Navigating ESG issues during the private fundraising process

21 24 The different regulatory regimes and market environments EU: Sustainable Finance Disclosures Regulation (SFDR) Article 6 (conventional funds) Funds that are neither Article 8 nor Article 9 (i.e., conventional funds) Cannot promote environmental and/or social characteristics nor have a sustainable investment objective Must integrate ESG risks into the investment decision making process Article 8 (funds promoting environmental/social characteristics) Binding investment strategy which promotes environmental and/or social objectives Any exclusion screening requirements should be part of the binding investment strategy and be meaningful to it Investee companies (i.e., portfolio investments) must follow good governance practices May also make 'sustainable"¹ investments Currently no minimum threshold although this may change Article 9 (funds with sustainable investment objectives) " Makes exclusively 'sustainable' investments (a small proportion of other investments may be available for hedging or liquidity purposes) Investments must do no significant harm to any other environmental or social objectives by reference to the principal adverse impact indicators Investee companies must follow good governance practices U.S.: SEC Proposed Rules ESG Integration Integrates ESG factors alongside non-ESG factors in investment decisions ESG factors are generally no more significant than other factors in the investment selection process, such that ESG factors may not be dispositive with respect to any particular investment ESG Focus ESG factors are a significant or main consideration in selecting investments or in engaging with portfolio companies (e.g., screens for carbon emissions, board or workforce diversity and inclusion, or industry-specific issues) ESG Impact Seeks to achieve a specific ESG impact or impacts that generate specific ESG-related benefits (e.g., financing the construction of affordable housing units or advancing the availability of clean water) 1 Sustainable investments' means an investment in an economic activity that contributes to an environmental objective or an investment in an economic activity that contributes to a social objective provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance. Managers also need to disclose how these investments align with OECD Guidelines for Multinational Enterprises and UN Guiding Principles of Business and Human Rights. ROPES&GRAY

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