Website product disclosure for financial products referred to in Article 9(1), (2) and (3) of Regulation (EU) 2019/2088
For financial products referred to in Article 9(1), (2) or (3) of Regulation (EU) 2019/2088, financial market participants shall publish the information referred to in Article 10(1) of that Regulation and Articles 46 to 57 in the order and made up of the following sections titled:
The Polestar Circular Debt fund objectives are of a sustainable nature. Consequently, the fund will exclusively make sustainable investments with an environmental objective.Therefore it categorizes as an Article 9 fund (dark green category) under the SFDR. The objective of the fund is to realise positive ecological impact and specifically aims to support the transition to a circular economy by providing financing to circular production facilities. Moreover, the fund aims to attain a contribution to achieving the United Nations Sustainable Development Goals.
b. No significant harm to the sustainable investment objective (DNSH)
The fund screens borrowers during the investment process on the principal adverse impacts on sustainability factors of the SFDR, the ‘Do no significant harm’ criteria of the EU Taxonomy, and the exclusion criteria of the fund and ensures alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights through an ESG assessment and agreement.
The fund considers principal adverse impacts on sustainability factors in the investment process with regard to the sustainability factors which are relevant and material to a borrower. The assessment is done before an investment is made. If an actual or potential adverse impact is identified, this may impact the investment decision of the fund, resulting in either mitigating the principal adverse impacts or refraining from an investment. If and as long as a borrower meets any of the exclusion criteria of the fund, the fund will refrain from investing in the borrower.
After a loan has been disbursed, the fund continues to monitor the relevant and material principal adverse impacts through ad hoc and annual data collection, of which the results will be disclosed in the annual report. The fund will engage with the borrower if principal adverse impacts are identified. If principal adverse impacts pursue unmitigated and are material, such engagement may also include, but are not limited to, engaging with other stakeholders of the borrower, imposing penalties or reclaiming the loan.
c. The sustainable investment objective of the financial product
The fund specifically aims to support the transition to a circular economy. By providing financing to circular production facilities, the fund aims to achieve the fund Objectives. The fund Objectives include impact objectives that are translated into: (i) quantitative impact objectives related to recycled and upcycled residue streams, substituted virgin abiotic raw materials and products, avoided (equivalent) CO2 emissions and mobilised commercial capital; (ii) qualitative impact objectives, including contributing to attaining the UNSDGs; and (iii) impact-related Exclusion Criteria. The contribution to attaining the UNSDGs is monitored by measuring the progress of borrowers via the impact metrics related to certain UNSDGs, which are part of the funds Impact Metrics.
d. Investment strategy
The Investment Strategy is centred around creating impact by providing debt financing to innovative circular production facilities. The fund targets borrowers that otherwise (i) would not, (ii) would not completely or (iii) would later receive funding. Before the fund considers extending a loan, an assessment is made on (i) whether a to be financed project contributes sufficiently to attaining the impact targets of the fund, and whether a borrower deploys activities specified on the Exclusion Criteria or causes negative externalities such as any negative ecological or social side-effects (for example deforestation, use of harmful materials or forced labour etc.). Based on this assessment, the fund may choose not to extend financing to the assessed borrower.
In addition to an assessment of the ecological impact and social adverse effects, the governance of a borrower is included as a component of the assessment. This part of the assessment is, for example, conducted on factors such as the presence and mechanisms of internal control systems, the composition and quality of the management team, the checks and balances in administrative processes, the adequacy and timing of financial statements and the presence of financial resilience and risk management mechanisms. If a project has insufficient or inferior governance mechanisms in place, Polestar Capital will propose improvements in its governance before a loan is extended. If a borrower does not adhere to the governance standard required by the Polestar Capital, no loan will be extended by the fund (yet).
The impact analysis and its conclusions are an integral part of the investment decision process. If Polestar Capital believes this to be of value, an external advisor will be engaged during the due diligence phase of the credit process in order to validate (parts of) the impact analysis.
e. Proportion of investments.
The fund is committed to finance sustainable investments/projects only. To the extent possible, from 2022 onwards, loans will be aligned with the EU Taxonomy into the categories of climate change adaptation, climate change mitigation and the transition to a circular economy. Given the fact that EU-taxonomy is still new and in development, most of the SME’s the fund finances do not publish impact data (yet). Therefore the fund cannot guarantee alignment with the EU Taxonomy at this moment, and can only declare a 0% alignment. The fund will continue to work towards a situation where the fund and its portfolio companies publish data on eligibility and alignment.
