Sustainable Finance Disclosure Regulation (SFDR)

Entity-Level

Entity-level disclosure in alignment with Article 3, 4, and 5 of Regulation (EU) 2019/2088.

Article 3: Transparency of sustainability risk policies

Paragon believes that the thoughtful management of ESG issues is an essential part of long-term success in a rapidly changing world. Due to this conviction, Paragon has committed itself to the integration of ESG into its investment principles, among others, through the signing of the United Nations Principles for Responsible Investment (UN PRI) already in 2015.

Companies that carefully manage sustainability risks and opportunities today, will be better positioned in the future as diminishing resources, changing consumer demands and increased regulation are expected to pose greater challenges. To be most effective, ESG initiatives should be considered as best practices for operational excellence.

As investment partner, Paragon seeks to help companies finding solutions to their biggest challenges and aims to invest in companies with clear value creation potential. Unlocking this value can often include the thoughtful management of ESG risks and opportunities. Paragon analyses the company’s operations, identifies efficiency improvement potentials and drives positive change, whether on the company´s environmental impact, in its supply chain, among its employees or in its corporate governance.

To identify potential ESG risks and opportunities, Paragon follows a two-step process – firstly assessing risks in the due diligence process, and secondly creating ESG value during the holding period.

Initially the target company undergoes an ESG risk assessment during the due diligence including (i) a risk assessment of the main countries of operations, (ii) an industry specific governance risk assessment as well as (iii) an environmental and social risk assessment of the industry. The results of this assessment are considered in the investment decision.

In case Paragon decides to invest in a company and conducts a post-closing due diligence, the ESG practices of this company will be reviewed in greater detail and, if available, tangible opportunities for ESG value creation will be initiated. In addition, and in all of Paragon’s portfolio companies, ESG will be discussed as part of the board meetings to monitor and ensure that ESG receives the necessary attention.

The importance of creating ESG awareness and competence across the organization and the integration of ESG management as part of the education of investment professionals is a growing priority of Paragon. Members of the investment teams act as Paragon´s “ESG Champions” and ensure that ESG processes are considered and followed in all investment decisions and throughout the holding period.

As the integration of ESG principles into the investment process and into business operations are dynamically evolving areas, Paragon will continuously review and improve its ESG practices.

Article 4: Transparency of adverse sustainability impacts at entity level

Paragon´s investment process generally considers the principal adverse impacts (PAIs) on environmental, social and governance aspects. Paragon seeks to obtain information on potential sustainability risks and impacts during the general ESG risk assessment and due diligence phase and takes potential adverse impacts into consideration in the investment decision. Should potential impacts conflict with Paragon´s ESG investment principles, investment opportunities may be rejected.

Paragon will gradually build up its reporting capacities regarding PAIs and will in time introduce regular reporting on key performance indicators as stipulated within the Regulatory Technical Standard to the EU Sustainable Finance Disclosure Regulation. For the avoidance of doubt, Paragon may report on PAIs at its own discretion based on data availability, quality, and reliability.

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

Paragon´s compensation policies are structured in such a way that it incentivizes investment professionals to promote sustainable growth within investments. The remuneration model at Paragon includes a variable component that qualitatively considers compliance with the organization’s sustainability principles. In addition, the remuneration model comprises a carried interest component which naturally depends on the sustainable growth of the investment.

Product-Level

Product-level disclosure in alignment with Article 8 of Regulation (EU) 2019/2088. While Paragon has been generally considering ESG in all its previous investments, the approach described below currently only applies to The Paragon Fund IV.

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

Summary

The financial product promotes environmental and social characteristics but does not seek to make sustainable investments within the meaning of Article 2 (17), SFDR.

The financial product applies a holistic approach that acknowledges a broad set of environmental and social characteristics. Paragon’s financial product will invest in line with its investment strategy and investment restrictions, i.e., 100% of its investments are aligned with its promoted environmental or social characteristics.

The financial product incorporates environmental and social considerations into all stages of the investment process by applying a two-phased ESG approach based on internal ESG procedures with a defined set of criteria and supporting tools. The phases are defined as follows:

Pre-Investment: i) Standard ESG Risk Assessment, ii) Specific ESG Issue Assessment and iii) ESG Value Creation Assessment;

Post-Investment: iv) Post-Closing Due Diligence, v) ESG Monitoring and Reporting and vi) Ongoing ESG support.

