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50 Shades Of Green: European Impact Investing Explained

  • The EU introduced the Sustainable Finance Disclosure Regulation to combat greenwashing, categorizing funds as "dark green" (Article 9), "light green" (Article 8), or "grey" (Article 6) based on their commitment to sustainability.
  • 55% of early-stage impact VC investors in Europe are labeled as "dark green" funds, but the rigorous tracking of environmental and social impacts can be challenging, especially for startups.
  • Collaboration and sharing of investment methodologies can encourage more funds to achieve the "dark green" status, ensuring genuine impact and addressing global challenges.
Impact Investing

As late as the mid-noughties, it was almost inconceivable to marry together the idea of generating a positive ‘impact’ on the planet or society while simultaneously making a profit.

But as the list of successful impact tech companies gets longer, the venture capital industry has shown a growing interest in impact investing. So much so that the ‘impact tech’ sector has grown by 64 per cent since the end of 2020. This trend is encouraging, but the lack of clear regulation has led to an increase in VCs labelling themselves ‘impact investors’.

To address this issue and combat greenwashing, in 2020, the EU introduced the Sustainable Finance Disclosure Regulation (SFDR) and a supporting taxonomy. These initiatives aim to establish a common language and categorise funds within impact investing, providing structure, governance, and accountability.

EU regulations define the purest form of impact fund as Article 9 fund or “dark green” fund. It means sustainability is at the core of the investment philosophy, and all startups supported must have a clear impact objective, tracked with data. If there’s no impact, there’s no investment.

In contrast, Article 8 funds, known as “light green”, promote environmental and social characteristics, but don’t have them as core investment objectives. Lastly, there’s Article 6 or “grey funds”, which are generalist funds that make no claims of promoting sustainability in their investment strategy, though they might still dabble with impact startups.

Approximately 55 percent of early-stage impact VC investors in Europe have publicly opted to be dark green funds, or Article 9. The rest are Article 8. That percentage is sobering, though not surprising. 

Put simply, tracking impact – whether that’s tonnes of carbon reduced from the atmosphere per year, or tonnes of would-be food waste that’s saved – is important, but hard work. It’s costly and resource intensive, proving a challenge for huge corporates, let alone early-stage, ambitious, yet resource-light startups that are likely pre-product and thus pre-measurable impact. 

If you’re a “dark green” early-stage impact investor, you must consider all this pre-investment, and support your backed startups navigate complex impact reporting as the company scales, without becoming obstructive. It’s a difficult dance, when all you really want to do as an investor is to be founder-friendly and see your portfolio companies thrive. 

All this added portfolio relations, due diligence, and impact tracking is perhaps why 45 percent opt for what can be seen as the easier way instead. But there’s missed value and opportunity here.

The higher level of impact investment provides guidance for tracking impact, as well as helps expose and reduce greenwashing, while raising awareness of the measurable impact these startups can reach in the process. These funds, as well as the companies they invest in, also get access to new or additional pockets of capital through a more diverse range of limited partners.

Rather than singling out VC peers for falling short of the higher bar of Article 9 funds, we must make it easier to understand these “dark green” efforts. A big step is moving beyond relying solely on EU regulation and allowing collaboration within the ecosystem – something inconceivable in the VC world even a decade ago.

Some funds are starting to do this by offering up their entire investment methodology and impact assessment framework for other VCs to learn from, adopt and eventually add to. This holds immense potential for a practical, data-led impact investing repository. This resource would not only allow any fund aspiring to be a true early-stage impact investor to gain the “dark green” status, but help pave the way for more founders to launch ventures addressing today’s challenges.

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By Tove Larsson via CityAM

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