Polestar Capital Circular Debt Fund SFDR Website Disclosure

English summary

The Fund aims to ensure its investments align with the “do no significant harm” (DNSH) principle across environmental and social objectives. This assessment includes mandatory and additional Principal Adverse Impact (PAI) indicators outlined in the SFDR Delegated Regulation (EU 2022/1288). Environmental PAIs include air pollutant emissions, non-renewable energy use, and carbon reduction initiatives. Social PAIs include accident prevention, supplier codes of conduct, and CEO pay ratios. Investments that harm local communities, cause job displacement, or strain resources are excluded. Each borrower’s compliance with the DNSH principle is continuously monitored throughout the loan term, supported by specific thresholds and methodologies.

Borrowers must adhere to international standards such as the OECD Guidelines for Multinational Enterprises, UN Guiding Principles on Business and Human Rights, and the UN Global Compact. This compliance is confirmed through an annual ESG certificate, requiring borrowers to maintain ethical business practices and report incidents. Failure to meet ESG criteria may result in loan default or recovery measures.

The Fund’s core objective is to realise positive ecological impact, attain a contribution to achieving the United Nations Sustainable Development Goals, promote the circular economy transition and realise a Net Return of 6% or more for the Participants. The Fund strictly adheres to SFDR criteria, and all loans must meet sustainable investment standards.

Governance practices are integral to the Fund’s investment strategy, including internal controls, management quality, and financial resilience. Borrowers are evaluated on these aspects through the ESG certificate, and governance improvements are proposed if necessary. Continuous governance monitoring ensures ongoing compliance with set standards.

All investments are classified as sustainable under SFDR Article 2(17), with no derivative use.

Monitoring involves assessing contributions to environmental goals, DNSH adherence, and governance. This includes both quantitative objectives like avoiding emissions of CO2, substitution of abiotic raw materials and products and avoiding waste, and qualitative objectives like attaining a contribution to achieving the UNSDGs, decreasing the funding gap for Dutch innovative SMEs and enabling and accelerating the circular economy transition. Impact is measured at both borrower and fund levels using borrower-provided data.

The Fund acknowledges data limitations, including potential inaccuracies and incomplete reporting by borrowers. To mitigate this, it enforces strict reporting requirements, engages actively with borrowers, and verifies data where necessary. Regular engagement ensure compliance, and breaches can trigger penalties or loan recovery.

Due diligence involves comprehensive assessments of each investment’s suitability, including market, financial, technical, legal, and ESG considerations. If risks are identified, the Fund may require corrective actions, alter loan terms, or reject the investment. The Investment Committee validates each opportunity, ensuring all eligibility criteria are met.

To comply with SFDR and EU Taxonomy requirements, CO₂ emissions are measured according to international GHG standards, including Scope 1, 2, 3, and 4 (avoided emissions). Baseline emissions are calculated using industry standards, with reporting taking place both ex-ante and ex-post.

Nederlandse samenvatting

De beheerder controleert voorafgaand aan een investering of wordt voldaan aan het criterium ‘geen significante schade’ (DNSH) aan andere milieu- of sociale doelstellingen. Gedurende de looptijd van een lening wordt regelmatig getoetst of een investering kwalificeert als duurzame investering. Hierbij worden zowel verplichte als aanvullende PAI-indicatoren gebruikt zoals vastgesteld in de SFDR-verordening (EU 2022/1288). Relevante indicatoren kunnen betrekking hebben op luchtvervuiling, energieverbruik uit niet-hernieuwbare bronnen, arbeidsomstandigheden en mensenrechten. Indien een project sociale of ecologische omstandigheden verslechtert, zal financiering worden geweigerd. Alle investeringen moeten voldoen aan de OESO-richtlijnen en de VN-richtlijnen inzake mensenrechten. Voorafgaand aan financiering en jaarlijks daarna, moet de kredietnemer een ESG-certificaat ondertekenen dat naleving van deze richtlijnen bevestigt. Niet-naleving kan leiden tot wanbetaling of het terugvorderen van de lening.

