Investment Process
As Private Equity investment advisors, we apply a long-term perspective when evaluating potential investment opportunities. Our goal is to identify companies that we believe are best positioned to capitalize on emerging trends at sector level, and to avoid stranded assets. We will prioritize investment opportunities that have tailwinds from major macro trends. When looking for new companies to invest in, ESG matters are always considered.
ESG is an integrated part of the investment analysis and decision-making process
Sourcing and Screening
Responsible Investment Policy
In the first step of the investment process, FSN’s investment professionals screen the target company against the exclusion criteria outlined in FSN Capital’s Responsible Investment Policy.
FSN Capital Exclusion Criteria
Our Responsible Investment Policy defines our formal exclusion criteria, stating we shall not invest in companies that:
- Have contributed to systematic denial of human rights
- Demonstrate a pattern of non-compliance with environmental regulations
- Show a pattern of engaging in child labor or forced labor
- Have an unacceptable high greenhouse gas footprint and have failed to take reasonable steps to reduce these emissions
- Produce weapons that through their normal use may violate fundamental humanitarian principles (e.g. anti-personnel land mines, production of cluster munitions, production of nuclear arms)
- Are directly related to adult entertainment, tobacco, gambling or alcohol
Climate Change and Biodiversity Assessment
A standard requirement in all our transactions is that we conduct a climate change and biodiversity assessment early in the investment phase. This is intended to ensure we uncover financially material climate and biodiversity risks and opportunities that can impact the target company.
The assessment identifies both transition and physical climate risks and opportunities across different time horizons and climate scenarios. Transition risks and opportunities are assessed based on sector-specific properties, while physical risks and opportunities are assessed based on the geographical location of the company.
ESG due diligence
Double Materiality Assessment
Our ESG due diligence, conducted by external experts, is a standard requirement for all potential investments that reach the Preliminary Investment Decision stage.
The ESG due diligence applies a double materiality approach and always also includes an assessment of EU Taxonomy eligibility, Principal Adverse Impact indications (PAIs), sanctions and anti-corruption. Through the double materiality assessment, we assess both the company’s impact on the world through its full value chain, and the impact of the world on the company, covering all material stakeholders and climate scenarios analysis.
Once material ESG topics are identified through the double materiality analysis, a gap and maturity assessment provides the basis for a distinction between strategic and operational ESG topics. The strategic ESG topics identified are then also considered as part of the commercial assessment of the company. The external experts always provide recommendations on how to reduce risk, capture opportunities and meet best practices in the ownership period. This also forms our understanding of how the company can become a sustainability leader in its industry. If we acquire the company, the information from the ESG due diligence forms the basis for the company’s ESG Priorities in the ownership period.
Decarbonization Assessment
As part of FSN Capital’s science-based targets, we have committed to support our portfolio companies in setting their own science-based targets with the goal of driving decarbonization across FSN’s portfolio. We want to understand already in the due diligence phase (i) the commercial value of setting science-based targets, and (ii) how a potential investment’s GHG emissions can be reduced during our ownership period.
In every transaction we complete a high-level outside-in assessment of the commercial value of decarbonization initiatives, consider risks of not decarbonizing, and develop a company’s decarbonization path through identifying:
· the most material sources of GHG emissions in the company’s value chain
· how to reduce the most material GHG emissions
· level of effort and costs of key decarbonization initiatives
Moritz Madlener, Investment Manager, on how ESG screening and due diligence supports the larger FSN Capital investment process
Impact Assessment Framework
Together with Bridgespan Social Impact, we have developed our own Impact Assessment Framework to identify what constitutes a sustainable investment. The framework bridges regulatory criteria under the SFDR and traditional impact assessment methods such as the Operating Principles for Impact Management and Impact Frontier’s Five Dimensions of Impact.
The FSN investment professionals apply the Impact
Assessment Framework in the due diligence phase for all potential FSN Compass Fund investments, as well on select portfolio companies during the ownership period.
Investment Decision Materials
The final stage of the investment process integrates the findings from the sourcing and due diligence phases into three mandatory components of the investment decision materials.
The first component draws on the materiality analysis conducted during the ESG DD and summarizes the target company’s material ESG topics. These topics are then translated into strategic and operational improvements that inform the company’s ESG Priorities during our ownership period if FSN proceeds with the investment.
The second component presents an overview of the company’s GHG emissions and potential decarbonization levers. Combined, this yields a high level decarbonization pathway, providing a starting point for developing a decarbonization plan with the target company post-acquisition.
Finally, information from the early-stage screening and ESG due diligence is also used as input for the scoring of ESG risks in FSN’s overall Risk Framework.
Preliminary Investment Decision Slides
FSN Capital’s Risk Categories
The FSN Capital Risk Framework is used for detailed analysis of alpha and beta risks in a due diligence process. Alpha risks can be managed actively by our guidance, while beta risks are beyond our control.
We always consider the likely impact of key ESG and sustainability risks on return by having ESG risks integrated in our Risk Framework.
