Evaluating Climate Tech Investments With The EU Taxonomy

The EU Taxonomy came into force in 2020 to guide investors on how to evaluate sustainable investment opportunities. As the climate tech industry gathers pace, it has emerged as a vital framework to direct capital flow to where it’s most needed. 

The taxonomy is an integral aspect of the EU’s sustainable finance framework and is designed to create a common language for what “sustainable” means. It helps investors back companies that support the transition to a low-carbon economy by providing a unified assessment criterion. 

An estimated $5.7 trillion of annual investment is required to reach Net Zero by 2050. The framework is pivotal to steer funding towards projects that genuinely move the needle on the EU’s sustainability goals such as those outlined in The Paris Agreement. Without it, greenwashing could slow progress, and investor confidence could be lost, putting future funding at risk. 

What are the six environmental objectives? 

The EU Taxonomy outlines six environmental objectives as part of its framework for sustainable economic activities. 

1. Climate Change Mitigation: Companies hitting the brakes on greenhouse gas emissions such as Carbon Limit and Treefera.
2. Climate Change Adaptation: Solutions helping prepare for the negative impacts of climate change like weather extremes, rising sea levels, or food and water scarcity.
3. Sustainable Water & Marine Resources: From rivers to oceans, this objective ensures we’ll continue to have access to clean and healthy water. Startups addressing this goal include Wayout and Boon.
4. Transition to a Circular Economy: Companies reimagining waste as a resource by creating systems for reusing, recycling, and reduction. Leading circular economy players include the online grocery platform Picnic and sustainable battery company Verkor.
5. Pollution Prevention & Control: This involves cutting emissions of pollutants into air, water, and land such as mobility-as-a-service company Verne.
6. Protecting Biodiversity & Ecosystems: Whether by conserving habitats or restoring ecosystems, these efforts are about keeping nature’s delicate balance intact. 

These criteria set the bar, ensuring that only activities with a significant positive impact on these objectives are deemed sustainable, and keeps greenwashing in check.

How do the EU’s technical screening criteria work?

The EU’s Technical Screening Criteria (TSC) is the backbone of the EU Taxonomy and can be broken down into three pillars. 

• Substantial Contribution: For any economic activity to earn the label of “sustainable,” it needs to either make a big impact on —or help other activities significantly contribute to –  at least one of the six environmental goals laid out in the EU Taxonomy.
• Do No Significant Harm: For an activity to qualify as sustainable, it can’t cause significant harm to any of the other 5 EU Taxonomy objectives. In other words, you can’t fix one problem by causing another.
• Minimum Social Safeguards: This pillar is about social responsibility. Companies must show that their social safeguards comply with the standards set by the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

The TSC has a two-tier system: general criteria apply across key environmental objectives and sector-specific criteria tackle the unique challenges of different industries. As of last year, all large and listed EU companies need to report on their sustainability performance under the Corporate Sustainability Reporting Directive (CSRD). This is a huge leap forward towards encouraging companies to embrace more sustainable practices and give stakeholders the insights to gauge the impact of their investments.

Do investors need to report under the EU Taxonomy?

In the EU, some investment firms need to report on their activities too. This report is filed under The Sustainable Finance Disclosure Regulation (SFDR), which requires investors to disclose how their portfolios align with the EU Taxonomy. Funds typically fall into one of three categories based on their investment approach.

• Article 6: Funds without a sustainability focus e.g Atomico and Index Ventures
• Article 8: Funds like Project A and Speedinvest, backing some environmental and social activities
• Article 9: Funds with a core sustainable investment objective or those that integrate ESG into their investment decisions such as Planet A Ventures

Funds under Articles 8 and 9 must show how they weave sustainability into their investment choices, disclose ESG traits, count their sustainable investments, and reveal any negative environmental impacts. The EU Taxonomy steps in as a handy framework here, helping funds assess whether their investments tick the sustainability boxes.

The EU Taxonomy as an investment playbook

Reporting apart, the EU Taxonomy can serve as a useful framework for investors to evaluate climate tech opportunities. Here’s how:

• The EU Taxonomy as a Playbook: The EU Taxonomy can help identify and evaluate investments that match up with the EU’s environmental goals, like cutting carbon and adapting to climate change.
• Technical Screening Criteria: Make sure those climate tech investments meet the technical standards set by the EU Taxonomy. These criteria are the yardstick for measuring if an activity genuinely pushes the needle on environmental goals.
• Climate Performance: Whether you’re reviewing individual projects or an entire portfolio, the Taxonomy can help you gauge how well investments stack up against climate benchmarks.
• Look at Transition and Enabling Activities: Not all green investments are created equal. The Taxonomy helps you distinguish between what activities are truly considered sustainable. It’s crucial to see if your investments fall into these categories and hit the right sustainability targets.
• Leverage EU Taxonomy Tools: Tools like the EU Taxonomy Navigator can be your guide—offering visual maps of sectors, reporting calculators, and handy user guides.
• Align with EU Green Bond Standards: If you’re investing into green bonds, aligning with the EU Green Bond Standard (based on the Taxonomy) can add a layer of credibility and sustainability to your investments.

Criticism of the EU’s Taxonomy Framework

While this sounds all and well in theory, it can be hard in practice. For companies, navigating the reporting requirements can be challenging. Teams often scramble to collect the necessary data to meet the requirements and the report itself is no picnic in the park either, with intricate templates and a long list of KPIs to check off.

Then there’s the gray area in the rules. The framework leaves room for interpretation, resulting in reporting guesswork. Meeting the minimum safeguards criteria—covering social and governance standards like human and labor rights—creates another hurdle. 

So what’s needed? There’s been a call for clearer, more detailed guidance on the TSC across sectors. Companies need a better grasp on what exactly counts as taxonomy-aligned, and how to hit those targets. More straightforward explanations and concrete examples of how to approach KPIs and ambiguous terms would make the process easier. With better tools, companies could navigate the EU Taxonomy easier, leading to more consistent and transparent reporting.

The EU Taxonomy and Net Zero Insights

At Net Zero Insights, we use The EU Taxonomy to classify climate tech solutions depending on what activities are core to their companies. Our platform goes beyond Europe, mapping the entire global climate tech solutions landscape. By offering in-depth insights, we help investors quickly scout and identify new and niche players, and streamline sourcing and market research.