ISR Label – Transparency Code

1. Introduction

This Transparency Code outlines the responsible investment practices and Environmental, Social, and Governance (ESG) strategies implemented by the management company overseeing the funds concerned. The Transparency Code provides insights into how ESG criteria are integrated into the management of real estate funds, including EUROCARE IV fund.

2. List of funds concerned by this Transparency Code

This Transparency Code applies to the TSC Fund – EUROCARE IV.

3. General information on the management company

3.1. Name of the management company in charge of the fund(s) to which this Code applies

Threestones Capital Management SA (the “AIFM“ or “Threestones“)
50–52 route d’Esch
L-1470 Luxembourg
https://threestonescapital.com/

3.2. What are the background and principles of the management company’s responsible investment approach?

As a responsible AIFM, Threestones considers an integral part of its duty to respect environmental, social and governance (ESG) principles when investing capital on behalf of our investors. Threestones considers ageing population and climate change to be two of the biggest issues of our time. We strive to integrate ESG analysis into our investment decision-making process by targeting undersupplied areas of healthcare properties. Our goal is to generate long-term sustainable performance to our investors while endeavoring to achieve positive outcomes for society by providing high-quality facilities to the elderly population and offering quality buildings.

In 2021, Threestones Capital implemented a Sustainability Committee and formalised a Sustainability Policy.

3.3. How have the funds formalised their responsible investor approach?

Threestones has put in place an ESG Scorecard (the “Scorecard”), a stakeholder engagement policy and a sustainability policy, of which some extracts are available on its website: www.threestonescapital.com

3.4. How is the management company addressing ESG risks/opportunities, including those related to climate change?

Threestones is aware that each investment is exposed to sustainability risks, which could have a significant impact on the future value of the portfolio of assets under management. At the same time, Threestones is aware of the impact that its investments have on the environment and the local communities. Therefore, the Investment Team identifies and analyses sustainability risks as part of the due diligence process and monitors the identified issues or red flags during the holding period, to mitigate risk factors as highlighted in the Portfolio Management Policy.

Threestones prepares a Scorecard for each asset which allows the identification of sustainability risks and indicators for each investment and provides an explanation on how they will be mitigated in the future. The Scorecard is based on information collected by the Investment Team, the due diligence advisors and specific consultants hired (if any), so to come up with a total objective score for each specific investment opportunity based on the sustainability features of the target investments and the related risks identified.

3.5. Which teams are involved in the responsible investment activity of the management company?

Threestones has chosen to integrate sustainability at the heart of its investment strategy and has dedicated sustainability resources. The Sustainability Manager leads the integration of sustainability initiatives at Threestones, collaborating with ESG consultants as needed. Sustainability is integrated at each level of the corporate structure, starting from the senior management present on the board of the AIFM, the Executive Committee composed of the Conducting Officers, the Investment Team, Compliance, Risk and all other departments within the company.

The sustainability strategy and the implementation of the sustainability policy is overseen by the Sustainability Committee (the “Sustainability Committee”), which is composed of members of the Investment Team, the Head of Compliance, and the Sustainability Manager. Members of the property management team and external sustainability advisors could also take part of the Sustainability Committee to provide technical knowledge in the decision-making process of the sustainability strategy.

The Sustainability Committee was created to structure Threestones’ sustainability approach, including the application for international labels (ISR Label…) and external validation groups (UN PRI, GRESB, BREEAM…), the creation and implementation of the sustainability policy in compliance with the applicable European regulations. The Sustainability Committee meets at least bi-annually.

• The Sustainability Committee is responsible for defining and guiding sustainability strategy of Threestones and its funds.
• Any sustainability initiative must be submitted to the investment committee (the “Investment Committee”), which is led by the Portfolio Management team. Within the Investment Committee, ESG considerations, such as ESG Scorecards, are presented as part of a new acquisition. Other relevant ESG topics may also be discussed during the Investment Committee. The Investment Committee meets on a regular basis, typically several times per month.

3.6. What are the internal or external means used by the management company to conduct and take into account ESG analyses?

Threestones got supported by Sirsa/Cority, a French consulting firm specialised in sustainable transformation, to enhance its Scorecard. The Scorecard will be filled by the Sustainability Manager and controlled by the external consultants and the Investment Team. A brief summary of the Scorecards and the improvement plans are also presented to the Investment Committee via the investment memorandum of each asset.

For each acquisition, Threestones hires an external consultant to conduct a technical and environmental due diligence (“TEDD”) which evaluates items such as building equipment (fire protection, etc.) and maintenance, effectiveness of ownership status in the cadaster and licenses to operate etc. The environmental due diligence complements the technical due diligence and investigates potential land contamination, risk of flooding, earthquake, building features (heating, ventilation, etc.) and other technical details of the target property.

