Published on April 1st, 2021; updated on September 14th, 2022 by Cusp Capital*
Cusp Capital aspires to follow a responsible and sustainable investment strategy. By doing so, we seek to identify and capture value creating opportunities as well as to mitigate sustainability risks. A sustainability risk is defined as "an environmental, social or governance (ESG) event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment". For Cusp Capital in specific, sustainability risks are risks which could cause a material negative impact on the value of our investment portfolio.
Cusp Capital has implemented an ESG Policy and by doing so follows a responsible investment process. When evaluating a potential investment, Cusp Capital’s investment professionals analyze potential material risks and opportunities related to ESG matters. Reasonable steps are taken to mitigate ESG-related risks. Cusp Capital’s legal team, together with external advisers as needed, provides necessary support in conducting this review.
During the phase of a direct investment in a portfolio company, Cusp Capital investment professionals assist the portfolio company’s board of directors and management in developing a plan to mitigate ESG risks and capitalize on ESG opportunities.
We additionally follow a Code of Conduct (including exclusion criteria with respect to business activities that are not eligible for investment) that is integrated in the investment processes.
Cusp Capital regularly reviews its sustainability risk policies to ensure alignment with current regulatory and market best practices as they may evolve over time.
Cusp Capital does not consider principal adverse impacts on sustainability factors.
‘Principal adverse impacts’ according to the SFDR are the most significant negative impacts of investment decisions on sustainability factors relating to environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. ‘Sustainability factors’ mean environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. Currently there is no established practice yet with regard to applying the provisions on principal adverse impacts.
Due to the blind pool-character of the managed funds and the differences in investment strategies, Cusp Capital is not able to determine ex ante whether all of the portfolio companies of all of the managed funds will be providing sufficient data to properly consider all principal adverse impacts. Given the early-stage nature of the investment strategies of the managed funds, the availability of relevant (non-financial) information to assess the adverse sustainability impacts may be limited. As the managed funds will only be minority shareholders in portfolio companies and target funds, Cusp Capital is not in the position of power to ensure the adherence to standards or high-quality reporting on all necessary data for the assessment of principal adverse impacts on sustainability factors.
Cusp Capital will reconsider its decision on principal adverse impacts periodically and adjust this statement accordingly.
Cusp Capital does not have a remuneration guideline (remuneration policy) in accordance with the requirements of the KAGB in place. Accordingly, sustainability risks are not integrated in such remuneration policy.
Published on February 22nd, 2023 by Cusp Capital*
Cusp Capital Fund 2021 GmbH & Co. KG ("the Financial Product") is managed by Cusp Capital Partners GmbH. Cusp Capital promotes environmental and social characteristics by incorporating these considerations into the Financial Product’s investment processes but does not have as its objective a sustainable investment in terms of the SFDR. The Financial Product promotes the following three ESG characteristics:
#1 Environmental Footprint
#2 Diversity & Inclusion
#3 Good Governance
The Financial Product’s investment strategy follows a dedicated ESG approach, contributing to the fulfilment of the environmental and social characteristics. Zero per cent of the Financial Product are taxonomy-aligned. The Financial Product undertakes to monitor environmental and social characteristics on an ongoing basis applying various methods prior and after the investment. The data for measuring the attainment of environmental and social characteristics is provided by portfolio companies in the form of qualitative and quantitative ESG data points. The information collected by Cusp Capital for the evaluation of a potential portfolio company as part of the ESG Due Diligence process as well as the reporting of the Financial Product is only externally verified if and to the extent that false information is suspected. The assessment of how the Financial Product’s investment in the portfolio companies relates to the above environmental or social characteristics is conducted for the first time as part of the Due Diligence process. Cusp Capital has appointed an internal ESG representative to ensure ESG compliance in the investment process.
