Sustainable Finance Disclosure Regulation (SFDR)*
Frog Capital wholeheartedly supports the regulatory drive to transparency of the financial sector to its environmental, social and governance (“ESG”) obligations.
As a European software investor, Frog Capital does not encounter significant environmental issues in Portfolio Companies and has clear investment criteria that exclude companies with negative environmental and social impacts so to avoid sustainability risks in the Fund performance. Frog Capital seeks to back companies with a sustainable investment thesis which aligns with trends in the economy supporting environmental and social good and it seeks to promote good governance.
Notwithstanding the above and although ESG and sustainability risk is important to Frog Capital, our previous fund, Frog European Growth II LP, was not launched as a vehicle to promote environmental or social characteristics (so-called “Article 8 product” under the SFDR), nor is it classified as a product that has sustainable investments as its objective (so-called “Article 9 product” under the SFDR). Our current fund, Frog European Growth III LP. is an Article 8 fund.
Frog Capital has taken the view that the investments to be made by the Partnership are not likely to be affected by sustainability risks and that those risks are not relevant in the context of the Partnership’s policy. Investors should note that it is very difficult to assess with any reasonable certainty whether there exists, or the likely outcome of, any sustainability risk on the investments and/or the risk of occurrence of any such risk.
Article 4 of the SFDR requires fund managers to make a clear statement as to whether or not they consider the “principal adverse impacts” of investment decisions on sustainability factors. Frog Capital considers the adverse impacts of investment decisions on sustainability factors in the manner prescribed by Article 4 of the SFDR because there is no sufficient and satisfactory data available to allow Frog Capital to adequately assess the potential adverse impact of its investment decisions on Sustainability Factors.
Article 5 of the SFDR requires fund managers to publicly provide information on remuneration policy consistency with the integration of sustainability risks. According to the Frog Capital Remuneration policy section on Risk Management, variable compensation awards are required to take note of key risk indicators and compliance by employee to regulations and best practice in order to promote effective risk management and discourage risk taking that exceeds tolerated levels. We consider ESG to be part of best practice and it is included within key risk indicators.
*Transparency of the integration of sustainability risks Art 4 and 6 of Regulation (EU) 2019/2088
SFDR 3
Sustainability Policy
Aligning with our PRI commitment, Frog Capital considers sustainability risks and factors at various points during the investment cycle per our Responsible Investment Policy. When considering a new opportunity, we utilise the IMP framework, a collaborative initiative to establish a common framework, to determine the impact of an investment on the environment and society and any risks associated with what they do.
This considers 5 dimensions of impact:
- What: what positive and negative impacts are relevant to the portfolio company
- How much: the scale/magnitude of impact
- Who: who is impacted by the product
- Contribution: the extent to which the company’s activities contribute to these impacts
- Risk: Assess and manage the risks associated with achieving positive impacts
What changes? Identify changes that can be made to enhance positive impacts and mitigate negative ones.
In addition to impact, ESG is built into our decision making and ongoing monitoring processes/engagement. ESG factors impact on financial performance and long-term value creation are considered throughout the investment’s lifecycle.
SFDR 4
No consideration of Principle Adverse Impacts of investment decisions on sustainability factors.
Our Responsible Investment Policy considers sustainability risks in our investment decision-making process. However, at present, we do not currently consider the principal adverse impacts (PAIs) of our investment decisions on sustainability factors. While we acknowledge the importance of assessing the PAIs, we are currently not in a position to measure all the necessary data required to report on these impacts comprehensively. This will be reviewed on an ongoing basis, at least annually, to assess whether our position changes.
SFDR 5
Frog Capital’s integrates sustainability risks into our remuneration policy and other remuneration arrangements. Sustainability risk considerations are embedded into our practices, and employees are assessed not only on their adherence to these policies but also on their efforts to continually improve them. Frog Capital does not encourage risk‐taking which is inconsistent with the risk profiles of our clients and of our Funds, including with respect to sustainability risks, being defined as environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of an investment.