Threestones also uses the BuildingMinds platform to collect and monitor asset data on consumption (energy, water, gas, etc.), as well as to run retrofit simulations, estimated overall carbon footprints of its asset portfolio and more.

3.7. In which Responsible Investment initiatives are the management company involved?

Threestones is a member of the GRESB organisation and a UN PRI signatory. Threestones also aims to prepare its portfolio of assets for the BREEAM certification, whenever feasible.

3.8. What are the total assets of the management company’s real estate funds managed according to an ISR approach?

The equity collected for the EUROCARE IV fund is EUR 320 million with leverage of 50% obtained via third-party lenders.

3.9. What are the total assets of the management company’s real estate funds managed according to an ISR approach?

100% of the assets in EUROCARE IV are managed using the ISR approach. EUROCARE IV accounts for 39% of the total TSC Fund umbrella. The remaining portion of the portfolio, consisting of two additional sub-funds, is not specifically labeled, but we integrate ESG considerations as part of our overall sustainability strategy. EUROCARE IV has finalized the investment period as Q3 2025.

3.10. What are the public ISR funds managed by the management company?

No public funds are managed by Threestones. However, Threestones Capital manages one unlisted real estate umbrella fund, of which the EUROCARE IV sub-fund is labeled as ISR fund.

4. General information on the real estate ISR fund presented in this Transparency Code

4.1. What are the objectives sought by taking ESG criteria into account within the EUROCARE IV fund?

In general, the objective of Threestones Capital’s ISR approach for its ISR fund is to set the fund on a systematic path of ESG performance improvement. This implies a tool for rating ESG performance and procedures that allow:

• stakeholder involvement through an ambitious engagement policy and by reporting to investors the results obtained.
• to create asset improvement plans based on the objective rating from the Scorecard.

For the EUROCARE IV fund, 5 objectives have been defined:

• Environmental objective: Monitor and decrease GHG emissions of the portfolio
• Environmental objective: Promote green building certification
• Social objective: Improve residents’ comfort and understand the quality of care
• Social objective: Engage with tenants and local communities on sustainability topics
• Governance objective: Ensure good governance practices of the Real Estate portfolio and meeting all compliance obligations for the AIFM and the real estate portfolio

4.2. What are the internal and external means used for the ESG assessment of the real estate assets forming the investment universe of the EUROCARE IV fund?

Threestones has developed and integrated a Scorecard into its acquisition and management processes. This tool determines an ESG score for each acquisition and covers 100% of the EUROCARE IV portfolio.

The aim is to bring all the assets held by the fund to a threshold rating within three years. For assets rated above the threshold, the objective is to maintain at least their rating. The Scorecard therefore makes it possible to monitor changes in the ESG performance for each asset over time, and this mix of qualitative and quantitative metrics thus allow management of the achievement of the fund’s objectives across time. EUROCARE IV is therefore committed to a global, progressive, and structured approach to improving the ESG score of its entire portfolio (“best-in-progress” approach). External consultants and advisors are engaged to run the due diligence on potential investment targets, the results of which are included in the Scorecard.

The teams involved are described in 2.5 and 2.6.

4.3. What ESG criteria are taken into account by the EUROCARE IV fund?

Threestones Capital’s Scorecard includes 42 indicators (being such number subject to increase upon annual review). The indicators include the following themes:

• Environment: environmental risks, energy, carbon, environmental certifications, waste and water;
• Social: building features, building security, mobility, comfort and quality of life, accessibility;
• Governance: operator green lease clauses, operator reputation, residents satisfaction and good governance practices.

The themes and indicators are weighted to reflect Threestones’ priorities in the final score:

• Environment: 19 indicators, approx. 35%
• Social: 16 indicators, approx. 40%
• Governance: 7 indicators, 25%

The Scorecard can be reviewed annually to ensure consistency with stakeholders’ demand, regulatory requirements and a continuous and better tailored ESG strategy.

4.4. What climate change principles and criteria are taken into account by the fund(s)?

Environmental performance is an important issue for the management company, so the following criteria are integrated into the evaluation of the Fund’s assets: climate risks, energy consumption, energy performance and greenhouse gas emissions linked to its consumption. Social issues are also considered such as ageing population, engagement with tenants, communities and employees on sustainability topics related to climate change and environmental concerns.

4.5. What is the methodology for ESG analysis and evaluation of real estate assets (construction, evaluation scale…)?

The EUROCARE IV Fund’s Scorecard is made up of 42 indicators, divided into 15 themes specific to the three areas: Environment, Social and Governance. See Appendix 1 for further details about the Scorecard composition.

