SL Capital Partners LLP Policy for Sustainable and Responsible Investment ( SRI ) for private equity investing

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SL Capital Partners LLP

Policy for Sustainable and Responsible Investment (“SRI”) for private equity investing

Introduction

Standard Life Investments (“SLI”) is a signatory to the United Nations Principles for Responsible Investing (“UNPRI”). As a subsidiary of SLI, SL Capital should also have a policy to cover SRI.

Additionally, this is a subject that is being raised with increasing frequency by trustees and executives of our pension fund clients (particularly public plans) and consultants.

Competitors such as Partners, LGT, Capital Dynamics, Pantheon and Lombard Odier are signatories to the UNPRI.

Key points to note

• There is no intention to dissuade a GP or LP from making an investment due to location, sector and nature of environment, social justice and corporate governance issues

• The PRI principles recognise that signatories’ value may be derived from investing and improving companies with ESG risk and opportunities

• SRI investing does not just mean investing in Biffa and wind farms etc, i.e. it is not only ethical investing

What is SRI and why should we do it?

SRI describes an investment strategy which seeks to maximise both financial return and social good. It recognises that corporate responsibility and societal concerns are valid parts of investment decisions. SRI means being aware of the impact of businesses on society at large and on the environment and encouraging the adoption of best practice by company management.

Sustainable and responsible investors favour practices that promote environmental stewardship, consumer protection, human rights and diversity

The specific areas of concern recognised by the SRI industry can be summarised as the environment, social justice and corporate governance (“ESG”)

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Why should SL Capital care about SRI?

• SRI forms a part of SL Capital’s overall corporate responsibility • Clients and consultants want us to do it:

 Many clients are already signatories to the PRI (e.g. Merseyside, Lothian, CalPERS, CPP, PFA).

 Consultants are rating us on ESG (e.g. Hymans, Mercer).

• SRI is going to be implemented into ILPA principles so this will become a routine due diligence matter.

• SRI and ESG do not come at expense of financial profit.

How does SRI fit into SL Capital’s approach to running its business? • SRI is one part of SL Capital’s overall corporate responsibility • The key points of corporate responsibility are as follows

 Being a responsible investor

 Life at work

 External stakeholders

 The environment

 Investing in the community

How does the Private Equity industry measure up in SRI terms?

In general, the managers we select carry out environmental studies as part of their due diligence process. They operate within the employment law framework for the jurisdiction(s) they invest in and they adhere to corporate governance legislation as required. Much of this can be evidenced by the amounts spent on legal and other due diligence fees as part of their transactions.

A more creative approach to SRI policies may also identify opportunities for upside through, for example, energy saving initiatives, better working practices that reduce employee turnover or sickness, or improving their brand image as a responsible investor.

However, the general public perception of private equity is that it does not pay close attention to SRI.

What do we need to do?

We need a statement of our policies and a statement of principles as well as some amendments to our investment due diligence and monitoring procedures that reflects the policy statement and principles.

We should also develop a way to inform our investors of our policy, how we monitor it, issues that have arisen from time to time with SRI and how we resolve them.

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Proposed policy statement

• SL Capital believes that a company run in the long-term interests of its shareholders should manage its relationships with its employees, suppliers and customers, and behave responsibly towards the environment and society as a whole

• Companies that demonstrate a commitment to environmental and social responsibility are likely to enjoy comparative advantage in the long run

• Increasingly, companies that fail to maintain adequate processes to manage these issues, risk damage to their reputation and consequent negative effects on their brand and image that can directly affect their financial performance • Because we take our responsibility as an investor seriously, we seek to use our

influence to encourage the achievement of best practice standards of environmental and social management with the fund managers in which we invest with a view to protecting and enhancing the value of the investments made on behalf of our clients.

Principles

The proposed principles, which fit with the UNPRI, are as follows:

1. We will incorporate ESG issues into the investment analysis and decision making process,

2. We will be active owners of funds and co-investments and promote the application of ESG principles with managers in our portfolios,

3. We will seek appropriate disclosure on ESG issues by the fund managers in which we invest,

4. We will promote acceptance and implementation of the UNPRI within the investment industry,

5. We will work together to enhance effectiveness in implementing the principles 6. We will report our ESG activities to our investors and other stakeholders. What minimum standards are acceptable?