De primaire doelstellingen van het fonds zijn het realiseren van positieve ecologische impact, het bijdragen aan de UNSDGs en het bijdragen aan de transitie naar een circulaire economie. Dit omvat investeringen in circulaire productieprojecten in Nederland. Maximaal 20% van het kapitaal kan buiten deze kerngebieden worden geïnvesteerd, maar blijft binnen de context van de circulaire economie. Het fonds hanteert strikte uitsluitingscriteria voor sectoren die niet in lijn zijn met de duurzame doelen. Governance van kredietnemers wordt beoordeeld op factoren zoals interne controle, managementkwaliteit en naleving van fiscale verplichtingen. Verbeteringen in governance kunnen worden voorgesteld indien deze onvoldoende zijn. Niet-naleving kan leiden tot wanbetaling volgens de financieringsdocumentatie.

Het fonds rapporteert minimaal 100% van zijn investeringen als duurzaam volgens artikel 2(17) SFDR en maakt geen gebruik van derivaten.

Monitoring gebeurt door vooraf vastgestelde criteria, zoals bijdragen aan milieu- en sociale doelstellingen en goed bestuur. Bij voortdurende niet-naleving kan de beheerder besluiten om desinvesteren, zelfs bij verlies.

De methodologie van het fonds omvat kwantitatieve doelen zoals het vermijden van CO2-uitstoot, het substitueren van abiotische materialen en producten en het vermijden van afval. Data wordt verzameld via kredietnemers, publieke databanken en industriële rapporten, waarbij verificatie en validatie plaatsvinden. Eventuele beperkingen in de methodologie betreffen gegevensbetrouwbaarheid en volledigheid. Toch zorgen strikte documentatie, actieve betrokkenheid en externe verificatie ervoor dat deze beperkingen de duurzame doelstellingen niet in gevaar brengen.

Bij due diligence worden risico’s beoordeeld en indien nodig externe specialisten ingeschakeld voor onder andere marktanalyse, technische en juridische aspecten. Besluiten worden genomen door de Investeringscommissie, die voorwaarden kan stellen aan kredietnemers. Engagementbeleid houdt in dat bij niet-naleving formele acties worden ondernomen, zoals boetes of het terugvorderen van leningen. Informele contacten helpen bij vroegtijdige signalering van mogelijke problemen.

Om aan SFDR- en EU-taxonomievereisten te voldoen, worden CO₂-emissies gemeten volgens internationale GHG-standaarden, inclusief scope 1, 2, 3 en 4 (voorkomen emissies). Baseline-emissies worden berekend met Nederlandse standaarden en rapportage vindt ex-ante en ex-post plaats.

No significant harm to the sustainable investment objective

The Manager will, prior to making an investment, establish that the criterium of ‘do no significant harm’ (DNSH) to any other environmental or social objectives is met. The Manager shall, and will ensure that the Fund, monitor(s) that any investment made in a Borrower continues to qualify as a Sustainable Investment throughout the duration of the Loan granted to such Borrower, which includes assessments on DNSH on both the environmental and social objectives.

Before making an investment, and during the monitoring, the Manager applies the climate and other environment-related PAI indicators (as reflected in Table 1 of Annex I to the Delegated SFDR Regulation (EU 2022/1288)) to assess the DNSH on any of the other environmental objectives. In respect of the additional indicators as reflected in Table 2 of the Delegated SFDR Regulation, the Manager determines per (prospective) Borrower which indicators are relevant and thus, can be used (in addition to the mandatory PAI indicators reflected in Table 1) to assess the DNSH on the other environmental objectives for the respective investment in the (prospective) Borrower. The additional PAI indicators are chosen based on the nature of the activities that are developed and/or deployed by means of the Loan. The additional climate and other environmental PAI indicators, based on the focus markets of the Fund, are (1) investments in companies without carbon emissions reduction initiatives and (2) water usage and recycling.

Before making an investment, and during the monitoring, the Manager applies the social and employee, respect for human rights, anti-corruption and anti-bribery matters related PAI indicators (as reflected in Table 1 of Annex I to the Delegated SFDR Regulation (EU 2022/1288))to assess the DNSH on any of the social objectives. In respect of the additional indicators as reflected in Table 3 of the Delegated SFDR Regulation, the Manager determines per (prospective) Borrower which indicators are relevant and thus, can be used (in addition to the mandatory PAI indicators reflected in Table 1) to assess the DNSH on the social objectives for the respective investment in the (prospective) Borrower. The additional PAI indicators are chosen based on the nature of the activities that are developed and/or deployed by means of the Loan. The relevant additional social PAI indicator is (1) rate of recordable work related incidents.

