Polish Green Fund by ARP – the first green infrastructure fund in Poland.

On July 27, 2023, ARP S.A. closed the transaction for the acquisition of all shares in KGHM Towarzystwo Funduszy Inwestycyjnych S.A.

JSC. The conclusion of this agreement constitutes a fundamental milestone for IDA JSC in implementing the project to create an investment vehicle. This fund finances investments that comply with sustainable development criteria. This is one of the critical initiatives in the new Strategy of Industrial Development Agency JSC for 20232025 with the perspective to 2030 entitled “ARP. CLEAN INDUSTRY“.

ARP TFI will apply with the registry court in the following months to register the first “Polish Green Fund by ARP” (PGF) in the register of investment funds. The Fund will adopt the formula of a Closed-End Investment Fund of Non-Public Assets (FIZAN) and will allow exposure of Polish and international professional investors to assets previously difficult for them to access. The Fund assumes that it will have at its disposal the resources of both the Industrial Development Agency and Polish and international financial institutions (public and private) interested in investing in the green transformation and energy decarbonization of the Polish economy, as well as in the green construction and modernization of assets in various parts of Poland, considering investments in municipal management and facilities of Local Government Units (LGUs).

The Polish Green Fund by ARP (PGF) will be the first Polish green infrastructural investment fund, which is part of a dynamic trend in recent years in global financial markets. In the past eight years, 135 new managers have emerged to create funds that invest in Europe. According to expertise and reports by KPMG Advisory, carried out in cooperation with and on behalf of the Industrial Development Agency in recent quarters, and data from Prequin, of the funds, which are the first funds of a given manager, 54 funds (40%) invested in the renewable energy sector, 40 have sector diversification, and 22 invest funds in energy industry projects. Due to risk, the investment activities of funds operating in the renewable segment were dominated by safe Core and Core Plus strategies (more than 80 funds and the amount raised from investors reached $33.3 billion).

The Polish Green Fund will invest in the most promising industries: Offshore Wind Energy, Renewable Energy, Decarbonization of Utilities (with a focus on District Heating), Green Industry, and Green Chemistry. The Fund operation will be based on the regulations of the SFDR (Sustainable Finance Disclosure Regulation), particularly Articles 8 and 9 – in this context, the key advantage of investing in this area is to achieve sustainable development goals while obtaining attractive market returns with balanced risks.

The attractiveness and competitiveness of the Polish Green Fund are derived, to a large extent, from, on the one hand, the financial, substantive, and reputational background of the Industrial Development Agency as a credible SOE (State-Owned Enterprise), which is the sole owner of the acquired ARP Investment Fund Company (ARP TFI), and, on the other hand, the fact of operating in an activity strictly regulated by both national and EU regulations, within the framework of European common supervisory priorities and guidelines set by the European Securities and Markets Authority (ESMA). On June 30 this year, The Polish Financial Supervision Authority issued a decision of no objection to the Industrial Development Agency’s intention to acquire the shares of KGHM TFI JSC.

It should be mentioned that the Polish Green Fund will invest sustainably and responsibly (meeting the green requirements of the EU Taxonomy), and thus throughout the investment process (from initial screening to corporate governance), it will take into account ESG factors that have a material impact on the value of the investment. The Fund will identify a list of sectors and subsectors it invests in as part of its green financial policy. In contrast, analyzing the sector’s sustainability impact will underpin the list. The Fund’s strategic objective will be bipolar – to obtain returns for investors by increasing the profitability of companies while at the same time influencing companies to promote ESG aspects to be more sustainable when the Fund disinvests. Therefore, the Polish Green Fund will invest, among others, in environmentally friendly companies, organizations, LGUs, and those willing to transform themselves and prepare sound, economically viable decarbonization plans. The Fund will, therefore, actively exercise its oversight rights over the entities in question to improve sustainability shares and activities, such as by contributing to the development of a sustainable business structure with environmental neutrality, measuring the GHG (Greenhouse Gas) emissions of portfolio companies, setting decarbonization pathways for all portfolio companies, or investing in water conservation programs.

Because of the above, professional investors who invest funds in the Polish Green Fund will be part of the global trend related to investing in “green” assets, which, in light of the European Central Bank’s so-called climate stress tests (already conducted in 2021 and 2022), are becoming an essential area of interest for financial institutions and an element of fulfilling regulatory criteria (the so-called Green Asset Ratio).

The challenge of the present times is to take decisive action in ensuring Poland’s energy sovereignty – independence from imported hydrocarbons. This applies to nationwide activities but also to activities undertaken in the so-called “small homelands,” i.e., among other things, the construction and modernization of smaller, local power installations. The advantage of the Polish Green Fund will be its close cooperation with Local Government Units and Polish companies to support them in the decarbonization process and enable them to scale their activities. This type of exposure has not previously been possible for large, international financial entities. One of the main goals pursued by PGF will be to green municipal economies, particularly in the heating sector. This will be enabled by the dialogue with public institutions and industry partners as well as available financial instruments.

