The following concerns Valo Ventures Management, L.P. (Valo) and its fund, Valo Fund II (the Fund).
- Version History: 1.0
- Publication Date: January 16, 2024
This document sets out sustainability-related disclosures in relation to the Fund, for the purposes of Article 10 of the EU Sustainable Finance Disclosures Regulation (SFDR). This document is published on Valo’s website.
Summary
The Fund is considered to be an Article 9 financial product under the SFDR. Valo and the Fund are committed to a sustainable investment objective of climate and environmental sustainability. We achieve this by investing in technologies and business models that “Digitize,” “Decarbonize,” and “Adapt” society in response to rising global temperatures. In line with our mission to “Invest for a brighter future,” Valo’s investment mandate is to prevent and reverse climate change alongside delivering attractive risk-adjusted returns to its investors.
To ensure the Fund’s investments align with its sustainable objective, Valo conducts rigorous pre-investment due diligence to ensure potential investments do no significant harm, monitors ESG and impact performance over the lifetime of an investment, and provides support to maximize the economic and sustainable outcomes of each business.
No significant harm to the sustainable investment objective
As part of both its diligence and management practices, the Fund ensures that its investments do no significant harm to any sustainable investment objectives. The Fund’s mandate is to invest in climate solutions that “Digitize,” “Decarbonize,” and “Adapt” our society to create a more sustainable world. Investments that meet these criteria are, by definition, actively advancing the sustainable investment objective of climate and environmental sustainability. Valo is focused on delivering attractive risk adjusted returns to our investors, and when two financial opportunities are equal, the Fund will invest in the company that has the greater potential for positive environmental impact.
In addition to meeting the minimum categorical threshold of combatting climate change, all investments are assessed for ESG risk as a key aspect of the diligence process. As required by SFDR, Valo assesses the do no significant harm test by reference to the PAI indicators. Before investment, and annually over the lifetime of that investment, portfolio companies must complete an ESG survey that includes all adverse indicators from Table 1 of Annex 1 and indicators from Tables 2 & 3, where relevant. This includes ensuring that all investments follow the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. The Fund invests only in companies that do no significant harm to environmental or social objectives, and actively manages its companies to maximize positive environmental impact.
Sustainable investment objective of the financial product
The Fund’s aim is to deliver on Valo’s mission of “Investing for a brighter future.” Valo sources companies that contribute to climate and environmental sustainability through the digitization, decarbonization, and adaptation of society.
Digitization: Orchestrating and delivering carbon-free firm power, reducing friction, and improving efficiency
Decarbonization: Eliminating carbon emissions and permanently removing greenhouse gasses from the atmosphere
Adaptation: Managing the current and forecasted physical and transitional impacts of climate change, preserving ecosystem services, and enhancing biodiversity
While this taxonomy is internally developed, it falls within the SFDR framework for sustainable investing as defined in Article 1, Paragraph 17. From companies that meet this sustainable investment objective, Valo looks to deliver the best risk-adjusted returns to its investors.
In addition to our mission and investment framework, Valo has committed to a 100% net zero portfolio by 2040, in line with Net Zero Asset Management goals. Starting in 2024, Valo will publish an annual report on the positive impact created by its portfolio companies.
Investment strategy
The Fund’s strategy is to invest in companies that have a strong potential to support climate and environmental sustainability and demonstrate strong financial viability. Because of climate change’s broad swath of impact, Valo’s investment strategy covers eight different, but overlapping, UN SDGs:
(i) 7: Affordable and Clean Energy; (ii) 8: Decent Work and Economic Growth; (iii) 9: Industry, Innovation, and Infrastructure; (iv) 11: Sustainable Cities and Communities; (v) 12: Responsible Consumption & Production; (vi) 13: Climate Action; (vii) 14: Life Below Water; and (viii) 15: Life on Land.
The Fund targets early stage (Seed, Series A, or Series B) financing rounds and prefers to lead or co-lead investments in order to play active partnership and governance roles throughout the foundational period of a company’s development. Before investment, Valo evaluates the corporate governance of each potential portfolio company, and periodically thereafter. Issues that the Manager considers in assessing good governance, include sound management structures, employee relations, remuneration of staff and tax compliance.
Proportion of investments
100% of the Fund’s invested capital will be allocated to companies that meet the sustainable investment objective outlined above. The Fund commits to making environmentally sustainable investments and will also consider the merits of investments in socially sustainable companies as well. Although the Fund is confident in its portfolio companies’ sustainable impact, the firm is not in a position to certify that those investments are ‘taxonomy aligned.’ Investments are assessed on their contribution to the sustainable investment objective, but because of the early and uncertain nature of these funding rounds, the Fund cannot commit to a certain percentage of taxonomy aligned assets, and its minimum proportion is 0%. The Fund does not invest in hedging instruments or sovereign bonds.