The Manager will not finance a project that contributes to attaining one or more of the Fund objectives but where the Manager, in general terms, considers if the project deteriorates (local) social or ecological conditions. Potential considerations could include, but are not limited to; disruption to local communities, inequitable access, job displacement, and negative environmental impact. The analysis and the weighing of considerations is done by the Manager.

The Manager in any case applies the mandatory PAI indicators included in Table 1 of Annex I of the SFDR Delegated Regulation. In respect of each of these indicators, the Manager has formulated a method and relevant bandwidths or thresholds, as relevant to determine the DNSH on the other environmental objectives or the social objectives. In addition to the assessment of the mandatory PAI indicators, the Manager shall assess the relevant additional PAI indicators for the relevant (prospective) Borrower and will determine the suitable method and bandwidths or thresholds, as relevant to measure the DNSH on the other environmental objectives or the social objectives on a case-to-case basis.

In order to determine whether or not the loan granted to an eligible borrower is aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (OECD Guidelines), the Fund requires data to be obtained from the borrowers as its investees to assess whether the activities of such borrowers would align with the OECD Guidelines.

Such information provided to the Fund provides the relevant details to subject the business operations of the relevant borrower to a number of core principles. We follow the following international core principles:

• OECD Guidelines for Multinational Enterprises;
• UN Guiding Principles on Business; and
• UN Global Compact.

These standards further include the principles and rights in line with the declaration of the International Labour Organization (ILO) and the International Statute of Human Rights.

In light of the above, the Fund requests every borrower to sign an ESG certificate prior to receiving the loan from the Fund and on an annually recurring basis, which contains information on the aforementioned principles following from the OECD Guidelines. Through the ESG certificate, the Fund asks and obliges the borrowers to actively work towards a healthy, clean and ethical business operations. This is done through supporting the borrower to develop and uphold an active policy and communication about this topic with their employees, suppliers and customers (including an periodic evaluation). In the ESG certificate, the borrower confirms that it establishes, implements and checks policies on ESG topics. The borrower must sign this ESG certificate annually and report incidents in the business operations to the Fund. This ESG certificate serves as a (annually recurring) declaration from the relevant borrower in which the Fund invests that its activities (whether or not in connection with the activities of such borrower that are financed by means of the loan of the Fund) do not cause significant harm to the theme of social impact (including human rights).

Performance in accordance with the ESG certificate is evaluated annually in monitoring and noncompliance can result in a default under the financing documentation. Borrowers are actively guided to enhance their performance in line with the topics contained in the ESG certificate to the extent improvements can be achieved. This improvement can be achieved through various means such as active engagement with the borrowers, setting specific targets, or devising improvement plans for such entity’s operations. If these active performance improvement strategies do not yield the desired results, the ESG certificate may not be provided by the borrower on the designated periodic moment in time. Further engagement strategies may include, but are not limited to, interacting with other stakeholders of the borrower, imposing penalties, or reclaiming the loan.

Sustainable investment objective of the financial product

The investment objective of the Fund is to make sustainable investments by mainly granting loans to borrowers that contribute to the reduction of waste, reduced use of abiotic resources, or reduced CO2-emissions, mostly through business models aimed at the circular economy. The Fund will provide Loans to circular production enterprises that use this financing to realise or expand a production facility in which an innovative sustainable technology and/or business model is applied for the first or second time at commercial scale. Up to 20% of total committed capital may be invested outside these areas, but within the focus area of the circular economy.

In addition, the Fund applies impact-related exclusion criteria which preventing prospective borrowers from becoming eligible for a loan by the Fund due to the sector in which such party is active.

Investment strategy

The Investment Strategy of the Fund focuses on the financing of production facilities in which an innovative circular technology and/or business model is implemented as further described in this section. By specifically financing innovative technologies and business models, the Fund contributes not only to accelerating and enabling the projects it finances directly, but also to accelerating and enabling replication projects in the future. The Fund targets borrowers who otherwise (i) would not, (ii) would not completely, or (iii) would later receive funding through conventional sources. This ensures the additionality of the Fund’s role in the financing landscape, which is central to its impact thesis.

