and generate social impacts

Methods

Selection Phase

During the selection phase, the SICAF assesses the level of compliance with ESG criteria and the potential impact profile of the target company concerning its priority areas (inclusion, diversity, youth, opportunity polarization), as well as other more specific areas. The focus is on assessing the solution’s effectiveness in addressing social issues, with special consideration for environmental preservation, and thus define the expected impact magnitude during the investment holding period. Additionally, the target company’s business plan outlines its impact goals, supported by detailed analyses.

During both the preliminary and final analyses (a deliberative decision-making process conducted in two steps) of the target company’s solution, we validate coherence with the business model (integrated impact), assess its additional impact compared to similar solutions, and consider any negative externalities associated with the proposed solution. We identify a pathway for enhancing the “boundaries and nature” of the intended impact, outlining an impact roadmap.

The impact analysis progresses through several stages. In the initial phase, we assess the investment’s alignment with specific parameters, including the company’s nature and social objectives, investment constraints, adherence to social criteria, and exclusion criteria outlined in the SICAF’s bylaws. This includes a review of sectors where investment is restricted, such as tobacco, alcohol, gambling, cloning, and GMOs. Additionally, we conduct an initial examination of potential human rights infringements, crises, or conflicts with stakeholders along the supply chain, identifying sustainability risks (using a checklist validated by the Unique Control Function “UCF”).

The second phase involves an analysis of ESG compliance. We administer a questionnaire to evaluate the target’s implementation of policies, processes, practices, and internal monitoring activities related to ESG.

Risk Management and ESG Performance Measures

The ESG performance of the potential target company is calculated/evaluated by the Investment Office at time t0 using a series of indicators (proprietary methodology) for each investment opportunity, defining an ESG score that will be monitored throughout the investment duration, along with social KPIs approved by the Advisory Board.Evaluation of governance and management tools for monitoring sustainability-related risks (including policies, strategies, operational procedures, ESG performance, and disputes) present at the potential target company level.

For the diagnostic phase of target impact and roadmap design the Sicaf utilizes dedicated tools related to diversity (gender lens framework & migrants lens framework). Diversity and inclusivity are pursued not solely as internal impact objectives of the Sicaf but also as instrumental drivers for the company’s good governance, aligning with the attainment and coherence of ESG objectives.

The aim is to evaluate the company’s impact culture maturity level and its alignment and consistency with ESG policies and practices.

The comprehensive ESG compliance analysis is presented in a dedicated section of the memorandum/info memo prepared by the Partner responsible for the specific investment. Following collaboration with the Investment Office, it is then presented to the Board of Directors.

Investment Phase

Following the validation of the investment opportunity through the preliminary impact analysis, the investment team, overseen by a partner, drafts a provisional information memorandum. This memorandum provides a comprehensive overview, incorporating the results of the ESG survey, detailing existing measures, where relevant, and assessing the impact on the Sicaf’s priority areas and other additional specific areas.

The preliminary information memorandum is forwarded to the UCF, which, as per the Risk Management Policy, is entrusted  with the responsibility of identifying, measuring, monitoring, and continuously managing all current and potential risks associated with the Sicaf’s investment strategy. In the initial phase, the identified risks primarily revolve around a limited set (statutory limitations, concentration limitations).

The UCF’s report undergoes discussion during the opportunity evaluation stage at the Board of Directors’ level. Following the board’s favorable decision, a comprehensive analysis phase follows, often engaging external consultants for legal, administrative, and fiscal Due Diligence.

Once the UCF acquires the comprehensive documentation regarding the investment structure and the nature of the target and its operations, it concludes its analysis document, which delineates the identified risks in accordance with the Risk Management Policy, incorporating sustainability risk assessment as well.

Subsequently, Board of Directors (BoD) then reviews the documentation and opinions received in order to deliberate on the investment operation.  This decision-making process considers the available information concerning ESG factors, ensuring the presence of sufficient ESG measures, and thoroughly scrutinizing any risk factors identified in the Risk & Compliance report provided by the UCF.

Moreover, when granting authorization to the Chief Executive Officer (“CEO”) or another Director to finalize the Investment Agreement with the target company, the BoD may outline suspensive conditions or preliminary activities necessary for the investment’s completion. This step is taken if the board finds the sustainability measures insufficient or seeks to enhance commitments regarding social impact generation as outlined in the Investment Memorandum. The Investment Agreement might contain contractual clauses requiring the counterparty to undertake a series of activities aimed at achieving specific impact objectives and meeting certain ESG performance standards beforehand.

