Investment Decisions at DPE
Integration of sustainability risks in our investment decision-making process
All new DPE Fund investment opportunities are subject to negative screening in accordance with our exclusion list of sectors and principal business activities. In particular, we use best efforts not to invest in a company whose principal activities are based on:
- the manufacture or sale of offensive armaments, weapons, or ammunition to be used in the act of war or military conflict;
- hardcore pornography or the sex industry (including, for the avoidance of doubt, any activity of prostitution or procuring of prostitutes);
- the manufacture or sale of tobacco;
- the operation of casinos or other gambling facilities; or
- human cloning activities
Once an investment passes the exclusion criteria and moves into the due diligence phase of the investment process, we review sustainability risks and opportunities through a dedicated ESG due diligence carried out by independent external specialist consultants. This enables us to identify ESG-related risks and potential for value creation right at the start of the investment. The key ESG due diligence findings are detailed in the investment memorandum and thus also formally taken into account in the investment decision.
Consideration of principal adverse impacts of our investment decisions on sustainability factors
Within our investment decisions, we are committed to minimizing any potential negative sustainability impacts by following our dedicated ESG management approach. This includes applying our exclusion list, conducting an ESG due diligence on potential investments, and monitoring a set of ESG-related KPIs for every portfolio company. Our monitoring processes and systems enable us to quickly react and initiate mitigation measures early on after a material impact or risk has been identified.
Within the Portfolio Companies, the respective Compliance/ESG officer (or, where applicable, the CEO) monitors and records material ESG-related incidents that occur and notifies the Board and DPE without undue delay. In such case, the Portfolio Company’s Advisory Board will ask the Management Team to:
- conduct an in-depth root cause analysis and provide the respective results
- develop precautions to prevent the reoccurrence of such incidents
- provide an action plan if such incident would occur again
Once DPE becomes aware of it and after a proper review, we will timely disclose (to the extent permitted) any material ESG-related incidents that occur at the level of DPE, the Fund and any of the Fund’s Portfolio Companies to our Investors.
Remuneration policies in relation to the integration of sustainability risks
DPE’s compensation policy is designed to encourage our professionals to promote sustainable growth and consider sustainability risks within investments. The compensation model includes a long-term variable component which considers, among others, the adherence to our sustainability approach, application of ESG principles in the investment process as well continuous monitoring and support of portfolio companies regarding the implementation of ESG performance improvement measures.
Environmental and Social Characteristics of DPE Investment Funds
Our ESG commitment spans over the entire lifecycle of an investment, from deal sourcing and due diligence to performance monitoring and exit, and uses a set of dedicated tools and measures (see Exhibit 1)
Exhibit 1: ESG integration along investment cycle
Within this approach and the separate steps in the investment process, we generally consider the key sustainability aspects in all three ESG areas (Exhibit 2).
Exhibit 2: Key sustainability aspects in DPE investment process and portfolio management
Each aspect in turn is based on several detailed sub-criteria, which are assessed during the due diligence phase. The selection of the criteria serves to record the general ESG structures of the company and to identify the ESG aspects that are particularly relevant for the company. As of 2020, DPE also considers climate change aspects within its ESG approach.
Our investment strategy particularly fosters the improvement of social characteristics within investments and society. By focusing on investments in companies with high growth potential, our portfolio companies generally create a substantial number of new jobs during the investment period. At the same time, the sustainable growth of the companies ensures that existing jobs are secured in the long term and that employees have positive future prospects and opportunities for their personal careers. Conversely, stable, qualified workforces, good working conditions and regular qualification measures also support the sustainable growth of the companies and thus make an essential contribution to increasing the value of our investments.
Due Diligence Process & Methodology
Having passed the initial screening stage, potential investments are subject to a more in-depth due diligence process. Alongside the standard commercial, legal and tax-related aspects of the due diligence assessment, we mandate independent external consultants to conduct an ESG Due Diligence process for new fund investments.
To get a thorough understanding of the companies, the consultants perform desktop research, review relevant documents and conduct site visits and interviews with the management and relevant staff of the portfolio company. Information gathered through these processes also feeds ESG KPIs that are monitored throughout the investment cycle.
Depending on the business model of the target company, focus of the ESG Due Diligence will vary. For example, a manufacturing company with multiple production sites will require a more in-depth analysis of environmental and safety aspects, whereas an IT services company will require a stronger focus on employee working conditions and compliance with data security regulations.
Due Diligence findings are compiled in a standardized report, where materiality, risks and opportunities are assessed and categorized (i.e. whether they are low, medium or high). The key ESG considerations are also detailed in a separate section of the investment memorandum for new fund investments.
With respect to potential add-on acquisitions, the target company should be subject to the same investment procedures and requirements (and therefore also an ESG analysis) as the original acquisition. Likewise, ESG considerations should be, as far as economically justifiable, incorporated into the decision-making process regarding such add-on acquisitions.
Monitoring of ESG characteristics & Engagement Policy
Following the acquisition of a target company, the company’s Advisory Board (or similar organ) implements or amends a set of internal compliance guidelines, and ensures that the portfolio company incorporates and adheres to ESG standards. ESG issues shall be regularly addressed in Advisory Board meetings. Typically, the meeting agenda will include the progress of implementation of the ESG action plan, the progress of the agreed performance indicators and, if applicable, the discussion of any material ESG incidents.
The second element of DPE’s engagement approach is to encourage the management teams of the portfolio companies to formulate annual specific ESG performance improvement targets for their companies. Examples for such targets are the reduction of energy consumption, waste volumes, the absenteeism rate or the introduction of an anti-bribery policy and respective employee training. Progress toward these goals is regularly monitored by the Management itself, the company’s Advisory Board and its shareholders. Achieving those targets can have a positive effect on profitability (e.g., by reducing energy costs), and also reduce or remove growth obstacles (e.g. by becoming an attractive employer for highly qualified employees).
Upon exit, we produce a final ESG assessment in order to capitalize on progress made and determine the created value. If necessary, we mandate independent external advisors to support the exit review.
Data Sources and Processing
ESG data is derived from the ESG pre-screening, due diligence and continuous monitoring process of target and portfolio companies, respectively. The data is processed by DPE and its external ESG consultants.