The technologies the Fund aims to finance encompass:

• the processing of residue streams into materials and semi-finished goods and products, whereby these residue streams can be processed more usefully than is presently the case in the market; and

• replacing traditional (abiotic) raw materials with cleaner alternatives, organic raw materials and/or biodegradable raw materials.

Please refer to the more detailed description of the ‘Sustainable investment objective of the financial product’ section of this website disclosure.

Pursuant to the limited partnership agreement of the Fund (including all intended contractual terms and conditions) all loans granted by the Fund shall meet the sustainable investment-definition within the meaning of the SFDR. The main focus of the Fund as reflected in the Private Placement Memorandum (and which will also be embedded in the contractual fund terms) is the financing of production facilities in which an innovative circular technology and/or business model is implemented as further described in this section. By specifically financing innovative technologies and business models, the Fund contributes not only to accelerating and enabling the projects it finances directly, but also to accelerating and enabling replication projects in the future. Ultimately 20% of total committed capital may be invested outside the main target areas, but within the focus area of the circular economy.

There is no option for the Fund to grant loans to borrowers that are not meeting the investment criteria of the Fund, which explicitly includes, amongst others, the meeting of the loan of (all elements of a) sustainable investment pursuant to the SFDR.

Before financing is considered, an assessment is made on whether a borrower engages in activities listed in the Fund’s Exclusion Criteria or causes negative ecological or social externalities, such as deforestation, use of harmful substances, or exploitative labour practices. Based on this assessment, the Fund may choose not to extend financing.

Thus, the attainment of the sustainable investment objective is considered a main, binding element of the investment strategy of the Fund.

In addition to an assessment of the ecological impact and social adverse effects, the governance practices of a borrower is included as a component of the ESG assessment performed by the Manager as part of its investment decision-making process. This part of the assessment is, for example, conducted on factors such as (i) the presence and mechanisms of internal control systems, (ii) the composition and quality of the management team, (iii) the checks and balances in administrative processes, (iv) the adequacy and timing of financial statements and (v) the presence of financial resilience and risk management mechanisms. If a borrower has insufficient or inferior governance mechanisms in place, the Fund will propose improvements in its governance. If the borrower does not adhere to the required governance standard, the Fund will not proceed with the loan until sufficient improvements are made.

As part of the impact process performed by the Manager in respect of the investment decision-making process, the ESG certificate obtained from the relevant borrower also provides insight to the good governance practices of the relevant party, which are taken into account in the aforementioned assessment by the Manager. The Manager will periodically assess whether the borrowers that have been granted a loan by the Fund, are (continuously) meeting such good governance standards. The re-confirmatory ESG certificate assists the Manager in this respect.

The impact analysis and its conclusions are an integral part of the investment decision process. In cases where additional assurance is valuable, the Manager may engage an external advisor during due diligence to validate certain aspects of the impact analysis.

If a borrower does not adhere to the governance standards required by the Fund or does not comply with the covenants set in the financing documentation may result in a default under the financing documentation.

Proportion of investments

The Fund has sustainable investments as its objective, and thus reports a minimum of 100% of its investments as being sustainable under the meaning of Article 2(17) of the SFDR.

The Fund does not use any derivatives in the pursuit of its sustainability objectives.

Monitoring the sustainable investment objective

As the Fund has making Sustainable Investments as its Investment Objectives, the Manager will prior to making an investment, establish that the following criteria are met on the date that the Loan is granted:

• the Loan is made in an economic activity that contributes to an environmental objective;
• the Loan does not significantly harm any other environmental or social objective; and
• the Borrower follows good governance practices,

all of the above within the meaning of article 2(17) SFDR. The Manager shall, and will ensure that the Fund, monitor(s) that the investment in the Borrower continues to qualify as a Sustainable Investment throughout the duration of the Loan granted to such Borrower. Both prior to making an investment, as well as during the monitoring, this process shall include an assessment of:

• the contribution to the environmental objective, as measured by the quantitative and qualitative impact objectives of the fund functioning as sustainability indicators;
• the do no significant harm (DNSH)-principle on any other environmental objective by assessing the relevant climate and other environment-related PAI indicators designated by the Fund;
• the do no significant harm principle (DNSH) on any social objective by assessing the relevant social and employee, respect for human rights, anti-corruption and anti-bribery matters related PAI indicators designated by the Fund;
• whether good governance practices are followed by the Borrower in respect to sound management structures, employee relations, remuneration of staff and tax compliance, as further detailed in the ‘Investment strategy’ section of this disclosure. The Manager assesses the good governance practices of the Borrower being a prospect of a Loan by the means of the ESG certificate.