During the negotiation phase of the investment, which involves defining the agreement and terms of investment, parameters (KPIs) and corresponding objectives for social impact are identified along with the impact roadmap. These indicators and targets are established taking into account the company’s mission, the Sicaf’s key impact areas, and the specific characteristics of the target; they are also framed considering their alignment with the SDGs and, if feasible, visually depicted using proxies to IRIS catalogue metrics or other international standards. The process of defining appropriate metrics involves engaging in discussions with the target team, conducting market analyses, and ultimately consulting with the Sicaf’s Advisory Board. The aims of these efforts are diverse and encompass setting ambitious social impact targets to be monitored throughout each investment’s lifespan and collectively for the Sicaf, instilling methodological discipline and rigor in impact assessment consistent with the Sicaf’s nature and desired impact outcomes in priority areas. Simultaneously, it addresses the target’s approach to impact by aiding in the establishment of extended accountability mechanisms, tracking progress, and reporting on achievements related to social objectives, which are pivotal and supportive of the Sicaf’s overarching mission.

3 IRIS Catalogue: This catalogue was developed as an initiative of the Global Impact Investing Network (GIIN); IRIS metrics are designed to measure the social, environmental, and financial performance of an investment. IRIS+ is the generally accepted impact accounting system that major investors use to measure, manage, and optimize their impact. Proper use of the IRIS+ system ensures a minimum level of consistency in impact statements, making it easier for investors to analyze and extract useful information for decision-making. The use of IRIS+ also facilitates impact information comparison. The standards underlying the IRIS+ system are constantly updated based on market evolution. Individual IRIS metrics are numerical measures used in calculations or qualitative values to account for the social, environmental, and financial performance of an investment. IRIS metrics should be used and analyzed in combination based on the five dimensions of impact and other contextual factors to produce relevant and comparable impact performance information.

Where feasible, the parameters serve as proxies for international standards (IRIS and SDGs) and are aligned with ESG principles, thereby functioning as a guiding framework for management in advancing the company’s social mission and for the Sicaf in fulfilling its overarching mission. These annual parameters and targets are endorsed by the Sicaf’s Advisory Board, comprising key investors, which is also tasked with overseeing the progress and pursuit of social objectives for each investment and for the Sicaf as a whole.

The Sicaf with the approval of its AB sets an overarching social target, which comprises the combined social objectives of each individual investment within its portfolio. Achieving this collective social impact goal constitutes a key component for calculating the “carried interest” allocated to management, contingent upon reaching the social goal by at least 60% in addition to meeting the hurdle rate. In the event of falling short of this target, the “carried interest” for the corresponding portion will be redirected to third-sector entities (non-profit). This condition fosters deeper alignment between the interests of management, the Sicaf, and the investors.

Depending on the investment operation’s structure, social parameters and corresponding targets are also used as incentives within the portfolio companies (e.g., ESOP for the key people, possible  earn out at the exit or in the structuring of any Social Financial Products (SFPs), the interest rate might linked not only to financial objectives but also to the achievement of certain social milestones.)

The Sicaf typically defines an average of 5 parameters for each portfolio company, considering various stages of the business plan. These parameters are quantifiable, measurable, and aligned with the Sicaf’s key impact areas.

The dedication to social impact is evident in the crafting of the investment agreement, which addresses the concept of “mission drift” to prevent straying from the company’s social mission and established objectives.

The comprehensive info memorandum, inclusive of ESG and impact analyses, along with the UCF’s final report, is presented to the Board of Directors for consideration regarding the investment operation. The decision-making process also incorporates information on ESG factors and associated risks outlined in the info memo and Due Diligence documents.

Monitoring Social Characteristics

The Sicaf constantly monitors its portfolio companies by appointing a delegated director or observer to the Board of Directors or a member of the Board of Statutory Auditors, usually chosen from the Sicaf’s partners. The partner(s) and the team members directly involved are responsible for monitoring and supervising the performance of the portfolio companies.  Their responsibilities include encouraging the adoption and facilitating the implementation of ESG policies and procedures, overseeing data collection for social KPI measurement, and promptly identifying any emerging critical issues.