Threestones initially implemented a scoring system which was based on two different scorecards, a “pre-acquisition” scorecard and a “holding” scorecard, properly linked by a calibration exercise, as some information requested in the indicators could not be collected before being owners of a property.

As part of its annual review, assessment, and improvements of its sustainability strategy, Threestones decided to bring changes to its proprietary scoring system. The main changes are reported here:

• Removal of the two scorecards system and merge of the indicators into a unique template, applicable both pre-acquisition and holding period;
• Addition of 6 new indicators to the new template – allowing to better capture sustainability features at asset level specific to the asset class of nursing home – and slight update of indicators’ weights within each pillar;
• Addition of minimal negative scores of -0.25 points for those indicators covering items which (i) are not available and/or cannot be collected before Threestones becomes owner of the building, or (ii) are not existing/available and a new operator (tenant) is brought to the property and plans to implement such measures;
• Updating the social indicators to better fit the health care asset class.

Increasing the target score by property and for the portfolio overall. The maximum score is 100 and the minimum score is 38. If the asset scores below 30, the minimum threshold established by Threestones, the decision to buy the asset is suspended. When the scoring is above 30, an improvement plan is established to increase the scoring towards the target score of the portfolio in excess of 77.5 (the “Target Score”). The Target Score figure will be reviewed from time to time.

For the upcoming 2025–2027 cycle, the portfolio’s target average score will increase from 67.5 to 77.5, reflecting our ambition to further strengthen the ESG performance of the portfolio. For assets acquired at the end of the first cycle, targeted efforts will be made over the next three years to bring them up to the required standards.

• Carbon and Energy: The OID European Sustainable Real Estate Initiative Country Fact Sheets were used to identify the minimum EPC to obtain points. For example:
Spain: 81.5% of EPCs are class ‘E’ or lower; Germany and Italy: the average EPCs are class ‘D’. Therefore, only assets with an EPC equal to or higher than class D are awarded points for this criterion.

• Renewable Energy Source (Eurostat):
Spain: in 2020, the share of energy from renewable sources in gross final energy consumption is 21.2%;
Italy: 20.4%;
Germany: 19.3%.

• Certification: according to the 2019 GRESB study, 3.3% of healthcare assets are certified in Europe.

• Water saving solutions: according to the 2019 GRESB study, 87% of participants (all sectors combined) have implemented measures to reduce water consumption within their assets.

From this, two typologies of assets are defined:

• Assets whose rating exceeds the threshold rating. For the latter, the management company must, at a minimum, maintain this asset above the threshold rating.
• Assets whose rating is below the threshold rating. The latter are subject to a five-year improvement action plan, the objective of which is to achieve at least the fund’s threshold rating.

Key ESG performance indicators are monitored annually and are the subject of an annual collection of quantitative and qualitative information enabling the EUROCARE IV fund to monitor the ESG performance of assets over time.

4.6. How often is the ESG assessment of real estate assets reviewed?

The ESG assessment of the assets under management of the EUROCARE IV fund is assessed annually by the asset managers of Threestones Capital.

5. Management process

5.1. How are ESG research results taken into account in portfolio construction?

The objective is to continuously improve the ESG performance of the assets in the portfolio. An analysis is carried out during the acquisition phase to classify all assets as early as possible under an ESG perspective. An exclusion based on the overall ESG performance of the asset is applied. Assets with a negative overall ESG rating on the rating scale, and which therefore seriously contravene the criteria for responsible investment, or which present an overall high level of non-financial risk, will be excluded.

The ESG assessment methodology of each asset allows us to assess the potential for improvement with regard to the objectives sought and thus to establish an improvement plan over 6 years (best in progress approach).

5.2. How are climate change criteria taken into account in portfolio construction?

The ESG Scorecard takes into consideration the energy performance of buildings as well as carbon emissions, through the Energy Performance Certificate (EPC). The environmental due diligence also let us cover climate-related risks.

In addition, Threestones evaluates physical risks during holding period for the entire portfolio, considering both acute (e.g., extreme weather) and chronic (e.g., rising sea levels) risks that may impact its funds.

• Acute Risks: Assessing the impact of severe events like storms and infrastructure failure, with mitigation measures.
• Chronic Risks: Analyzing long-term risks, such as temperature increases, affecting asset viability in specific regions.

Transition risk encompasses the financial and operational challenges associated with the transition to a low-carbon economy. Threestones also assesses the transition risk.

5.3. How are assets in the fund’s portfolio that are not subject to ESG analysis taken into account?

The AIFM’s intention is to analyse 100% of the funds’ assets, as defined in this Transparency Code.