Cusp Capital Fund 2021 ("das Finanzprodukt") wird von Cusp Capital Partners GmbH verwaltet. Cusp Capital berücksichtigt bestimmte ökologische und soziale Merkmale im Rahmen der Investitionsentscheidungen des Finanzprodukts, strebt aber keine nachhaltigen Investitionen im Sinne der SFDR an. Das Finanzprodukt fördert die folgenden drei ESG-Merkmale:
#1 Ökologischer Fußabdruck
#2 Diversität und Integration
#3 Gute Unternehmensführung
Die Anlagestrategie des Finanzprodukts folgt einem speziellen ESG-Ansatz und trägt zur Erfüllung der ökologischen und sozialen Merkmale bei. Null Prozent des Finanzprodukts sind an der Taxonomie ausgerichtet. Das Finanzprodukt verpflichtet sich, die ökologischen und sozialen Merkmale regelmäßig zu überwachen, indem es vor und nach der Investition unterschiedliche Methoden anwendet. Die Daten zur Messung der Erreichung der ökologischen und sozialen Merkmale werden von den Portfoliounternehmen in Form von qualitativen und quantitativen ESG-Datenpunkten bereitgestellt. Die von Cusp Capital für die Bewertung eines potenziellen Portfoliounternehmens im Rahmen des ESG-Due-Diligence-Prozesses sowie die Berichterstattung des Finanzprodukts erhobenen Informationen werden nur dann extern verifiziert, wenn und soweit der Verdacht auf falsche Angaben besteht. Die Bewertung, wie sich die Investition des Finanzprodukts in die Portfoliounternehmen auf die oben genannten ökologischen oder sozialen Merkmale bezieht, wird erstmals im Rahmen des Due Diligence-Prozesses durchgeführt. Cusp Capital hat einen internen ESG-Beauftragten ernannt, um die Einhaltung der ESG-Richtlinien im Investitionsprozess sicherzustellen.
This Financial Product promotes environmental or social characteristics but does not have as its objective sustainable investments.
Since the European Disclosure Regulation (EU 2019/2088) is still new and rather untested, and there is only very limited practical experience with the application of its requirements, no sustainable investments are being sought at this point. If and to the extent that a practicable market and administrative standard is established and a sufficient flow of information can be ensured, Cusp Capital will reconsider in due course.
The Financial Product promotes environmental and social characteristics by excluding investments (directly or indirectly) in companies whose business activities consist of any activity that is listed in our exclusion list (including, but not limited to, controversial behavior or products, weapons and ammunition, nuclear power, coal & oil, chemicals, life science/genetic engineering, animal welfare, protection areas, cryptocurrency).
Furthermore, the Financial Product promotes environmental and social characteristics by incorporating ESG considerations into its investment processes.
Specifically, the Financial Product promotes the following environmental, social and governance characteristics:
The characteristics listed above are not considered as final or conclusive, since the Financial Product is a so-called "blind pool" and, therefore, its investment cannot be defined ex ante. Thus, the factors may need to be refined and revised at a later time.
Environmental, social and governance aspects are addressed as part of the ESG due diligence carried out before each investment by the Financial Product since 01.01.2022. In Cusp Capital’s ESG Questionnaire the specific topics on material ESG indicators and questions may vary depending on the type of the portfolio company. Typically, questions are asked about the environmental footprint (GHG emissions), as well as diversity & inclusion and good corporate governance. While the results of this review are not legally binding, they are considered – if material for the portfolio company – as material factors in the investment decision.
i. Investment strategy
The investment strategy is part of the overall ESG approach of Cusp Capital. The following three-step ESG approach substantiates Cusp Capital’s investment strategy and describes how it contributes to the fulfilment of the environmental and social characteristics:
1. (Pre-) Investment phase
As part of the deal sourcing, an initial review takes place to determine whether a potential portfolio company meets Cusp Capital’s investment criteria or violates Cusp Capital’s exclusion criteria (that are part of Cusp Capital’s exclusion list). Every company that violates the exclusion criteria is not even considered as a potential investment.