As part of the support provided, reflecting the Sicaf’s active involvement, portfolio companies receive comprehensive assistance to pursue social goals and implement the impact roadmap outlined during the investment analysis and finalization phase. The impact roadmap may be structured with operational milestones (such as changes in legal form, e.g., transformation into a benefit corporation, structuring and implementation of internal policies, e.g., anti-discrimination policies, gender pay gap policies, employee health and support, social procurement, and social supply policies). Portfolio companies provide the Sicaf with regular progress updates on the impact achieved against the defined objectives through reports and monitoring sheets, which are then reviewed with the Sicaf’s Advisory Board.

4 Benefit Corporations are entities that, alongside profit, pursue one or more shared societal goals while conducting economic activities. They operate responsibly, sustainably, and transparently towards individuals, communities, territories, and the environment, as well as cultural and social assets, organizations, and other stakeholders. Introduced to Italy in 2016, following the example of Benefit Corporations in the USA, this model has been embraced by over 1000 Italian companies. They acknowledge it as an effective instrument for implementing stakeholder governance and preparing to confront the challenges of the new era. Source: https://www.societabenefit.net/

Portfolio companies are requested to submit a qualitative progress report on their social mission semi-annually, or more frequently in some cases, along with any updates or information that could affect the Sicaf’s reputation. Moreover, they are obliged to prepare an annual social balance sheet in line with the Ministry of Labor and Social Policies’ guidelines and measure social indicators against predefined targets annually. The Sicaf ensures the accuracy and completeness of data provided by each portfolio company and presents various progress reports and updates to the Advisory Board and the Board of Directors for evaluation and validation at both individual company and overall portfolio levels.

As highlighted, the Sicaf plays a crucial role in assisting portfolio companies in defining impact metrics and implementing strategies to achieve social impact targets.

Reporting and Communication Phase

The Sicaf communicates the progress made against defined Key Performance Indicators (KPIs) for each portfolio investment to its Board of Directors and Advisory Board. Additionally, it provides an annual update on the overall portfolio impact goals.

Exit Phase

In the agreement, whenever feasible, there’s a commitment to “mission preservation post exit”: The Sicaf and its portfolio companies pledge, upon divestment, to identify buyers or exit options that align with both the company’s and the Sicaf’s missions, ensuring safeguarding and enabling the continuation of the social mission over time.

The Sicaf holds the belief that the social and environmental sustainability of a company should be integrated into the business model of its portfolio companies, and that this positioning benefits the company’s economic performance.

Sustainability and impact lie at the core of the Sicaf’s investment strategy and are seamlessly woven throughout the entire investment process.

The infusion of sustainability and impact culture into the investment process is aided by the fact that all team members have exposure to impact investing, and much of the team has considerable experience in this asset class, covering all stages of the investment process, from target selection to monitoring to exit. In addition to specific experience in impact investing, there is extensive experience in the field of social cooperation and the financial system serving the country’s cooperative system, ensuring familiarity with the most established impact practices in terms of methodology and best practices. The Sicaf has also appointed an ESG manager at both the Board and Team levels.

Data Sources and Treatment

The data used to evaluate social characteristics mainly come from portfolio companies through annual questionnaires. Where available, Opes also requests social balance sheets or additional reports prepared by portfolio companies and/or third parties, which may further strengthen the verification of promoted social characteristics.

Methodology and Data Limitations

Opes Sicaf’s impact management and measurement process conform to the operational frameworks of target companies, employing a flexible approach to consistently uphold endorsed social attributes.

A limitation arises in the data collection process itself, as the Sicaf evaluates data directly sourced from portfolio companies. Nevertheless, this limitation is mitigated by the Sicaf’s verification activities that the Sicaf conducts on additional documentation available in companies, such as social balance sheets, impact reports, and/or third-party reports.

Due Diligence

Opes maintains a high level of scrutiny across all investment stages, with a focus on impact assessments.

Furthermore, the Sicaf undertakes targeted due diligence measures on all Target Companies, sometimes enlisting external consultant assistance when necessary. These mandatory due diligence activities encompass legal, accounting and tax, as well as ESG and impact considerations.

Engagement Policies

Opes is dedicated to enhancing the ESG and impact performance of portfolio companies by:

1. Providing direct assistance to each portfolio company in developing its own ESG and impact performance measurement and management procedures;
2. Conducting an annual evaluation of an aggregate ESG score crafted using a proprietary methodology;
3. Identifying particular areas for enhancing ESG and impact performance;
4. Regularly monitoring ESG and impact performance;
5. Engaging in portfolio companies’ board of directors to bolster oversight of company performance, including ESG and impact metrics.