5.4. Has the ESG assessment and/or management process changed in the last twelve months?

The ESG assessment process at Threestones was updated as part of its annual review and sustainability strategy improvements. Key changes include:

• Merging the “pre-acquisition” and “holding” scorecards into a single template;
• Adding 6 new indicators to better capture sustainability features for nursing home assets and adjusting the weight of existing indicators;
• Introducing minimal negative scores (-0.25) for indicators that cannot be collected before ownership or when a new operator is introduced;
• Updating the social indicators to better fit the health care asset class;
• Increasing the target score by property and for the portfolio overall.

5.5. Does the fund contribute to the development of the social and solidarity economy (cf. article L. 3332-17-1 of the Labour Code)?

The fund does not contribute to the development of the social and solidarity economy under article L3332-17-1 of the Labour Code.

5.6. Does the fund invest in mutual funds?

The EUROCARE IV fund does not invest in mutual funds, in accordance with its investment policy.

6. ESG Controls

6.1. What internal and/or external control procedures are in place to ensure that the portfolio complies with the ESG rules set for the management of the fund(s)?

Threestones Capital has implemented a multi-layered internal control framework to ensure that sustainability rules are consistently applied both before acquisition and throughout the holding period of each asset. The control process involves several functions across the organization and includes both first- and second-line control mechanisms as well as external ESG consultants and technical advisors.

The pre-acquisition controls are not required any longer as Eurocare IV is not in investment period.

Holding period

• The Portfolio Management Team together with the Property Managers, supported by the BuildingMinds platform (and or manually, whenever not feasible pre-acquisition), collect utility consumption data and other ESG metrics throughout the year. This data forms the basis of asset-level ESG performance assessments via the Scorecard.
• A CapEx proposal including ESG improvements is developed jointly by the Property Managers, the Portfolio Management Team, and – where relevant – the tenant, taking into account opportunities identified at acquisition and ongoing asset operation feedback.

Controls

• The Portfolio Management Team reviews CapEx proposals during quarterly meetings with Property Managers, ensuring alignment with the ESG strategy and Scorecard goals.
• An annual (ESG) CapEx budget is validated asset-by-asset during on-site visits with Property Managers, and any deviations from ESG performance targets are discussed internally. During property visits, the ESG features are also duly documented.
• The Scorecards are updated annually during the holding period through a maker / checker process. The “maker” is responsible for collecting all necessary documentation and updating the Scorecards for each asset, while the “checker” conducts a thorough review to ensure all evidence is provided and that the weightings, thresholds, and scores align with established targets.
• The aggregated ESG score of the portfolio is updated annually by the Portfolio Management Team with verification of the progression of the sustainability strategy toward Net Zero and making sure that Best in Class and Best in Progress thresholds are respected.
• The Compliance Officer checks that weightings, thresholds, and scoring methodology in the Scorecards are correctly applied and aligned with ISR Label requirements and internal policies. Controls are also done at portfolio level to assess if the progress is in line with the targets.
• The Head of Risk reviews and samples criteria from the Scorecard to ensure consistency and proper documentation. The Risk Manager also checks disclosures, including consumption data and various ESG criteria like engagement with the tenants, to ensure compliance with the targets.
• As part of its “Label ISR” certification, the EUROCARE IV Fund will be subject to external annual audits. The label is to be renewed every 3 years.

7. ESG impact measurement and reporting

7.1. How is the ESG quality of the EUROCARE IV fund assessed?

The methodology of the fund’s ESG approach is as follows:

• ESG analysis of assets during the acquisition phase.
• Each year, ESG data is measured through an update of the Scorecard of all assets, and the overall ESG assessment of the portfolio is made. In addition, consumption data are continuously monitored via the BuildingMinds platform.
• The implementation and monitoring of improvement plans aim to increase the ESG performance of the assets under management.

7.2. What ESG impact indicators are used by the EUROCARE IV fund?

The impact indicators used for the EUROCARE IV fund are the following:

The environmental indicators are derived from the energy data reported by the buildings.

7.3. What media are used to inform investors about the ISR management of the fund(s)?

A page on Threestones Capital’s website is dedicated to Threestones’ sustainability strategy and discloses Threestones’ Sustainability Policy, Stakeholder Engagement Policy and other sustainability-related documents.

An annual ISR report for the EUROCARE IV fund is published annually.

7.4. Does the management company publish the results of its engagement policy towards the fund’s key stakeholders?

Threestones Capital publishes its policy on engagement with key stakeholders on its website.

8. Review of the Transparency Code

This Transparency Code is subject to a periodic review, at least annually or when a change in the process needs to be disclosed.