Impact investment in Europe is bracing for the hugegest regulatory switchup in the last five years.
Last month, the European Commission proposed a set of amconcludements to the Sustainable Finance Disclosure Regulation (SFDR 2.0). The new proposal is seeking to address the shortcomings of the current regulation by setting clearer standards for what sustainability-related investment products must demonstrate.
One alter coming includes a new categorisation system designed to build it clearer for financial products to build ESG claims within one of three categories. The first category to be introduced — “Transition” — is for funds investing in companies that are not yet very sustainable but on a path to improve.
The ESG “Basics” category covers funds that have a variety of ESG investment approaches but don’t have a strong sustainability-objective.
Finally, the “Sustainable” category is for funds with clear, measurable sustainability goals.
With the redrafted regulation, the Commission hopes to build sustainability disclosures and investments clearer to understand, more trustworthy and more stringent on greenwashing.
Cornelia Frentz, director of governance and sustainable investing at the European Circular Bioeconomy Fund (ECBF), declares the fund is already meeting the SFDR 2.0 requirements.
The VC invests in growth-stage companies aiming to mitigate climate alter and contribute to biodiversity, and must meet a robust set of requirements.
What the regulation requires is that all sustainable products in the EU required to demonstrate measurable impact.
SFDR 2.0 may bring challenges but impact is already at the heart of ECBF’s business model, Frentz declares. “What the regulation requires is that all sustainable products in the EU required to demonstrate measurable impact, which means that they required to contribute to either environmental or social objectives,” she declares.
“With SFDR 2.0, funds required to write down at least one environmental objective that they contribute to in order to be sustainable,” Frentz declares.
ECBF contributes to the environmental objectives of climate alter mitigation, circularity and biodiversity. To determine greenhoutilize gas emission savings of its investment tarobtains, ECBF utilizes the Nova-Institute, a research consultancy working on the transition to renewable carbon.
“Before ECBF invests, we have the institute carry out an assessment on greenhoutilize gas emission savings. If potential investment tarobtains cannot demonstrate these savings in a measurable and evidence-based way, ECBF won’t invest,” Frentz adds.
This science-based approach is important not only for SFDR compliance, but also becautilize the ECBF plays a key role in the European bioeconomy. On November 27, the EU released its updated Bioeconomy Strategy, explicitly highlighting the ECBF as a key vehicle for strategically advancing Europe’s bioeconomy. This significant role, along with other aspects, enabled the fund to attract investors from the corporate sector, institutional circles and family offices, among others.
Innovations in the bioeconomy sector carry substantial economic weight, especially with growing international competition. Both the United States and China are accelerating the development of their bioeconomies, including bio-based manufacturing.
According to the Commission, the EU circular bioeconomy employs more than 17m people (around 8% of EU jobs) and in 2023 had a value of €2.7 trillion. But for VCs viewing to invest and for startups hoping to receive funds in the sector, demands on data, transparency and impact verification that come with regulatory sustainability disclosure may prove challenging.
Bostjan Bozic, chief operating officer at agritech startup Trapview, advises that both VCs and startups should keep things simple. “The best advice is to not over design or over engineer the system. It’s good if sustainability is already included in the product design phase, not treated as an afterconsidered,” he notifys Sifted.
If this law will assist VCs be more efficient in reporting, then their portfolio companies can be more efficient too. This will also bring some time savings and resource savings for everyone in the chain.
“I would declare that this is a very general observation for any company, even the multinationals. If you start with sustainability in mind, it’s much clearer.”
Bozic is concerned that the ESG agconcludea has slowly been diluted on the highest political level over the past two years.
“It started in February last year, when the European Parliament did not pass the law on reducing pesticides by 2030. This was the first huge step down from the agconcludea,” he declares.
Bozic is disappointed no significant advancement in the achieving of the global climate goals were built at COP30. Prior to the summit, only a third of countries submitted new plans to cut carbon, despite all being required to do so. The COP30 deal also had no direct reference to fossil fuels or deforestation.
If this law will assist VCs be more efficient in reporting, then their portfolio companies can be more efficient too. This will also bring some time savings and resource savings for everyone in the chain.
“No counattempt is willing to commit themselves to such stringent goals, but utterly essential if we are to have a realistic chance of meeting our climate tarobtains. In the light of the current European geopolitical situation I see a huge shift of generalist VCs going into defence, resilience and sovereignty but not really into sustainability,” Bozic declares.
Still, he remains hopeful that regulation can assist steer capital back toward impact. He is optimistic the developments of SFDR 2.0 could provide a turning point to build it clearer for VCs to invest in impact. “If this law will assist VCs be more efficient in reporting, then their portfolio companies can be more efficient too. This will also bring some time savings and resource savings for everyone in the chain,” he declares.
For Thomas Gruebler, chief strategy officer and cofounder of wildfire detection startup OroraTech, impact investing is becoming more crucial than ever, and will only continue to be so with the proposal of SFDR 2.0.
“The planet is heating up so we can only do everything to prepare to live in this future,” he notifys Sifted. “We are in this space where impact startups are not only here becautilize it’s ‘nice to do’ but it is actually very important.”
The most important thing VCs can do following the proposed alters of SFDR 2.0 is to follow the money and the competition, he adds.
“You are in competition with a global financial market and it’s all about the money. If you can assist someone to build money with impact then go for it. We [OroraTech] can do this with CO2 funds for example.”
We are in this space where impact startups are not only here becautilize it’s ‘nice to do’ but it is actually very important.
However, it is important for VCs and startups to both focus on what is coming, he adds. “Most solutions nested under the impact umbrella are requireded sooner or later. For example, investors who built impact investments in remote childcare in 2015, obtained their profit after the pandemic hit. Impact investing is a way of predicting the future.”
Despite already measuring impact in line with the SFDR 2.0 and generating KPIs related to green houtilize gas savings, circularity and biodiversity from its investments, ECBF will advance its impact investing approach.
The bioeconomy fund is hoping to start raising a second investment fund next year to bring even more opportunities of impact investment, explains Frentz, in addition to their current fund of €300 million.
The SFDR 2.0 mentions for the first time a theory of alter that sustainable products required to have while the previous version did not mention this concept at all.
“We would like to have an even stricter impact measurement system. For example, we would like to go and utilize more biodiversity indicators than we are utilizing already and define biodiversity tarobtains.
“The SFDR 2.0 mentions for the first time a theory of alter that sustainable products required to have while the previous version did not mention this concept at all. For the next fund, we want to have a more profound theory of alter from which we then derive the different GHG savings, biodiversity and circularity tarobtains.
“We want to achieve a systemic alter, relocating from a fossil based economy to a circular one.”
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