The fund does not use any derivatives in the pursuit of the fund’s sustainability objectives.
f. Monitoring the sustainable investment objective.
Each loan, the quantitative impact objectives will be incorporated into the financing documentation, together with the agreements made with a borrower with regard to the qualitative impact objectives. If the objectives are not attained, or if Polestar Capital becomes aware that a borrower does meet the impact-related exclusion criteria, this constitutes a default under the financing documentation.
The fund monitors the impact of its loan portfolio, by periodically collecting data from its (at least once a year) via a survey. In addition, the borrower needs to provide annual financial and impact data verified by its accountant. This impact data will be analysed and administered by Polestar Capital. The aggregated impact data will be the basis of the annual impact statement/report of the fund. This report will be assessed and verified by the external impact advisor of the fund.
Polestar Capital has developed an impact framework in which impact metrics have been established with respect to the SFDR, EU Taxonomy, UNSDGs and Polestar Capital’s own impact targets. These metrics and the methodology to collect data and monitor the progress, are documented in the impact measurement policy of Polestar Capital. This policy furtherdescribes the uniform approach of how the impact metrics of each project in which a fund managed by Polestar Capital has invested are measured, before an investment decision is made (ex-ante), and how the actual impact of a project is measured after the investment is completed (ex-post). The policy distinguishes and elaborates on the following impact themes, including impact metrics:
In order to comply with both the SFDR and the EU Taxonomy, the CO2-equivalent emissions of a project will be measured in conformity with the international green house gas (“GHG”) accounting standards as defined by the Greenhouse Gas Protocol. Further to this standard, a distinction will be made between Scope 1, 2 and 3 emissions. In addition, the fund adds scope 4 emissions, which are the avoided emissions due to the circular solution the project offers in comparison to the current status quo.
The impact analysis on a project’s circularity must be based on its energy/mass balance. The energy/mass balance is validated or composed during an impact analysis conducted by an (external) expert, which is normally performed during the technical due diligence phase. On the basis of this energy/mass balance the volumes of waste reduced, or virgin abiotic resources substituted, will be estimated.Polestar Capital measures and reports the circular impact of the fund via a bottom-up approach (i.e. impact per project), at least on an annual basis. The results will be disclosed in the yearly impact report of the fund.
With respect to a project’s impact on ESG performance indicators, several standards and data points are determined via recurring annual due diligence. The fund asks the borrower to comply or report any incidents to the fund. If necessary, an onsite audit executed by or on behalf of Polestar Capital can be used to cross-check the statements made. fundamental for validating a project’s impact regarding ESG is that entrepreneurs must complete an ESG questionnaire and sign an ESG certificate on an annual basis.
4. Sustainability risks
Polestar Capital has identified several sustainability risks relevant to the projects it invests in/finances. These are related to 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 one or more loans.
During the investment process, Polestar Capital performs an analysis on the sustainability risk. If a risk is identified, Polestar Capital will analyse the likelihood that sustainability risk factor takes effect and, to what extent mitigation measures have been taken to minimize the risk or its impact, and will categorise the risk as low, medium or high. A description of the sustainability risk assessment is part of the investment proposal submitted to the credit committee of the fund to decide on a prospective investment, and the outcomes are administered in the customer relationship management system of Polestar Capital.
h. Data sources and processing.
To assess progress towards attaining the fund’s sustainability objectives, data is primarily obtained from the portfolio companies themselves. The primary data consists of actual production (energy and materials) data of the installation the fund has financed. With the use of additional metrics such as emission factors the fund calculates for example the GHG emissions reduced.
The fund takes the following measures to ensure the quality of data:
- It obliges the borrower to verify production data together with the financial data by the borrower’s accountant.
- It sends out annual surveys and the investment team verifies the received data.
- The aggregated data in the funds impact report is assesses by the funds external impact consultant.
The data provided by the borrowers is administered in a customer relationship management system. With the raw data the fund calculates the performance of the borrower with regard to certain impact metrics. On the basis of a life cycle analysis (impact analysis) the impact is compared with the current standard technology in the market. The fund only provides loans to projects that improve the utilization grade of resources, and/or that reduces CO2 emissions, waste and/or abiotic resource usage, in comparison to the current market standard.
The fund does not use indices or external databases to achieve its objective. The fund uses ex-ante assessments to select investments, and to determine whether an investment contributes sufficiently to one or more impact objectives. This is due to the nature of the projects, which will often include innovative start-ups or scale-ups. The impact of each project is determined individually, and due to the innovative nature, benchmarks are either not applicable or not available for accurate impact calculations.
i. Data limitations and methodologies.