Information collected during the Pre- and Post-Investment phases build the foundation of a company´s specific set of ESG KPIs which will be regularly monitored by Paragon and the portfolio company to assess the success of ESG-related actions. An annual ESG report will provide details on the sustainability profile of each investment.

Paragon actively supports its portfolio companies by integrating necessary ESG management and reporting structures. Oversight and implementation responsibilities are anchored within Paragon’s respective investment teams. These act as Paragon´s “ESG Champions” ensuring that ESG processes are considered and followed in all investment decisions and throughout the holding period.

The following paragraphs discuss the environmental and social characteristics promoted by the financial product as well as the overall ESG framework and methodologies applied.

No sustainable investment objective

Although Paragon’s financial products promote environmental and social characteristics (within the meaning of Art. 8, SFDR), they do not seek to make sustainable investments (within the meaning of Article 2 (17), SFDR).

Environmental or social characteristics of the financial products

The financial product applies a holistic approach that acknowledges a broad set of environmental and social characteristics.

Paragon’s financial product excludes investments in industries which businesses go against the ESG principles. Particularly, excluded sectors comprise companies whose principal business is the manufacturing or production of tobacco products, the manufacturing, distribution or sale of arms or ammunitions or the exploration or extraction of oil, gas or coal. In addition, investments in portfolio companies who derive more than 10% of its annual total revenue from the production, distribution or sale of pornography or gambling activities are excluded.

Besides the application of ESG exclusion criteria, the following key ESG aspects are considered and promoted in the investment decision process and during the holding phase:

Environmental: climate change, pollution, waste management, resource management, environmental footprint in the supply chain;
Social: staff wellbeing, fair working conditions, health and safety, supply chain and human rights, product integrity, safety and quality, community impact, diversity, and equal opportunity;
Governance: business ethics, anti-corruption and anti-bribery, code of conduct, board and management structure, internal controls, governance in supply chain, data protection, stakeholder engagement and r

By means of a materiality analysis, ESG aspects that are of particular importance for the investment are identified and taken into consideration when determining ESG risks and opportunities.

Furthermore, Paragon applies the UN principles for responsible investments (UN PRI) and reflects on additional frameworks and initiatives, such as the Task Force on Climate-related Financial Disclosures (“TCFD”), and the ESG Data Convergence Initiative (EDCI) as guidance.

Investment strategy

Paragon believes that the thoughtful management of ESG issues is an essential part of long-term success in a rapidly changing world and thus has integrated ESG as long-term focus into its investment strategy. As an investment partner, Paragon aims to help companies find solutions to their biggest challenges and to invest in companies with clear value creation potential, while generating attractive financial returns for its investors.

A focus is thereby placed on environmental and social aspects, specifically climate change and environmental impacts of portfolio companies as well as staff wellbeing, diversity and integrity in all its forms. Governance criteria, including those relating to management structures, employee relations, remuneration of staff and tax compliance, are promoted and assessed in terms of good governance practices as part of the investment decision as well as by envisaged improvement on the level of the portfolio companies. Paragon strives to enhance the ESG performance of its portfolio by defining tangible initiatives to mitigate potential risks and unlock ESG value creation potentials and actively tracking and supporting ESG progress.

ESG is considered throughout all phases of the investment process and the holding period, namely trough i) Standard ESG Risk Assessment, ii) Specific ESG Issue Assessment and iii) ESG Value Creation Assessment, in the Pre-Investment phase, as well as iv) Post-Closing Due Diligence, v) ESG Monitoring and Reporting and vi) Ongoing ESG support in the Post-Investment phase.

Please refer to the following sections for details.

Proportion of investments

Paragon’s financial product will invest in line with its investment strategy and investment restrictions, i.e., 100% of its investments are aligned with its promoted environmental or social characteristics.

Monitoring of environmental or social characteristics

To identify potential ESG risks and promote ESG opportunities throughout the lifecycle of the financial product, Paragon follows a two-step process – firstly assessing risks in the Pre-Investment due diligence process, and secondly creating ESG value during the holding period.

