Updated on December 30, 2022
Originally published on March 10, 2021
Venture capital is one of the biggest drivers of innovation, a lever for improving the quality of life on many different levels, in various geographies, across diverse populations. All of us at Cavalry Ventures Management GmbH (AIFM) have made a conscious decision to be part of the digital ecosystem, and to foster meaningful innovation – by providing capital, our expertise, the expertise of our network, an our time.
To learn more about our take on ESG, please see Stefan Walter’s Medium post.
🧭 What guides us?
Our actions are guided by fundamental European values such as respect for human dignity, freedom, democracy, equality, the rule of law, and respect for human rights, including the rights of members of minorities. Non-discrimination, tolerance, justice, solidarity, and equality of people regardless of their gender, age, marital or parental status, sexual orientation, ethnic or national origin, political affiliation, physical ability, appearance, education, or religious background are values with which we have grown up in a liberal democratic basic order and which firmly belong to our canon of values and our maxim.
In our investment activities and internal operations, we rely on that, on common sense, on our conscience, and specific key questions on which we will elaborate later.
🌍 What is ESG?
On 8 March 2018, the European Commission published a Sustainable Finance Action Plan. The main points are:
1) Improving the contribution of the financial sector to sustainable and inclusive growth by financing the long-term needs of society;
2) Strengthening financial stability by taking into account environmental, social, and governance (ESG) factors in investment decisions.
One of the most important measures is to increase transparency on sustainability issues in the financial market (Sustainable Finance Disclosure Regulation – SFDR). This is to enable investors and stakeholders to assess the long-term value creation of companies and their exposure to sustainability risks.
We are happy to comply with this obligation.
✋ What are we committing to?
No consideration of adverse impacts of investment decisions on sustainability factors
Article 4 SFDR provides for a framework aimed at achieving transparency with regard to any principle adverse impacts of investment decisions on sustainability factors as defined in the SFDR.
We acknowledge the importance of incorporating ESG principles into our core processes and throughout the investment, ownership, and exit phases, and that sustainability plays a major part in the way Cavalry builds long-term business success.
However, Cavalry does not consider the adverse impacts of its investment decisions on sustainability factors in accordance with the SFDR. In our view, the data that we receive from most of our portfolio companies is not sufficient to comply with the Regulatory Technical Standards (RTS). Furthermore, the current mandatory principle adverse impacts are – in our view – not suitable for or do not apply to tech companies in the early stage, meaning companies that we invest in. Nevertheless, we ask our portfolio companies to provide information that is more relevant to the assessment of their overall sustainability – apart from standard data points like carbon emission – such as on data security, diversity, etc.
That is why we opt out of the principal adverse impact reporting.
Nonetheless, we strongly believe that the attention to ESG matters and is crucial for long-term value creation for us, our funds and our portfolio companies.
🚀 What are our specific actions?
1. Investment Phase
When evaluating a potential investment, our investment professionals identify and assess material risks and opportunities related to ESG matters. Reasonable steps are taken to mitigate ESG related risks.
Early in the screening process, we start assessing a set of ESG aspects that are accessible from afar (such as the degree of diversity within a founding team), and automatically exclude companies that meet one or more of the following criteria:
- Companies based in jurisdiction classified by one or more Lead Organisations for not having made sufficient progress towards satisfactory implementation of EU and/or internationally agreed standards in connection with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) and/or tax good governance standards.
- Business models built around the following topics: all topics seen as illegal under EU law, criminal activities such as money laundering, financing of terrorism, tax crimes (i.e. tax fraud and tax evasion), artificial arrangements aimed at tax avoidance, tobacco and distilled alcoholic beverages, weapons / ammunition, casinos / gambling, pornography, GMOs.
As part of the due diligence, we identify ESG related risks and opportunities and generate an internal score based on the findings, both of which are being evaluated as part of any investment decision.
At the time of our initial investment, we implement ESG clauses in all shareholder agreements to formalise a certain level of buy-in amongst our portfolio companies.
2. Ownership Phase
As long as we are shareholders, our investment professionals assist our portfolio company’s board of directors and management in establishing a plan to mitigate ESG risks and capitalise on ESG opportunities. We set out clear expectations for portfolio companies that are designed to ensure that material ESG risks and opportunities are being addressed on a regular basis. While the respective management is ultimately responsible for developing the portfolio company’s sustainability strategy and ensuring it is implemented, we aim at providing guidance to help the companies achieve their strategic aims and meet their expectations.
We want to encourage our companies to integrate ESG aspects in their internal processes and track this regularly. We do that because:
a) we strongly believe that there is immediate value add (e.g. when it comes to hiring) and that companies eventually perform better when implementing a culture and positioning based on sustainability and a long-term view from the get-go;
b) the relevancy of this will only increase as the companies mature over time, and in our view incorporating ESG in a company’s DNA early on will be especially beneficial in the long run;
c) after all, it is our regulatory and fiduciary obligation to mitigate potential risks for both our portfolio companies and eventually our own investment vehicles.
- We aim at encouraging our portfolio companies and supporting them in increasing their impact on the UN Sustainable Development Goals.
- We aim at providing our support with defining ESG related topics and goals on related KPIs that will regularly be discussed in board meetings.
- We aim at providing our support with achieving these goals.
- We aim at increasing the overall transparency on ESG related topics (e.g. via an annual questionnaire) // Please find the current version (first draft) of this questionnaire here. Feel free to adapt or use this – and most importantly, to share your feedback with us!
3. Exit Phase
In preparation for the exit phase of an investment, we aim at making sure ESG aspects are part of the agenda and will be taken into account in merger and acquisition discussions and any future integration process.