Summa's approach to impact investing

We have summarized Summa Equity’s ("Summa's") approach to investing with impact intentionality as a complement to existing materials, including Summa Equity Fund III Pre-Contractual Disclosure. Specifically, we have described Summa’s impact investment strategy (i.e., what kind of impact investments will Summa make?) and how impact is integrated across the investment process from sourcing to investment decision-making and beyond.

The document reflect the most recent regulatory guidance and learnings from Summa investments made to date. Over time, we will continue to refine these guidelines based on the latest thinking and accepted standards for impact investing. Our hope is that this serves to create more transparency for Summa’s work and contributes to ongoing dialogue in the space about how to invest with impact intentionality.

Context: Operating in an ambiguous environment

The Sustainable Finance Disclosure Regulation (SFDR) established a transparent, standardized framework for sustainable investment. Specifically, the regulation defined two distinct classifications of sustainability-linked financial products: Article 8 funds, which are required to promote environmental and/or social characteristics among other characteristics (and ensure good governance across all portfolio companies), and Article 9 funds, which are required to have a sustainable investment objective and thus only invest in companies qualifying as ‘sustainable investments’ (as defined in the SFDR).

For funds investing under Article 9, like Summa Equity Fund III, it is important to understand what qualifies as a “sustainable investment”.

Two questions in particular demand our attention:

a) Harm: What may not qualify as a sustainable investment given the risk of potential harm? What is the threshold for avoiding adverse impacts and practicing good governance? SFDR outlines criteria to disqualify investments that create significant social or environmental harm (aligned with the Principal Adverse Impact indicators) as well as investments that fail good governance practices.(1) However, the regulation leaves room for interpretation as to the point at which an investment generates significant harm and risk.

b) Sustainable contribution: What qualifies as sufficient contribution to solving an environmental or social problem? Can contribution evolve over the course of ownership? SFDR indicates that Article 9 investments must “contribute” to social and/or environmental objectives. (2) But the guidelines do not specify what counts as “contribution”. For instance, funds can choose to align or not align sustainable investment objectives with the EU Taxonomy (which in itself has yet to be fully defined). Funds that decide not to align with the EU Taxonomy can choose other indices as a reference benchmark to define sustainability – yet even this is optional as long as they explain how sustainable investment objectives will be pursued.(3),(4)

This document clarifies how Summa navigates these questions through a succinct impact strategy and decision-relevant framework for evaluating impact throughout the investment process.(5)

Summa's impact investment strategy

Summa creates impact by investing in companies that contribute to solving a social and/or environmental challenge, as aligned with the UN Sustainable Development Goals (UN SDGs) and including companies focused on governance in the service of helping solve environmental or social challenges. (6)

Specifically, investment opportunities reflect strong:

• Impact alignment: Core business aligns with an environmental or social challenge, with impact outcomes identified and aligned against the SDGs and, where relevant, aligned with the EU Taxonomy (although Taxonomy alignment is not a criterion for investment)

• Impact contribution: Business can help solve the specific environmental and/or social challenge identified, as evaluated based on six contribution considerations (see next section)

• Impact fundamentals: Business has minimal risk of failing Do No Significant Harm test (including assessment against Principal Adverse Impact indicators) and meets basic good governance tests

Summa invests in companies at the leading edge of sustainability in their industry, as well as companies with an emerging sustainability platform that are well-positioned to evolve into leaders over the holding period. Investments focused on developing impact leaders may require more resources to support evolution of the business model. Given this added focus on investor contribution, Summa seeks to balance investments across companies already leading on sustainability and those with the promise to become leaders.

Impact in the investment process

Impact is integrated across Summa’s investment process, including impact considerations for screening, due diligence, and the path to value creation.

Impact alignment screening (from actionable deal to indicative bid)

In the first stages of the investment process, companies are screened for impact alignment within the appropriate Summa theme, and deals representing low impact potential are deprioritized. Specifically, deal teams are asked to define the core environmental and/or social challenge(s) addressed by the investment, including relevance to specific SDGs. This includes:

• Briefly articulating the core challenge and way in which the business helps solve the challenge
• Assessing whether the company reflects a sustainability leader today or can evolve into a leader given the core challenges addressed (preliminary perspective)
• Generating potential impact KPIs to track progress, including output and outcome metrics

The impact alignment step creates the foundation for impact in the investment process: it clarifies how an investment seeks to achieve sustainability through social or environmental benefits and forms the basis against which contribution can be assessed during due diligence.