The Manager shall at all times be authorised to have the Fund dispose of investments made in one or more Borrowers that no longer qualify as a Sustainable Investment, and it may do so in its sole discretion, even if that means disposing of such investments at a loss or terms and conditions that are less favourable than could otherwise be expected.

Methodologies

The Fund aims to make Sustainable Investments that contribute to the climate change mitigation-objective. The Fund has formulated specific quantitative and qualitative impact objectives on the Fund level, which are applied as sustainability indicators to measure the contribution of the Loan to the aforementioned climate change mitigation-objective:

Quantitative impact objectives:

The following are considered quantitative impact objectives on the Fund level:

• Net tonnage of recycled and up-cycled residue streams
• Net tonnage of substituted traditional raw materials and products
• Avoided emissions in CO2 equivalent
• Mobilised commercial capital

The Fund will only finance Borrowers that will use the Loan to perform activities that (could) contribute to the achievement of one or multiple of the aforementioned quantitative impact objectives.

Qualitative impact objectives:

The Fund has formulated the following direct and indirect qualitative impact objectives on the Fund level:

• Contributing to the circular economy transition; increasing global material and energy efficiency; decreasing the pressure on ecosystems (the consequences of which are deforestation, reduced biodiversity, water depletion and other negative ecological effects); reducing the risk of exploitation of vulnerable groups of the population in countries where the extraction of non-circular raw materials takes place;
• Reducing the emission of greenhouse gases and bringing down the pollution of air and water;
• Recovering the market failure of the financial sector in servicing SMEs and/or enterprises intending to implement innovative technology; enabling innovation for a more sustainable living environment; and
• Contributing to attaining the UNSDGs.

Please note that the impact on both the qualitative and quantitative impact objectives will not be measured by the Fund through the assessment of each detailed, single activity performed by the Borrower, but by means of assessing the impact of the activities financed through the granting of the Loan of each Borrower on a consolidated basis (i.e. the impact on a Borrower level) and the impact achieved by (all activities financed by the Fund of) all Borrowers of the Fund on an aggregated basis (i.e. the impact on the Fund level).

Data Sources and Processing

To assess the Fund’s sustainability objectives, data is primarily obtained from the Borrowers. The primary quantitative data consists of the actual production (energy and materials) data of the installation the fund has financed. Additional data sources are used that compliment this data, such as: (i) (Public) Databases; government and international organization databases on environmental and social indicators, (ii) Industry Reports; sector-specific studies and reports from recognised industry analysts and experts.

To ensure the reliability and accuracy of the data used, the Fund takes on several measures: (i) Verification and Validation; all data received from direct and third-party sources are subject to verification and validation processes to ensure their accuracy and completeness; and (ii) Compliance Standards; data collection and processing adhere to international standards.

The data provided by the Borrowers is administered in a customer relationship management system. The raw data is used to calculate the impact of the Borrowers on the quantitative impact objectives, to evaluate environmental impacts, and to check for compliance with sustainability related criteria. The Fund can, if needed, ask for a life cycle analysis of the financed assets. Data is compared to baseline emissions of fossil fuel driven solutions and processed into insights and reported to stakeholders in the annual impact report to demonstrate the attained impact.

Limitations to Methodologies and Data

The primary methodology for collecting impact data within the Fund is reliant on self-reported data from Borrowers. While these data sources generally adhere to market standards and regulatory requirements, they present certain limitations:

• Data Reliability: The accuracy of the data is dependent on the Borrower’s transparency and ability to provide accurate, unmanipulated data. There is a risk of receiving incomplete or inaccurately reported data.
• Data Completeness: Borrowers may not disclose data that is not explicitly requested or required. This could lead to a loss of potentially interesting impact-related findings.
• Methodology Constraints: The methodologies employed for data collection and impact assessment may not capture all nuances of environmental and social impacts, especially in rapidly evolving sectors such as the circular economy.
• Dependence on External Assessments: For some metrics, the Fund relies on third-party assessments, which could introduce variability based on the methodologies and expertise of different assessors.