In case of a positive investment decision, the ESG practices of a company will be reviewed in greater detail by conducting a post-closing due diligence and, if available, tangible opportunities for ESG value creation will be initiated together with the management. Information collected during the Pre- and Post-Investment ESG due diligence build the foundation of a company´s specific set of ESG KPIs which will be regularly monitored by Paragon and the portfolio company to assess the success of ESG-related actions. An annual ESG report will provide details on the sustainability profile of each investment, in addition to an analysis of performance in the prior year against company specific KPIs, such as renewable energy share, emission reduction initiatives and diversity in the workplace.

As the integration of ESG principles into the investment process and into business operations are dynamically evolving areas, Paragon will continuously review and improve its ESG practices.

Methodologies

As mentioned above, ESG is considered throughout the investment process and lifecycle of the financial products by applying a two-phased approach, namely through a) a risk-based approach during the pre-Investment phase, including due diligence and the consideration of ESG in the investment decision, and b) by creating ESG value during the holding period through post-investment due diligence and ongoing monitoring and support.

For methodological details on a) – please refer to section “Due Diligence” below.

For methodological details on b) – please refer to section “Monitoring of environmental or social characteristics” above.

Data sources and processing

ESG data is derived from the general ESG risk assessment, the due diligence process (including document reviews, potential site visits as well as interviews with the management and industry experts), as well as from the continuous monitoring of portfolio companies. The data is processed by Paragon and, where appropriate, supported by external ESG consultants.

Limitations to methodologies and data

Although Paragon makes reasonable efforts to ensure data quality, data reliability, and data availability, some portfolio companies may still be limited in their possibilities in collecting relevant ESG-related data. In these cases, Paragon will promote increased capacity for data collection and reporting.

Due Diligence

Initially, all potential investments are screened against Paragon’s investment principles and exclusion criteria, as well as adverse impacts on environmental, social and governance aspects (see above). Should potential investments or impacts conflict with relevant principles and/or exclusion criteria, investment opportunities may already be rejected at this stage.

When an investment opportunity enters the due diligence phase, an assessment of potential ESG risks and opportunities is conducted, that is based on three pillars: (i) Initial ESG Screening, (ii) Specific Issue Assessment and (iii) Value Creation Assessment. Where deemed necessary, external ESG consultants may support the ESG assessment. Findings are considered in the investment decision.

All potential acquisitions undergo a standardized ESG screening during the due diligence including an assessment of governance risks based on the main countries of operations and relevant stakeholders as well as an environmental and social risk assessment of the industry. The results of the ESG screening are presented and discussed internally.

Informed by the standard risk assessment, material ESG issues to the target are investigated in depth. Depending on the risk class identified in the initial screening, the investment team will undertake further assessments and concentrate on identified risks and opportunities. Where necessary, external ESG consultants will support the assessment. In this phase, the ESG assessment is part of the general due diligence process which comprises extensive desk research, relevant document review, personal interviews with the management of the target investments as well as site visits.

As Paragon sees ESG leadership as a critical parameter to the future valuation of a business, due diligence processes prior to investment not only focus on risks but also on value creation angles and opportunities which will also form Paragon’s plans for the post-investment phase.

In case Paragon decides to invest in a company, a post-closing due diligence will be conducted which reviews the ESG practices of the acquisition in greater detail and, together with the management, define tangible initiatives to mitigate potential risks and unlock ESG value creation potentials.

Engagement Policies

Paragon engages with its portfolio companies on ESG topics throughout the entire investment lifetime. A specific engagement focus is given post-investment, namely through defining and prioritizing value creation initiatives to mitigate potential risks and enhance ESG performance, establishing the necessary processes to collect relevant ESG data, and tracking progress throughout the lifetime of the investment. To ensure that ESG receives the necessary attention, both within internal investment processes and portfolio companies, Paragon has assigned and trained dedicated oversight and implementation functions within its investment teams.

Besides the active engagement through ESG monitoring and support processes, Paragon will also encourage its portfolio companies to track and report ESG KPIs at least annually. The deal teams are responsible for performing the ongoing engagement with the portfolio company in achieving its goals, including those relating to ESG. This includes discussion of progress on ESG-related goals during recurring board meetings.

The annual reporting under the EU disclosure regulations as well as additional, targeted ESG reports to investors inform about the evolving ESG management of Paragon and the ESG performance of portfolio companies.

Designated reference benchmark

No index has been designated as reference benchmark to attain the environmental or social characteristics promoted by Paragon’s financial product.