Impact due diligence

After the initial impact alignment stage, impact due diligence is performed. Impact due diligence includes assessment of the target company against three pillars (see Appendix for detailed criteria):

• Performance against fundamental impact elements focused on Do No Significant Harm and good governance, with harm assessment based on a company’s industry, most relevant regulatory guidance, and region; where relevant, this pillar also includes preliminary assessment of EU Taxonomy alignment (although Taxonomy alignment is not a criterion for investment)(8);
• Potential for contribution to address the core environmental and/or social challenges identified in screening, including evidence of impact, potential for impact at scale, additionality of impact, potential for positive impact across the value chain, collinearity between business and impact opportunities, and control over the impact; and
• Ability to execute on this impact contribution, including Summa’s capacity to support the company’s impact contribution.

Impact due diligence is focused on the core business as it is today, and where relevant may also consider how the business is expected to evolve during the holding period. Where companies are not already leaders in sustainability, it is particularly important to evaluate the company’s ability to execute on impact and consider Summa’s capacity to support the company’s impact journey.

Deal teams often engage expert partners to lead the impact due diligence, including due diligence providers with environmental sustainability expertise as well as other technical areas of expertise as needed. Where relevant, the impact due diligence is also integrated with other diligence processes, including commercial due diligence (relates to contribution), organizational due diligence (relates to ability to execute and impact fundamentals), and legal due diligence (relates to impact fundamentals and ability to execute).

Impact in the path to value creation

Recommendations for impact-aligned value creation

Deals brought to the investment committee also include recommendations for value creation, which serve as a starting point for Summa’s approach to portfolio management during ownership (called “Via Summa”). These recommendations focus on relevant levers to advance impact based on the impact due diligence, including:

• Critical gaps to close (value protection): Near-term priorities to address gaps related to impact fundamentals and to bolster impact capacity where needed (e.g., implementing additional good governance expectations)
• Opportunities to advance impact (value creation): Near- and long-term priorities to integrate impact via strengthen, scale, and disruption opportunities, as part of Summa’s three-phase plan for the company

Value creation recommendations during the deal process serve as the foundation for an active approach to portfolio management. Summa continuously evaluates relevant impact priorities and opportunities during ownership and through to exit, which is part of our ambition to future proof companies and sell at a point when company growth is aligned to impact.

Two types of impact advanced during ownership

Active ownership includes engagement and capacity building for investee companies on fundamental impact areas, for which Summa sets shared goals for all companies, such as setting Science-Based Targets and achieving gender balance in corporate boards. These 4 topics extend from the areas considered during the impact fundamentals component of due diligence.

In addition, active ownership includes helping companies advance contribution aligned with the social or environmental challenges identified in the investment process. These opportunities are often directly linked to the core business model or strategy and reflect “game-changing” impact opportunities.

Where possible, Summa seeks to align game-changing impact to a strong theory of change, including helping define a clear impact ambition, articulating how a company can achieve that ambition directly and indirectly, and tracking leading and lagging indicators.

Summa is also committed to strong impact measurement. Portfolio companies are required to report on both fundamental and game-changing impact along with financial reporting. This reporting includes data snapshots aligned with the Principal Adverse Indicators.

Appendix A: Overview of impact due diligence criteria

I. Impact fundamentals:

Does this company have the ‘house in order’ when it comes to impact fundamentals as addressed in the SFDR and, where relevant, the EU Taxonomy?

Synced with LDD and ODD

A. Do No Significant Harm:

Does the investment meet Do Significant Harm (DNSH) requirements under SFDR? If there is risk, how will Summa materially reduce risk?

B. Good Governance:

Does the company have basic good governance in place, including Via Summa compliance and EU Taxonomy minimum safeguards?

• Does the company pass good governance test for sound management structures, employee relations, remuneration of staff, and tax compliance?

C. Red Flags:

Are there any red flags on ESG topics beyond those considered under SFDR and EU Taxonomy? For companies that are EU Taxonomy eligible, what is the initial view of Taxonomy alignment?