When evaluating a potential investment, Cusp Capital’s investment professionals and ESG experts identify and assess material risks and opportunities related to ESG matters (based on the Sustainability Accounting Standards Board (SASB) Materiality Assessment). Reasonable steps are taken to mitigate ESG-related risks. Cusp Capital’s legal team, together with external advisors as needed, provides necessary support in conducting this review.
Cusp Capital is focusing with this Financial Product on early-stage investments in companies leading this decade of software and sustainability redefining every industry. Therefore, we include ESG specific clauses in all agreements with portfolio companies dealing inter alia with the introduction of an ESG policy as well as measuring and tracking selected ESG KPIs on a regular basis within a reasonable time after signing. Cusp Capital’s investment professionals and ESG experts support the founders with the recommended frameworks to establish an ESG policy.
2. Ownership phase
During the phase of its investment in the portfolio company, Cusp Capital’s investment professionals and ESG experts assist the portfolio company’s board of directors and management in developing a plan to mitigate ESG risks and capitalize on ESG opportunities. In an initial ESG workshop Cusp Capital sets out clear expectations (based on Cusp Capital’s ESG Framework) for portfolio companies that are designed to ensure that (i) material ESG risks and opportunities are being addressed, and (ii) that material ESG topics and corresponding measures are being implemented and monitored.
While the board of directors is ultimately responsible for developing the portfolio company’s ESG strategy and ensuring its implementation, Cusp Capital provides guidance (through workshops and coaching) to help the company to achieve its strategic aims, and to meet its expectations regarding the ESG characteristics mentioned above.
3. Exit phase
Cusp Capital believes that ESG-improvements contribute to the exit value of a portfolio company. Therefore, in preparation for the exit phase of an investment, reasonable steps are taken to ensure the portfolio company is positioned to continuously improve its ESG performance.
ii. Assessment of Good Governance practices
Cusp Capital acknowledges the importance of responsible investment, and that Good Governance plays a major part in building long-term business success. Therefore, the Financial Product abides by and actively encourages its portfolio companies to consider the Ten Principles of the United Nations Global Compact. Furthermore, the Financial Product follows Cusp Capital’s ESG framework which is based on the UN SDGs and balances the three dimensions of sustainability – Environment, Social and Governance. For the purpose of Good Governance Cusp Capital expects from each portfolio company that an ESG policy is being introduced within 12 months after its initial investment.
The Financial Product does not invest a fixed percentage in portfolio companies that are taxonomy-aligned. Estimating the possible degree of alignment with the Taxonomy remains difficult at this time due to the early stages of the portfolio companies and the incomplete status of the Taxonomy (such as the uncertainty around which economic activities will become eligible).
However, the Financial Product will invest in line with its investment strategy and invest in portfolio companies that are 100% aligned with environmental and social characteristics.
No portion of the Financial Product’s capital will be allocated to other asset classes.
Cusp Capital monitors the Financial Product’s ESG compliance with respect to environmental and social characteristics on an ongoing basis. The KPI tracking is done by the portfolio companies through a technology platform. To this end, the Financial Product may request from portfolio companies to install an internal ESG Governance (+ internal ESG policies and processes) which is responsible for providing information (up-to-date ESG Data) on environmental and social characteristics.
Cusp Capital carefully reviews the completed ESG Reports of the Financial Product’s portfolio companies as soon as they are uploaded on the platform. However, Cusp Capital does not initiate regular reviews itself, at least if there are no reasonable doubts about the data reported by the portfolio.
Post-investment monitoring is done through a close exchange and communication with the Financial Product’s portfolio company.
