Statements on Principal Adverse Impacts of Investment Decisions on Sustainability Factors

Generation Investment Management

SFDR Article 4 Disclosure

Summary

Generation considers principal adverse impacts (“PAIs”) of its investment decisions on sustainability factors. The present statement is the consolidated statement on PAIs on sustainability factors of Generation Investment Management LLP and Just Climate LLP and covers the reference period from 01 January 2024 to 31 December 2024.

The information provided in this statement relates to the funds that Generation acts as investment manager or Alternative Investment Fund Manager (“AIFM”) that report on PAIs in relation to their investments, as further detailed in Generation’s Article 10 SFDR Disclosures. With respect to public equity funds managed by Generation, PAI data was sourced from a third-party provider. With respect to private equity funds for which Generation acts as investment manager or AIFM, all PAI data was received directly from portfolio companies. Where there was incomplete PAI data or inconsistencies in third party data sources or incomplete data received directly from portfolio companies, Generation sought to take reasonable steps to estimate the PAI metric based on its understanding of the portfolio companies’ operations and/or the drivers of PAI indicators, where making reasonable estimates was possible. Specific explanations of the calculation methodology for the PAI indicators are outlined in the ‘Description of the principal adverse impacts of investment decisions on sustainability factors’ table below. Refer to the section ‘Sources of PAI Indicator Data’ for the proportion (weighted by market value) of data that came from direct and indirect sources. 

In reviewing relevant PAI indicators for portfolio companies, Generation has implemented benchmarking in both public and private strategies to understand relative performance. The benchmarking not only allows us to further focus engagement efforts, but also gives a more structured analysis to present back to portfolio companies, when relevant. Generation has deployed various engagement initiatives across strategies, ranging from promoting Science Based Target setting across all portfolio companies to directly supporting appointments of diverse board Directors for our private markets investments. Further details on actions taken are outlined in the ‘Description of the principal adverse impacts of investment decisions on sustainability factors’ table below.

As this is the third reference period, this statement provides a comparison of PAI information to the previous (second) reference period. Given Generation’s strategies continue to invest and divest over the period, the change in values reflect changes in data coverage and company-specific performance, as well as portfolio composition. Generation will continue to monitor the PAI performance during the next reference period and review its overall PAI data coverage, sources and methodology as overall data standards and availability continue to develop and improve.  Further, although this is the third reference period, regulatory guidance and developed market practice to assist in the interpretation of various PAI metrics used in this report remains limited. As a result, financial market participants are required to interpret how they apply certain PAI metrics. For this PAI report we refer you to the explanations of the calculation methodology in the table below and would highlight:

• PAI 4: Exposure to companies active in the fossil fuel sector
  • The definition of ‘companies active in the fossil fuel sector’, as per Article 2, point (62), of Regulation (EU) 2018/1999 of the European Parliament and of the Council, includes “companies that derive any revenues from exploration, mining, extraction, production, processing, storage, refining or distribution, including transportation, storage and trade, of fossil fuels”. Distribution in this context is understood to focus on the physical distribution of fossil fuels (for example by network operators). As such, Generation understands that the definition of ‘companies active in the fossil fuel sector’ would not include energy supply companies that (i) arrange, but do not own or provide the physical transportation of, the supply of energy to households; and (ii) do not own or operate local networks used to deliver such energy supply.
• PAI 11: Lack of processes and compliance mechanisms to monitor compliance with the UN Global Compact principles and OECD Guidelines for Multinational Enterprises
  • There is no widely-agreed market practice to assist in the interpretation of whether other policies that would implicitly encompass the spirit of the principles of the UN Global Compact principles and OECD Guidelines for Multinational Enterprises would satisfy this requirement. For public companies, Generation has included portfolio companies for which our primary ESG research provider, MSCI, could find no evidence of processes and compliance mechanisms. For private companies, Generation has likewise been conservative and classified companies as ‘having’ the appropriate processes and compliance mechanisms only in the case that the company has a whistleblower protection policy (PAI S6), an anti-bribery and anti-corruption policy (PAI S15), a Code of Conduct outlining its commitment to responsible business practices, and policies or practices relating to human rights due diligence processes. In addition, Generation has opted to include voluntary indicators (PAI S6 and S15) to help provide additional information on portfolio companies’ operations.
• PAI E4: Investments in companies without carbon emission reduction initiatives
  • This PAI strictly requires portfolio companies to have initiatives “aimed at aligning with the Paris Agreement”. For private markets companies, Generation has applied its own analysis and conservatively interpreted this metric to include only company initiatives that are explicitly aligned to the Paris Agreement. In practice, this means that only companies that have committed to set, or have had verified, a Science Based Target with the Science Based Targets initiative, or are participating in The Climate Pledge, are deemed to have initiatives aimed at aligning with the Paris Agreement. This may result in slightly lower alignment than a more expansive interpretation of what constitutes alignment with the Paris Agreement would have.  For public markets, a third party provider has been used that assesses this PAI using Implied Temperature Rise assessment.
• PAI E14: Natural species and protected areas, Metric (2) Share of investments in investee companies without a biodiversity protection policy covering operational sites owned, leased, managed in, or adjacent to, a protected area or an area of high biodiversity value outside protected areas.
  • This is the last year that Generation will report this PAI, on account of poor data availability.