As described, the primary source of the data is the borrower. Although the borrower is likely to have more accurate data available than benchmarks or indices would provide, this creates the risk thatthe borrower could provide wrong or manipulated data, or could refrain from disclosing data not specifically requested in the survey.
This data quality limitation is relevant at the level of the borrower, the fund has processes and incentives (like penalties or reclaiming our loan) in place to generate sufficient data on a fund level. The fund expects that only in exceptional cases borrowers provide insufficient or incorrect data.
Measures to address these limitations:
- Impact data reporting is a requirement as agreed in the finance documents, thus borrowers are obliged to deliver impact data on an annual basis. If a borrower does not comply with the agreement the fund will engage, penalize or even reclaim the provided financing.
- The fund will actively engage with borrowers on a periodic basis, via direct contact and impact surveys, to collect and assess the impact data.
- Impact data with regard to circularity are part of the annual financial reports audited by the accountant. Data provided by the borrowers will be checked and verified by the investment team.
j. Due diligence
In the due diligence phase, the business model, the expected impact, the legal aspects and the business plan are validated by means of a detailed internal and/or external due diligence. Dependent on the project’s specifics, this phase may (partially) run in parallel with the analysis and structuring phase.
As a point of departure, Polestar Capital performs financial and commercial due diligences internally and has the technology, impact, legal (project documents and public law) and insurances investigated externally. The focus of the impact due diligence lies on validating the energy- and mass balance. This will be the starting point for a Life Cycle Analysis (“LCA”) or other type of impact analysis. In a life cycle analysesthe circular solution of the borrower is compared tothe current linear market practice it will replaces.
To the extent the due diligence work is performed externally, Polestar Capital has a mainly a coordinating and supervising role in the due diligence phase.
The due diligence activities will result in resolvable and non-resolvable risks and recommendations for a borrower and/or Polestar Capital. Polestar Capital will ask the relevant borrower to implement the recommended improvements in order to limit financing risk for the fund to the maximum extent possible. If a borrower is not able or willing to mitigate certain risks, Polestar Capital will assess whether the projected cash flows remain sufficiently solid or that other modifications, including a higher pricing, are necessary to make the risk acceptable for the fund. Potentially, such modifications require approval from the credit committee of the fund.
If the Polestar Capital at any point expects a borrower to violate the financing documentation, the Polestar Capital can at any time terminate the investment process and reject the application.
External control is organized via the fund’s credit committee. Before providing a loan to a borrower, the credit committee is consulted. The credit committee will check and validate if the investment team has done sufficient due diligence amongst others with regard to the impact of side of the project.
During the term of the loan an additional external control consists out of the data validation by the borrower’s accountant on the financial and main impact figures.
k. Engagement policy
In the case that the borrower has incidents or does (potentially) not comply with the impact clauses in the financing documents, the borrower may be in default and the fund may have legal grounds to act or reclaim its facility. The fund has the following engagement policy in the case of a (potential) non-compliance event:
- A formal meeting is planned with the borrower to check and cross check incidents or (potential) breaches with the impact conditions. The borrower will be requested for a recoveryplan with regard to meeting the impact agreements.
- If the borrower continues to be in breach of the financing documentation, the fund can take action, which includes but is not limited to, imposing penalties to the borrower until the impact situation is compliant again.
- A final step the fund can take is to reclaim its loan.
The fund has the right to randomly audit borrowers to assess the compliance with the financing documentation, including the impact clauses. Next to the formal procedures, informally the investment team is in regular contact with the borrower to monitor on developments of the project.
l. Achieving the sustainable investment objective.
In order to comply with both the SFDR and the EU Taxonomy, the CO2-equivalent emissions of a project will be measured in conformity with the international GHG-accounting standards as defined by the Greenhouse Gas Protocol (https://ghgprotocol.org). Further to this standard, a distinction will be made between Scope 1, 2 and 3 emissions and to clarify the impact a “scope 4 emission” is added. Scope 4 emissions are defined as the avoided emissions based on the circular solution of the project in comparison to the linear market standard. The scope 4 emissions are estimated ex-ante via a LCA. In the LCA the fund uses well to wheel emission factors based on the Dutch standard used by regional impact funds: https://www.co2emissiefactoren.nl/
Further, the fund adheres to the PCAF standard in reporting CO2 emissions impact of the fund.