The Financial Product may apply a combination of the following methods prior to the investment (i.e., within the ESG Due Diligence), and following the investment, to collect information and to assess its alignment with the promotion of the environmental and social characteristics listed above:
- Exclusion list
- ESG Due Diligence: ESG questionnaire (based on the answers a qualitative and/or quantitative ESG analysis is performed based on Cusp Capital’s ESG Framework, to guarantee compatibility of match with its investible universe and ESG preferences), Initial SASB Materiality Assessment, Initial Sustainable Development Goal (SDG) Impact Assessment
Based hereon, the Financial Product may apply one or a combination of the following measures to adjust its alignment with the promotion of the environmental and social characteristics listed above:
The introduction of:
- ESG specific terms letters or Shareholder Agreements
- ESG-specific covenants and undertakings (e.g., introduction of ESG policy, Code of Conduct)
- Ongoing ESG portfolio management
Data for measuring the attainment of environmental and social characteristics is provided by portfolio companies in the form corresponding to the applied method(s) of data collection listed above.
Certain measures are taken by Cusp Capital to ensure data quality for the Financial Product, including (but not limited to):
- Assignment of technical and subject-matter expertise to overcome the wide range of challenges within the ESG data landscape.
- Utilization of an ESG questionnaire to be completed by the portfolio companies, and a mix of (predominantly) internal and external data points are used as the inputs of relevant ESG KPIs.
- Utilization of an ESG Platform to report on the ESG performance of portfolio companies, to avoid any operational risks or unnecessary human intervention.
Data is collected in both quantitative (e.g., headcount by gender split) and qualitative (e.g., description of roles & responsibilities) forms.
The proportion of data that is estimated by portfolio companies cannot be quantified in advance. No external sources are used to verify the data received from portfolio companies.
The information collected by Cusp Capital for the evaluation of a potential portfolio company as part of the ESG Due Diligence process as well as the reporting of the Financial Product is only externally verified if and to the extent that false information is suspected. Therefore, it cannot be completely ruled out that false information may remain undiscovered in certain cases. To address this limitation, an ongoing dialogue with portfolio companies is maintained to gain a more comprehensive understanding of the environmental and social characteristics measured.
As the Financial Product’s investment is made for several years, Cusp Capital considers it a priority to establish and maintain a relationship of trust with the portfolio companies to provide assurance in light of the limitations described in this section.
To attain each of the environmental and social characteristics set out above, the Financial Product carefully selects its investment opportunities during the pre-investment phase.
An essential part of the deal sourcing process is an initial review to determine whether a potential portfolio company meets Cusp Capital’s investment criteria or violates Cusp Capital’s exclusion criteria (that are part of Cusp Capital’s exclusion list). Every company that violates the exclusion criteria is not even considered as a potential investment.
The Financial Product’s ESG Due Diligence (DD) process is performed by the internal ESG experts together with other members of the Investment Team and covers the three dimensions of ESG.
The components of Cusp Capital’s ESG DD are the following:
1. General ESG Questionnaire,
2. Initial SASB Materiality Assessment,
3. Initial SDG Impact Assessment.
In an initial ESG Workshop with the potential portfolio company, the underlying ESG questions are used as a basis to identify and assess material risks and opportunities related to ESG matters. Reasonable steps are taken to mitigate ESG-related risks.
During the DD process the Financial Product refers to Cusp Capital’s own ESG framework and the internal team evaluates whether the potential investment has a potential to positively contribute to the three overarching ESG goals. Depending on the stage of the potential investment, established standards and frameworks (i.e., SASB, Invest Europe, VentureESG) are used to identify material ESG characteristics.
Cusp Capital’s legal team, together with external advisors as needed, provides necessary support in conducting this ESG DD.
Cusp Capital has appointed a qualified Head of ESG to ensure ESG compliance in all stages of the investment process.
To respond to ESG related incidents or controversies appropriately, the Financial Product has implemented internal procedures where an appropriate escalation mode is identified.
If Cusp Capital on behalf of the Financial Product determines any potential issues relating to environmental or social characteristics, it will engage with the portfolio company’s management and/or ESG manager (if appointed) in discussions with a view to resolving, reducing or mitigating such effects, provided, however, that such efforts will always remain within a scope considered by Cusp Capital in its absolute discretion to be proportionate in light of the size and strategic importance of the respective investment in the portfolio company.
*Cusp Capital refers to Cusp Capital Partners GmbH