SFDR Disclaimer

Sustainable Finance Disclosure Regulation Disclaimer

The European Parliament and the Council of the European Union published Regulation 2019/2088 on the 27th November, referring to sustainability-related disclosures in the financial services sector. The purpose of this regulation, known as the Sustainable Finance Disclosure Regulation, or SFDR, is to improve transparency on the sustainability of investment decisions, and to classify financial market participants according to their environmental, social, or governance (“ESG”) commitments and positive contributions to environmental and social goals.

Mustard Seed MAZE – Sociedade de Capital de Risco, S.A. (hereinafter “MSM”, “we”, “our” or “us”) is an alternative investment fund manager (“AIFM”) who manages social entrepreneurship and impact funds, so sustainability is in our core. We meet the requirements of SFDR article 9 by offering a financial product which has sustainable investments as its objective.

We hereby disclose how MSM works towards ensuring that we meet the requirements of this regulation.

SFDR article 3: transparency of sustainability risk policies

Sustainability risks are any ESG events that could harm the short- or long-term sustainability of a company, and cause potential negative impacts on our investments, society and/or the planet. These include market risks, regulatory risks and operational risks, among others.

At MSM, we integrate these sustainability risks in our investment process from the start. During the Due Diligente (“DD”) process for each company, the impact case is thoroughly discussed based on an analysis we prepare by using the Impact Management Project (“IMP”). This is a set of guidelines which provides a lens to understand the impact performance of each investment against the United Nations’ Sustainable Development Goals (“SDGs”), and is currently formalised in our Impact Policy.

We are focused on impact management, rather than on impact measurement in isolation. The IMP allows us to have the ongoing practice of measuring our risk of negative impacts and our positive impacts, so that we can reduce the negative and increase the positive. The Impact Fact Sheets following the IMP guidelines are published on our website, per company, under the Portfolio section.

SFDR article 4: transparency of adverse sustainability impacts at entity level

MSM is below the threshold to publish a PAI statement at enity level, and therefore does not publish it due to the very small scale of our company.

At portfolio level, considering the small scale of our companies at the time of first investment, our Impact Policy (available under Article 10 of this disclaimer) is not directly aligned with the EU Climate Transition Benchmark or the EU Paris‐aligned Benchmark. We focus on defining one or two impact metrics for each investee company, as well as 4-year annual impact targets, which are approved by the MSM Fund’s Advisory Board. MSM also supports but is not formally associated with the OECD Guidelines for Multinational Enterprises nor the UN Guiding Principles on Business and Human Rights. As mentioned above, the MSM Fund aligns its investments with the UN’s Sustainable Development Goals. This means that despite not being formally aligned with the above frameworks, our portfolio companies are expected to do no significant harm to any SDGs, while pursuing a positive contribution to solutions for the SDGs.

MSM considers overall adverse impacts, as well as Do No Significant Harm principles, as part of the IMP analysis of the Fund’s investments, as described in the “Impact Risk” section of the Impact Fact Sheets available per company, on our website.

Following the entry into force of SFDR, MSM has implemented additional reporting requirements from the Fund’s portfolio companies, so that we can have additional granularity on the PAIs of our existing portfolio. For the reporting period ended on 31st December 2022, we have collected data referring to the PAIs stated on Table 1 of the SFDR RTS (safe for PAIs 15 to 18, which do not apply to MSM), as well as a selection of PAIs from Tables 2 and 3 of the same Regulation.

See our detailed 2023 statement on Principal Adverse Impacts of investment decisions on sustainability factors here.

The data was collected using ApiDay.