The minimum standard acceptable for any ESG issue must be compliance with legal and other regulatory requirements within the jurisdiction(s) that the company operates in. However, the adoption of best practise should be encouraged as far as possible.

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As a fund of funds, where do we sit in the chain?

As a fund of funds, we do not have direct influence on the policies and behaviour of underlying investee companies. However, we do have influence with the general partners that we back and have the opportunity, particularly at the time of manager’s fund raisings, to try to introduce or refine SRI guidelines to the fund documentation. We are active owners of fund partnerships and our participation at many advisory boards also allows us a forum to encourage good practice and open reporting on any SRI issues that may have arisen in the portfolio.

How do we influence the implementation of SRI?

The proposed main ways SRI cover this during due diligence and monitoring are covered in Appendix 1. The investment team can work up detailed due diligence questions once we have agreed the overall approach.

We influence the implementation of SRI through GPs we invest with and through the limited partnership agreements.

Where possible, we will seek to ensure that GPs have an SRI policy and that SRI issues are routinely reported to investors.

The GP’s implementation of SRI principles will be reviewed during our due diligence process and progress on SRI should be discussed during Advisory Boards and as part of the routine reporting framework.

We have more ability to measure ESG issues for co-investments and the existing portfolios in secondaries.

Recommendation

• Consider SL Capital becoming a signatory to UN PRI. (consider the additional costs and if we need it given SLI are a signatory)

• Incorporate SRI principles and ESG issues into our due diligence and questionnaires for GPs.

• SRI principles should form a key point of our way of thinking about GPs. • Incorporate SRI/ESG into all SL Capital’s marketing and other corporate

publications (see Appendix 2 for first draft of the proposed pitchbook page). • SL Capital should participate in Standard Life’s special corporate

environmental initiatives.

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Appendix 1 - Due diligence Overview

• SL Capital’s ESG Policy Statement is aimed at

 GPs

 Team members

 Service providers

• SL Capital has ongoing training of its team in ESG issues • Key part of ESG fund of funds investing is pre-investment stage • Key parts of due diligence on GPs are

 ESG policies

 Systems

 Expertise

 Past examples

• Pantheon produce specific ESG ratings on its GPs Due diligence

• SL Capital issues GPs with a copy of its ESG policy with intent of discussing any potential problems

• Effectiveness of ESG practices are reviewed by looking at

 ESG policies

 Environment

 Workplace and community

 Marketplace

 Governance

 Application of ESG policies on previous deals

 Discussion with senior management at GP

 Expertise

 Commitment to ESG improvement

• Managers must, at least, have a commitment to address any ESG deficiencies • SL Capital engages with GPs to support integration of ESG

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Documentation

SL Capital expects to receive from the GP:

• Their responsible investment policy (if any)

• Confirmation of receipt and acceptance of SL Capital’s ESG policy

• A description of ESG-related information (if any) that will be supplied in GP’s reporting of

 Advisory boards

 Annual reports

 Capital calls

 Investment memos

• Reports on any ESG issues which arise during the life of the fund Monitoring

• Continue to take an advisory board seat with the GP • Monitor annual reports

• Arrange informal meetings

• Encourage notification of ESG issues that arise (USS and Pantheon claim they push for this)

Engagement

• Encourage GPs to develop ESG policy

• Share SLI research on ESG

• Encourage GPs to become UN PRI signatories

Routine reporting to SL Capital clients

• SL Capital’s policy statement on ESG issues • Any specific ESG initiatives or issues

 Funds

 Co-investments

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Appendix 2 – Sustainable and Responsible Investing • Sustainable and responsible investing policy statement

• Environmental, social justice and corporate governance (“ESG”) are integrated into our due diligence:

 ESG policies

 Systems

 Expertise

 Examples of ESG issues in previous deals

• Monitoring

• Advisory boards

• GPs reporting

• Engagement

• SL Capital specifically reports on ESG issues in its reports to investors • SL Capital employs practices of corporate responsibility

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