Sustainable Financial Disclosures
Regulation (EU) 2019/2088, known as the Sustainable Finance Disclosure Regulation (“SFDR”), was adopted on 27 November 2019 and deals with sustainability-related disclosure in the financial services sector. The Regulation aims to improve transparency between financial market participants (“FMPs”) on how they integrate sustainability risks in their investment decisions, consider potential adverse impacts, promote certain environmental or social characteristics, or aim to achieve sustainable investment objectives.
At IFHA we invest in fast-growing private healthcare companies in Africa, with a clear focus on developing the market for private health care and enabling companies to realize their potential.
IFHA is committed to improve the Environmental, Social and Development (ESD) impact of its Portfolio Companies. For this purpose, IFHA has developed an ESD Framework.
As such, IFHA was set up to set up sustainable investments across its funds portfolio’s from ESD perspective. What follows from the SFDR is that we need to transparently communicate to potential investors on our website on:
- Our consideration of sustainability risks in our investment decision-making process (“Article 3 SFDR”); and
- Our policy on considering and mitigating potential negative impacts of our investment decision-making on sustainability factors (“Article 4 SFDR”); and
- Our integration of sustainability goals within our remuneration policies (“Article 5 SFDR”); and
- The processes within our Funds on how we measure the performance of our sustainable investment objectives (“Article 10 SFDR”)
Consideration of sustainability risks in our investment decision-making process (“Article 3 SFDR”)
The innovative strategy of IFHA aims to accelerate the development and to optimize the commercial potential of investee companies. Through providing capital for expansion and for investments in new technologies, and through improving finance and control functions, IFHA offers Portfolio Companies attractive growth opportunities in Africa’s health care market. The funds actively contribute to the availability of quality health care for the population of Sub-Saharan Africa.
IFHA is committed to improve the Environmental, Social and Development (ESD) impact of its Portfolio Companies. For this purpose, IFHA has developed an ESD Framework on which it reports on an annual basis to its investors.
The two IFHA funds under management are currently in exit phase and no actual new investments will be made during the remaining funds lifetime.
Considering potential negative impacts of our investment decision-making on sustainability factors C“Article 4 SFDR”]
In April 2022, the European Commission adopted the Regulatory Technical Standards [“RTS’] under the SFDR. This included a list of Principal Adverse Impact (“PAI”) indicators which a Fund must take into account to determine that an investment Does No Significant Harm [“DNSH’].
Although we believe our investment process with respect to screening for potential ESG risks aligns with the requirements under Recital 17 SFDR [“the precautionary principle’] the assessment does not (yet) include a full pre-deal or periodic review of all indicators for adverse impacts provided in Tables 1, 2 and 3 of Annex 1 SFDR .
We believe that at present this is not yet possible, as we invest exclusively in private healthcare companies in Africa, which do not always have the capacity to report quantitively on all numerical PAI indicators (e.g. GHG emissions, hazardous or radioactive waste) or develop and implement fit-for-purpose policies on other indicators (e.g. human rights, workplace health and safety). As such, we cannot state that we use PAI indicators as a fund manager.
However, in June 2023 we have issued a questionnaire to our 8 active portfolio companies, asking them to report back their 2022 performance on all 14 mandatory Principal Adverse Impact (“PAI”) indicators under Annex 1 Table 1, together with 1 environmental indicator of Table 2 and 3 social indicator of Table 3.
The results of this questionnaire are presented below.
Considering potential negative impacts of our investment decision-making on sustainability factors C“Article 4 SFDR”]
The results point to several things:
- Our overall response rate of 87,5 percent gives us confidence that we can draw some conclusions, while leaving room for improvement for the 2023 reporting process
- Based on the reported data, we have no investments in the fossil fuel or controversial weapons sectors, or investments which negatively impact biodiversity-sensitive areas, have emissions to water or have been involved in violations of UNGC principles or OECD Guidelines for Multinational Enterprises.
- Very few companies are able to report on their greenhouse gas emissions (Scope 1, 2 or 3) while almost all can provide information on their energy consumption or renewable energy use. Several companies did report that they were working on a greenhouse gas emissions assessment and could share insights once completed.
- Waste and waste management appears a material issue in the sector; with not many companies recycling their waste and quite some companies generating medical waste and using third party collectors for processing and disposal.
- The unadjusted gender pay gap of our investee companies appears below long time averages measured in the U.S. (18%), the European Union (12.7%) or the Netherlands (13.5%) and board gender diversity seems above long term reported trends in mature markets and companies .
We intend to work across the remainder of 2023 and 2024 on three actions:
- Assist our existing portfolio companies with further maturing their data collection, calculation and quality for material PAI indicators – with a focus on greenhouse gas emissions data; and
- Work on our own data collection and reporting processes, with a focus on data presentation to our investors; and
- Analyse whether we adjust our policy settings and escalation processes to further inform our investable universe and our active ownership approach.
Integration of sustainability goals within our remuneration policies [“Article 5 SFDR”]
Remuneration at IFHA reflects the success of the company and is based along multiple parameters. To have an effective risk management system it takes into account the careful and diligent decision making and lacks any form of incentives for its employees in excessive risk taking for both business and sustainability.
Remuneration is for a limited part financially aligned with the long-term interest of the entity.
IFHA’s remuneration policy and salary bands are yearly reviewed by its management.
The sustainable investment objectives of the IFHA Funds [“Article 10 SFDR”]
We manage two private equity funds, named IFHA B.V. (IFHA-I) and IFHA-II Coöperatief U.A. (IFHA-II)
Fund I started in 2007 and Fund II in 2016. The investment period of both funds have ended and no new investments have been planned, besides follow on investments in existing portfolio companies of fund II.
In 2007, with the goal to materially contribute to closing this large healthcare gap, IFHA-I became one of the first private equity funds exclusively dedicated to investments in private healthcare companies in Africa. IFHA-I closed with EUR 50.1 million and began investing in high-potential small and medium-sized enterprises (“SMEs”) active in care provision, health insurance, manufacturing, and other health-related areas.
Nearly 10 years later and building on the success of IFHA-I, IFHA-II was established, completing its final close at USD 149.5 million in December 2016. IFHA-II invested in and is building pan-African solutions to achieve the necessary economies of scale to drive down costs for patients and unlock attractive investment opportunities in healthcare to global large-scale investors.
Our Quality Framework: The IFC Performance Standards
The IFC Performance Standards on E&S Sustainability are directed towards investors and provide guidance on how to identify E&S-related risks and impacts of the underlying portfolio companies. They provide a non-disruptive framework to avoid, mitigate, and manage such risks and monitor the impact.
Through this framework, 8 crucial areas are covered, which incorporate modifications on challenging issues that are of utmost importance to ensure human rights, safety, and community protection.
The IFC Performance Standards form a core part of IFHA’s E&S strategy, as they provide the guiding quality framework for all portfolio companies. IFHA’s ESD Policy has integrated these standards as core compliance features in its Fund documents and requires all of its portfolio companies to adhere to them. An E&S Action Plan (ESAP) has been implemented at point of investment, if areas of improvement or non-compliance have been identified.
- We are aware that the mandatory list of PAI indicators is likely to expand as markets mature and market consultations give direction on priority factors
- Pew Research and Eurostat
- “Based on data covering a sample of listed companies from 50 jurisdictions, women represent 25.1% of board directorships in 2021”.
See: https://www.oecd.org/publications/enhancing-gender-diversity-on-boards-and-in-senior-management-of-listed-companies
Published on 10 August 2023