Besides the assessment of principal adverse impacts and adverse sustainability impacts in general, and as a vehicle invested by the European Investment Fund, any MSM-managed products do not invest, guarantee or otherwise provide financial or other support, directly or indirectly, to companies or other entities (i) established in or which maintain business relationship with entities incorporated in a Non-Cooperative Jurisdiction, or (ii) whose business activity consists of:

  1. an illegal economic activity, i.e. any production, trade or other activity, which is illegal under the laws or regulations applicable to the Fund or the relevant Portfolio Company, including without limitation, human cloning for reproduction purposes;
  2. activities excluded as referred to in Article 19 of the Regulation EU no. 1291/2013 of the European Parliament and of the Council, including:
    1. research aiming at human cloning for reproduction purposes;
    2. research intended to modify the genetic heritage of human beings which could make such changes heritable (excluding research relating to cancer treatment of the gonads); and
    3. research intended to create human embryos solely for the purpose of research or for stem cell procurement, including by means of somatic cell nuclear transfer;
  3. the production of or trade in tobacco or distilled alcoholic beverages and related products;
  4. the production of or trade in weapons or ammunition of any kind, it being understood that this restriction does not apply to the extent such activities are part of or accessory to explicit European Union policies;
  5. gambling, casinos or equivalent enterprises;
  6. the research, development or technical applications relating to electronic data programs or solutions, which aim specifically at:
    1. supporting any activity referred to under (a) to (e) above;
    2. internet gambling and online casinos, pornography; or
    3. which are intended to enable the illegal entry into electronic data networks or download electronic data.

In addition, when providing support to the financing of the research, development or technical applications relating to human cloning for research or therapeutic purposes, or genetically modified organisms (“GMOs”), MSM shall ensure the appropriate control of legal, regulatory, and ethical issues linked to such human cloning for research or therapeutic purposes and/or GMOs.

Sustainability risks can lead to a significant deterioration in the financial profile, liquidity, profitability, or reputation of the investee company and ultimately the MSM Fund as its investor. Despite not formally considering PAIs during the Due Diligence stage, our use of the IMP analysis allows the MSM team to map impact risks of each business, thus having better understanding of the risks that such investment may have. We assess risk level (low, medium or high) and risk type, which can be the following:

  1. Evidence Risk: the probability that insufficient high-quality data exists to know what impact is occuring;
  2. External risk: the probability that external factors disrupt our ability to deliver the impact;
  3. Stakeholder participation risk: the probability that the expectations and/or experience of stakeholders are misunderstood or not taken into account;
  4. Drop-off risk: The probability that positive impact does not endure and/or that negative impact is no longer mitigated;
  5. Efficiency risk: The probability that the impact could have been achieved with fewer resources or at a lower cost;
  6. Execution risk: The probability that the activities are not delivered as planned and do not result in the desired outcomes;
  7. Alignment risk: the probability that impact is not locked into the enterprised model;
  8. Endurance risk: the probability that the required activities are not delivered for a long enough period; and
  9. Unexpected impact risk: the probability that Significant unexpected positive and/or negative impact is experienced by people and the planet.

Despite the consideration of the above risks before the investment, any ESG event can hinder the liquidity of an investment and the return of the MSM Fund. Potential impacts on the return of an investment or the Fund depend on various aspects, in particular how the investment policy and asset universe of the product are related to or impacted by sustainability events or conditions. The MSM Fund I includes a put option on the investment legals which allows the Fund to sell its stock of a given company should any of the above risks be triggered with severe reputational consequences for the Fund.

SFDR article 5: Transparency of remuneration policies in relation to the integration of sustainability risks

We are proudly an impact VC fund at our core. As such, we have adopted a mechanism that includes impact performance as a key eligibility criterion for any carry remuneration we may have as fund managers. In sum, we are only entitled to our performance fee if we reach a minimum threshold of impact performance across our portfolio, per financial product. Since we consider potential negative impacts as part of our continuous IMP framework analysis, we believe that impact performance is an appropriate proxy for sustainability risks. Our process is the following:

  1. For each investment, we define one or two impact metrics that reflect our investment thesis, i.e., an impact metric that is linked to the revenue model of the company. We adopt the IMP framework for this purpose;
  2. For each metric, we establish annual target goals, that are quantified. These metrics and goals are proposed to an Advisory Board for approval;
  3. The impact mission of each venture is added to their Articles of Association. The regular reporting of the performance on each impact metric, against the established target goals, is embedded in contractual agreements at the point of investment;
  4. Based on this, at any point in time, we can calculate for each company what is the ‘impact multiple’: the ratio between the target goals established at the time of investment and the performance at the time of calculation;
  5. From a portfolio perspective, we can calculate at any point in time the ‘portfolio impact goal’, which refers to the weighting of the impact multiple of each venture with the capital invested in each venture.