Despite these limitations, the Fund ensures that they do not limit the attainment of its sustainable investment objectives through several ways:

• Documentation and Agreements: All financing agreements mandate regular and comprehensive impact data reporting. A breach of information disclosures can trigger a review process where the Fund may engage directly with the Borrower, apply penalties, or consider reclaiming the Loan.
• Active Engagement and Monitoring: The Fund maintains an active engagement strategy with Borrowers, involving for example, but is not limited nor obligated to; direct contact, impact surveys, and site visits to verify data and assess ongoing projects.
• Verification of Data through third-party Sources: Where needed, the Fund supplements Borrower-reported data with information from independent data providers, industry benchmarks, and public databases, enhancing the robustness of the data used.

Due diligence

During the analysis & structuring phase, many investigative activities are performed with the intent to support the assessment of whether an intended investment structure and offering are suitable for the Fund.

In the due diligence phase, the results from the investigative activities performed in the analysis & structuring phase are combined with additional internal and/or external due diligence on the investment opportunity (including, where relevant, additional risk assessments). This phase also involves evaluating the prospective Borrower's financial viability.

Based on the risks identified during the earlier stages of the investment process, the Manager can select specialist consultants or due diligence specialists (possibly in consultation with the prospective Borrower) to outsource due diligence on various subjects including but not limited to: market, financial, scale-up, technical, impact, legal, tax and insurance due diligence. In general, the due diligence activities will be commissioned by the prospective Borrower, with the Fund determining the scope, and with the Fund ultimately deciding if the outcomes are sufficiently substantiating the envisaged impact-risk-return profile of the intended investment. This will be the starting point for a Life Cycle Analysis (“LCA”) or other type of impact analysis. In a life cycle analysesthe circular solution of the borrower is compared to the current linear market practice it will replaces.

Where relevant or required, the Manager will request the prospective Borrower to provide additional information on specific topics to be able to complete such due diligence.

If due diligence findings do not adequately support the Fund's analysis of the investment opportunity, the Investment Committee may decide that:

• The prospective Borrower may undertake activities to improve the investment opportunity;
• The Fund may issue an offering with different terms; or
• The investment opportunity may be put on hold or rejected by the Fund.

The Investment Committee validates if all Eligibility Criteria are met and provides a negative, positive, or conditionally binding or non-binding advice for the continuation of the transaction. If the intended transaction can continue, the Fund will proceed with its extensive due diligence process.

Engagement Policies

In the case that a Borrower has sustainability related incidents or does (potentially) not comply with the impact clauses in the financing documentation, the Borrower may be in default and the Fund may have legal grounds to act or reclaim its facility. The Fund has the following engagement policy in the case of a (potential) non-compliance event:

• A formal meeting is planned with the Borrower to check and cross check incidents or (potential) breaches with the impact conditions. The Borrower will be requested for a recovery plan with regard to meeting the impact agreements.
• If the Borrower continues to be in breach of the financing documentation, the Fund can take action, which includes but is not limited to, imposing penalties to the Borrower until the impact situation is compliant again.
• A final step the Fund can take is to reclaim the Loan.

The Fund has the right to (randomly) audit Borrowers to assess the compliance with the financing documentation, including the impact clauses. Next to the formal procedures, informally the investment team is in regular contact with the Borrower to monitor on developments of the project.

Attainment of the sustainable investment objective

In order to comply with the SFDR and EU Taxonomy, the CO2-equivalent emissions of a project will be measured in conformity with the international GHG-accounting standards as defined by the Greenhouse Has Protocol (https://ghgprotocol.org). Furthermore, a distinction will be made between scope 1, 2, and 3 emissions. Additionally, scope 4 emissions are added, defined as avoided emissions based on the zero-emission solution of the project in comparison to the linear market standard. The scope 4 emissions are estimated ex-ante and reported ex-post. For the estimations of baseline emissions, well to wheel emission factors based on the Dutch standard are used. (https://www.co2emissiefactoren.nl/)