As a Sustainable and Socially Responsible Lender, October systematically “integrates ESG factors into its activity and investment process.”
Specifically, October’s latest fund OCTOBER SME V is aligned “to the Sustainable Finance Disclosure Regulation (SFDR).”
October’s strong commitment to ESG investing is proven “by reporting on SFDR one year before its first compulsory reporting date: the Fund’s first SFDR reports have been published on their website on June 30th.”
As mentioned in a blog post, October has provided an update to summarize essential aspects of the extensive report. This allows you to learn all the interesting facts about their commitment to ESG.
Investment Strategy
The October SME V Fund is classified “as a fund that promotes environmental and social characteristics.” In line with this status, October adopts “an investment strategy that aligns with selected UN Sustainable Development Goals” (SDGs):
- SDG 8 – Decent Work and Economic Growth: October’s loan granting activities support the sustainable growth of thousands of European SMEs, creating and maintaining tens of thousands of jobs.
- SDG 13 – Climate Action: October focuses on the environmental impact through its list of restricted sectors as well as the ESG Score. Prospective borrowers with good environmental performance, as well as financing requests aimed at reducing the environmental impact, are identified and rewarded.
To quantify the Fund’s contribution to these SDGs, October has also identified a set of objectives, specifically applied to its activities and target borrowers – European SMEs.
ESG Performance Evaluation
This sustainable investment strategy is “implemented through a systematic ESG assessment, applied to 100% of loan requests received by October since the launch of SME V (September 2022).”
October ESG Score
This systematic ESG performance evaluation “involves the use of a proprietary data-based ESG impact score known as the ‘October ESG Score’.”
This score includes 30+ ESG KPIs and is “updated as more ESG-related information becomes available during different stages of the loan analysis.”
Importantly, a complete ESG score is “required before a loan request can be forwarded to the October Credit Committee for a financing decision.”
The data-based nature of the ESG score “relies heavily on automated data extraction, which minimizes the declarative side and the risk of inaccuracy, and maximizes comparability and scalability of ESG data across the portfolio.”
ESG Pricing Impact
With OCTOBER SME V being an SFDR Article 8 fund, the promotion of ESG characteristics in its portfolio is “further pursued by assigning a pricing impact to the ESG Score.”
This is achieved “through a bonus/malus system that rewards projects with a good ESG score and penalises those with a poor ESG score.” The pricing incentives “range from a maximum bonus of 20 bps on the best ESG score A to a malus of 20 bps on the worst ESG score E, with the median ESG score of C being neutral.”
Due to this incentive, 18 projects “have received a bonus since september 2022.”
The ESG bonus/malus is “reflected in the final interest rate offered to the borrower, linked to the overall Credit Note.” This means that borrowers “who are high ESG performers will get more advantageous rates and are more likely to accept the funding offer.”
As a result of this incentive mechanism, the portfolio of the October SME V Fund “will be composed of more and more high ESG-performing companies over time.”
Sustainable Loan Purposes
A classification system was “introduced to identify portfolio loans that contribute to environmental and social sustainability purposes, in line with the European Taxonomy and the SDGs selected by the Investment Strategy.”
As part of the Borrower Questionnaire, all borrowers submitting “a financing request on the October platform must indicate the purpose of the requested loan.”
They must specify “whether the purpose relates to social or environmental sustainability.”
If yes, they are requested to “identify the primary purpose of their investment from a list that is in line with the European Taxonomy objectives.” For example, sustainable reasons for financing could “be a construction to increase energy efficiency, or the adoption of lower-emitting means of transportation.”
100% of deals financed “have undergone environmental and social performance assessment through the October ESG Score.”
The assessment showed “that one out of six projects financed by the Fund had a primary investment purpose which was related to social or environmental sustainability.”
A couple of examples of such projects “are CargoFlexx #2 and Torus Cooling.”
Indicators
The SFDR reports provide details “on a number of Principal Adverse Impacts (PAI) indicators on sustainability factors that the regulation requires to disclose.”
These indicators are divided into two categories: environmental and social.
On one hand, due to the early reporting phase and the generally low availability of PAI-aligned data “within the European SME market, the approach to some indicators is still under development, adopts proxies or best-effort approximations.”
On the other hand, however, several other indicators “required by the regulation can be automatically tracked by October’s technology and processes.”
In a market where we frequently witness SMEs as well as financing companies struggle with monitoring ESG indicators, this is a concrete testament to:
- the high potential of October’s technology, which can source and process ESG data just like financial ones;
- the virtuousness of October’s processes, aligned to recognised sustainability systems and standards.
October’s Exclusion Policy was already “aligned with this factor.”
This policy, adopted as first filter within October’s financing progress, systematically “excludes companies operating in fossil fuel sectors.”
This is a great example of no need “for any complex indicator to be generated or tracked, since October’s processes automatically ensure our portfolio exposure to the fossil fuel sector is 0%.”
October’s proprietary technology can “extract the location of the borrower company via the scan of its documents and match it against mappings of biodiversity-sensitive areas provided by the relevant authorities.”
This enables October “to automatically assess whether companies have a negative impact on these areas, as well as whether they are exposed to particular biodiversity or sustainability risks.”
In October’s Borrower Questionnaire, all companies are “asked whether they possess an internationally or locally recognized ESG label.”
Possession of a label implies that a company is “making recognized efforts in its environmental, social and governance performance and has been rewarded for best-in-class efforts.”
Obtaining an ESG label can be especially challenging for SMEs, “so possessing one is a strong indicator of a company’s high quality, advancement and reliability of ESG performance and standards.”
By exclusively operating in countries that are recognized upholders of the main international treaties, guidelines and charters, October ensures “that 0% of SMEs financed by the Fund in 2022 violate UN Global Compact principles and OECD Guidelines for Multinational Enterprises.”
Furthermore, October is committed “to conducting thorough background checks and due diligence processes on all prospective portfolio companies during the borrower application phase.”
As noted in the update, the average ratio of female to male workforce “for all companies in which the SME V-fund invests is 36.75%.”
October’s ESG Score includes “a gender balance indicator, which measures the share of women in the total workforce of a company.”
This is one of the main social performance indicators “within the borrower’s ESG assessment, and it is obtained from the Borrower Questionnaire.”
October’s Exclusion Policy ensures “that 0% of SMEs financed by the Fund in 2022 are exposed to controversial weapons, by excluding all sectors linked to weapons and ammunition.”
Social Security & Tax Payments
49% of the financed companies “carry out their social security and tax payments on time and in full, with no alerts.”
The October ESG score includes “a dedicated indicator to verify whether prospective borrowers guarantee their employees’ social security provision, by making timely and full payments. Closely linked to this is the current and timely payment of taxes as well.”
Both aspects can be verified by scanning borrowers’ bank accounts and statements “with October’s proprietary technological tool Bank X-Ray.”
The publication of this report signifies their “serious commitment” to ESG.
It is a fundamental milestone in October’s journey “towards more sustainable activity.”