As a result of this mechanism, we at MSM are only entitled to receive any carry above a ‘portfolio impact goal’ of 60%. This means that regardless of the financial performance of our portfolio, we will not receive carry if the ‘portfolio impact goal’ of the portfolio does not reach 60%. Above that threshold, we are entitled to 50% of our performance fee, upwards of which then follows a linear scale.

There are two currencies: money and impact. We are incentivised to deliver and maximise on both. Linking our remuneration to the impact performance of the founders we back is our way of demonstrating our full commitment to the impact mandate that has been placed on us by our investors and honour their support.

SFDR article 9: Transparency of sustainable investments in pre‐contractual disclosures

We believe that impact is the greatest economic opportunity of our time. By investing solely in social and environmental companies, MSM is compliant with SFDR article 9 by offering a financial product which has sustainable investments as its objective.

 

The Fund invests in fast-growing European ventures, with global lockstep potential where impact and financial returns are mutually reinforcing. Our portfolio ventures are lockstep in nature, meaning that impact and revenues are mutually reinforcing. In other words, our ventures’ revenues are driven by the impact that they create.

During the due diligence process for each company, the impact case is thoroughly discussed based on an analysis that the investment team prepares by using the Impact Management Project (“IMP”). This is a set of norms that provide a lens to understand the impact performance of each investment against the United Nations’ Sustainable Development Goals (“ UN SDGs”). Our investments work towards the following objectives:

  • SDG 3 – Good Health and Well-being – whereby technology is used to provide easier access and overall better-quality medical care and scientific research;
  • SDG 4 – Quality Education – whereby our companies implement innovative solutions that allow otherwise “unfit” workers to reskill and become relevant in the job market;
  • SDG 8 – Decent Work and Economic Growth – whereby our companies develop solutions that provide better working conditions for employees, namely from small businesses;
  • SDG 9 – Industries, Innovation and Infrastructure – whereby our companies provide innovative answers that reduce the negative impacts of heavily established businesses, such as telecommunications and materials;
  • SDG 12 – Sustainable Consumption and Production – whereby our companies develop online platforms that promote reutilisation and repair of goods, instead of one-off purchases and production of waste;
  • SDG 13 – Climate Action – whereby our companies develop solutions towards the reduction of CO2 emissions by investments in impact projects and Future Carbon Credits;
  • SDG 16 – Peace, Justice and Strong Institutions – whereby hardware and software is used to preserve security and transparency in matters of tax and data.

In order to deliver on the sustainability investment objective of the Fund, the proposed investments are only taked to a vote by the MSM Investment Commmittee once it has been proven that the business of the company directly and unequivocally works towards the UN SDGs listed above. This is confirmed by multiple iterations with the founders of the company, existing investors and access to data pre-investment.

The Fund’s investments comply with minimum safeguards which are based on OECD Guidelines for Multinational Enterprises & UN Guiding Principles on Business and Human Rights. The investments alignment with these are ensured through engagement with portfolio companies on topics related to (i) Human Rights (Including Labour and Consumer Rights), (ii) Bribery, bribe solicitation and extortion, (iii) Taxation, and (iv) Fair Competition.

MSM is focused on impact management rather than on impact measurement in isolation. The IMP allows us to have the ongoing practice of measuring our risk of negative impacts and our positive impacts so that we can reduce the negative and increase the positive. The Impact Fact Sheets following the IMP guidelines are published on our website, per company, under the Portfolio section.