The fund will develop industry expertise to solve sponsors’ problems – TFI will be the entity actively managing the PGF fund, which is an alpha fund – working on specific projects with its own engineering and energy expertise, understanding of regulatory considerations, and based on recent years’ experience in working with industry and local government.

PGF will actively search for and develop sustainable projects regarding environmental and social objectives (following the SFDR and the EU Taxonomy). Thus, for example, investments related to offshore wind energy will include a wide range of initiatives – from electricity production to activities along the value chain (production of offshore wind energy installation components and the infrastructure needed to build them). Investments in renewable energy sources include renewable energy projects such as onshore wind farms, biomass, photovoltaic farms, and biogas plants. Initiatives around green industry aim to implement the concept of a closed-loop economy, reducing resource consumption in industrial production. Projects in district heating will strive to decarbonize district heating systems (modernization of existing systems, use of zeroemission sources, heat storage, and construction of thermal waste processing facilities). It is worth noting that the scale of identified potential projects (green and infrastructure projects) in the Polish market by 2027 alone is as much as PLN 61 billion, and adjusting the Polish district heating sector independently to the EU requirements proposed in the draft regulations of the Fit for 55 packages will cost between PLN 95 billion and PLN 170 billion (data from the Polish Association of Combined Heat and Power Plants).

We believe in the idea and investment policy of the Fund – the Industrial Development Agency JSC will invest its funds in the project by taking up the certificates, thus acting as General Partner,” says Cezariusz Lesisz, President of the Management Board of ARP SA.

The actions taken by the Industrial Development Agency JSC and the creation of the Polish Green Fund, which will be a crucial tool and investment vehicle, will enable the Agency to invest in new, green, and transformative assets. The fund to be created by ARP TFI will benefit from the experience in industrial investment developed over the years (Industrial Development Agency JSC has participated in the transformation of the Polish industry for more than 30 years and has its portfolio of industrial companies in various sectors). The establishment and planned operation of PGF aligns with the title of The New Strategy of ARP SA for 2023-2025 with a perspective to 2030 “Clean

Industry.” Transparency, efficiency, and low carbon are desirable for any business today. Green investing is a global trend, and Poland is essential in international investment. On the one hand, we have regulations promoting ESG and green transformation (SFDR regulation, the European Green Deal). On the other hand, we have market-based, attractive rates of return associated with specific investment risks. An investment product that will reconcile these two perspectives will undoubtedly make the Polish financial market even more attractive to many investors. The Polish Green Fund is a product whose success will open new opportunities for Poland, the 6th in the EU and the 21st economy globally. – notes Izabela Antos, Undersecretary of State at the Chancellery of the Prime Minister, supervising, among others, the Department of Development Instruments.

Entities in the infrastructure fund market invest in assets characterized by high capital intensity and resistance to changes in macroeconomic cycles. The Polish Green Fund, as an infrastructure investment fund, will support on a long-term basis – the tenor of the fund will be ten years. This will be the first green FIZAN for professional Polish and foreign investors – at this point, there is no infrastructure fund based in Poland or focused on the Polish market that offers this type of green exposure to decarbonizing and transforming assets – in industry and Local Government Units.

The Fund will offer investment certificates that provide exposure to green and transformative assets that meet specific criteria of the ESG regime. Green monitoring of each investment and periodic independent ESG audits will ensure transparency and integrity in evaluating investments reported to the Investor Assembly. The fund will provide investors with safe exposure to tangible assets that are difficult to access, particularly for foreign financial institutions. ARP TFI will act as an active manager of the Polish Green Fund, based on the built business experience and regulatory and industry know-how of recent years. The investment certificates will be offered to certain entities, such as pension funds, insurance companies, multilateral banks, or Polish and international asset managers. Recently, the number of players entering the infrastructure fund management market has seen a noticeable increase. This trend is expected to continue in the coming years, supported by the projected increase in fund inflows.

The main drivers of the market’s growth are the energy transition and the development of the specific role of ESG. This factor is considered necessary by investors when making investment decisions. The need for a debut Fund to distinguish itself requires high standards in this regard, of which we are aware – these include certification and regular, periodic ESG audits of individual investments in the portfolio, the need for regular reporting of “green indicators,” the imposition of disclosure as to the degree of eligibility for the Taxonomy, and compliance with technical criteria. PGF will also pay attention to the ongoing monitoring, management, and mitigation of possible incidents that could affect the violation of the ESG strategy. This is very important for us – responsible investment must be based on the credibility and trust of all stakeholders of the Polish Green Fund, with the residents of our small homelands at the forefront, where we intend to make investments,” adds Prof. Tomasz Gackowski, Managing Director of ARP SA.

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