Monitoring of sustainable investment objective
Beginning for the fiscal year 2022, Valo has implemented an annual ESG survey of its portfolio companies that includes, but is not limited to, the fourteen mandatory PAI indicators. Given the relatively early stage of Valo’s investments, many portfolio companies will be setting ESG baselines for the first time. Beginning in 2023, Valo will also track its portfolio against sustainability indicators to measure the positive environmental impact had by each portfolio company. Because of its broad sustainability mandate, the Fund does not have a limited number of indicators it will measure each portfolio company against. The Fund’s portfolio companies are likely to contribute to environmental sustainability in diverse enough ways that many will require their own, unique indicators. While the exact composition of the portfolio—and the associated sustainability indicators—are unable to be pre-determined (especially in its initial investment period and divestment period), the Fund will report on but is not limited to measuring “CO2e abated” and “tons of material recycled.”
Methodologies
During due diligence, each potential investment is evaluated for its alignment with our sustainable investment objective. An ‘impact thesis’ is written to describe the investment’s potential to contribute to climate and environmental sustainability and a quantifiable metric is defined upon which to monitor the investment’s positive environmental impact. In addition to tracking the PAI indicators, Valo endeavors to work with the Fund’s portfolio to manage against these impact metrics. Valo has engaged the ESG and impact reporting platform Metric to assist its portfolio in this goal.
Data sources and processing
Data used to measure the sustainable investment objective is acquired directly from prospective and existing portfolio companies, primarily in the form of management presentations, data rooms, and independent publications, as well as through board materials and the annual ESG. Where possible, the Fund reviews third party life cycle assessments (LCAs) to understand emissions, land use, and water use associated with a portfolio company’s product. In other instances, the Fund will conduct an internal, 80/20 LCA to assist in diligence with a prospective investment.
Ongoing data collection and management from existing portfolio companies is done in partnership with Metric, an ESG and impact reporting software. Portfolio companies report actual data (and estimated data, if applicable). To ensure data quality, information provided by portfolio companies is reviewed by both the Valo and Metric teams. Valo manages the periodic reporting cycle once data has been submitted to the Metric platform.
Limitations to methodologies and data
Limitations to methodologies and data are expected to mainly stem from the early stage and relatively small size of many portfolio companies. Although the Fund endeavors to ensure that portfolio companies are capable of reporting, it is likely that some questions may remain unanswered until portfolio companies have the capability and expertise to assess them. Thus, the availability, completeness, timeliness, and accuracy of data is subject to delivery by the applicable external party. While incomplete surveys or questionnaires are not ideal, it is expected that these instances would coincide with companies so small as to, even in a worst-case scenario, have a negligible impact on the Fund’s overall sustainability. Where data is not available, Valo will use best efforts and reasonable assumptions to fill in any gaps.
Due diligence
The Fund uses due diligence to assess the financial, impact, and ESG health of a company, in addition to the investment’s risk-adjusted return profile. During the final diligence stage all potential investments for the Fund must complete an ESG survey through our partner service, Metric. This includes assessment of sound governance practices and serves as a baseline should the Fund choose to invest. Where applicable, the Fund reviews the carbon footprint of a potential investment’s product and assesses its impact relative to the prevailing solution. Ideally, the Fund can review a third-party LCA, but will, when necessary, complete its own assessment of a product’s life cycle.
Engagement policies
As a lead investor, the Fund is actively engaged with portfolio companies and frequently sits on their boards of directors. This enables strong governance practices, both financially and with respect to environmental and social impact. Every Valo term sheet includes signed commitments to achieve net zero emissions by 2040. The stated expectations scale proportionately to the stage of the investment, requiring more specific actions and policies for later stage companies. This mirrors Valo’s broader management strategy, which aims to rightsize measurement and reporting practices for a given company’s growth.
Additionally, Valo provides its portfolio companies with templates for implementing strong ESG policies and fair hiring practices. The ultimate responsibility for creating and implementing the ESG best practices is with portfolio companies, who can do so mindful of their own commitment to sustainable growth.
Attainment of the sustainable investment objective
No reference benchmark has been designated for the purposes of attaining the sustainable investment objective of the Fund. Although Valo has set a benchmark of net zero emissions by 2040, that does not encompass the totality of the sustainable objective of the Fund.