Several of our sustainable investments have the environmental objective of reducing carbon emissions by developing businesses that promote climate change mitigation, reduction of greenhouse gas emissions in alignment with the Paris Agreement, resource efficient ways to reduce unsustainable consumption and waste levels to support the transition to a circular economy, or fair labour and health-and-wellbeing standards.

Considering the small scale of our companies at the time of first investment, as well as the timing of the Fund’s close, our Impact Policy is not directly aligned with the EU Climate Transition Benchmark or the EU Paris‐aligned Benchmark. Instead, we focus on defining one or two impact metrics for each investee company, aligned with the lockstep business it is developing and directly responding to the objectives of each of the UN SGDs listed above. We also define 4-year annual impact targets, which are approved by the MSM Fund’s Advisory Board,  comprised of the five main LPs in the fund. The calculation of these metrics is agreed between the Fund’s team and the founders of each company, based on the carbon emissions saved (by climate solutions answering to UN SDG 13) or reduced (by climate resource efficiency answering to UN SDGs 9 and 12) by their business activity and their respective business plans.

Besides the assurance during the Due Diligence stage of a solid impact case that responds to the UN SDGs, the impact performance of the portfolio companies through the four first years of investment by the MSM Fund will inform the carry remuneration of the Fund Manager.

MSM is proudly an impact VC fund at its core. As such, we have adopted a mechanism that includes impact performance as a key eligibility criterion for any carry remuneration we may have as fund managers. In sum, we are only entitled to our performance fee if we reach a minimum threshold of impact performance across our portfolio, per financial product. Since we consider potential negative impacts as part of our continuous IMP framework analysis, we believe that impact performance is an appropriate proxy for sustainability risks. Our process is the following:

  • For each investment, we define one or two impact metrics that reflect our investment thesis, i.e., an impact metric that is linked to the revenue model of the company. We adopt the IMP framework for this purpose;
  • For each metric, we establish annual target goals, that are quantified. These metrics and goals are proposed to an Advisory Board for approval;
  • The impact mission of each venture is added to their Articles of Association. The regular reporting of the performance on each impact metric, against the established target goals, is embedded in contractual agreements at the point of investment;
  • Based on this, at any point in time, we can calculate for each company what is the ‘impact multiple’: the ratio between the target goals established at the time of investmentand the performance at the time of calculation;
  • From a portfolio perspective, we can calculate at any point in time the ‘portfolio impact goal’, which refers to the weighting of the impact multiple of each venturewith the capital invested in each venture.

As a result of this mechanism, we at MSM are only entitled to receive any carry above a ‘portfolio impact goal’ of 60%. This means that regardless of the financial performance of our portfolio, we will not receive carry if the ‘portfolio impact goal’ of the portfolio does not reach 60%. Above that threshold, we are entitled to 50% of our performance fee, upwards of which then follows a linear scale.

There are two currencies: money and impact. We are incentivised to deliver and maximise on both. Linking our remuneration to the impact performance of the founders we back is our way of demonstrating our full commitment to the impact mandate that has been placed on us by our investors and honour their support.

You can read our updated pre-contractual disclosure here.

Article 10: Transparency of the promotion of environmental or social characteristics and of sustainable investments on websites

At MSM, we invest in fast-growing European ventures with global lock-step potential where impact and financial returns are mutually reinforcing. Our investment thesis is rooted in the belief that the best businesses of the future are those that profit from solving social and/or environmental challenges, diametrically opposed to those that profit from the existence of such challenges.

You can read our impact policy here.

Article 11: Transparency of the promotion of environmental or social characteristics and of sustainable investments in periodic reports

We report the impact of our portfolio on a quarterly basis to our investors, as well as a consolidated version of our annual report. From the reporting period of April 2023 onwards, MSM will include additional detail on the adverse impacts of our investments.

We will not establish an index as a reference benchmark to compare the overall sustainability‐related impact of our investments against the impacts of the said index and a broad market index. The small scale of our companies and the nature of their businesses as impact start-ups refutes the existence of such an index at market level.

This disclaimer was updated on 04/10/2024.

If you have any questions, please do not hesitate to contact us at ops@msm.vc.

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