Funding the cleantech transition: An interview with Isabelle Canu

Cleantech for Europe had the opportunity to catch up with Isabelle Canu, a sustainable finance expert currently serving as Partner at the Green European Tech Fund. We discussed how regulation can provide the right finance to the right place at the right time to support scaling cleantech innovation, and how to avoid an unruly transition.

The topic is as hot as ever. On June 13, the European Commission published a new Sustainable Finance package. The package aims to “ensure that the EU sustainable finance framework continues to support companies and the financial sector, while encouraging the private funding of transition projects and technologies.”

Some highlights of the package include:

• A new Environmental Delegated Act including the technical screening criteria for the remaining four environmental objectives under the EU Taxonomy Regulation

• Amendments to the EU Taxonomy Climate Delegated Act introducing technical screening criteria covering additional economic activities for the climate change mitigation and adaptation objectives under the EU Taxonomy Regulation

• Proposal for a Regulation on ESG rating activities.

‍

With Isabelle, we took stock of the state of play of sustainable finance regulation in Europe’s efforts to scale innovative clean technologies.

‍

Cleantech for Europe: How do you view the implementation of the SFDR thus far?

Isabelle Canu: The implementation of the SFDR in Europe is a significant step towards promoting sustainable finance. The SFDR has raised awareness about sustainability in investment decision-making at the level of the general partners and of the limited partners.

As a result, limited partners have pushed their expectations into the market so that only very few new funds have classified themselves as “Article 6” funds. These are conventional funds without any specific approach of ESG risks or negative impact in sustainability factors. Therefore most of the new funds belong to the “Article 8” product category, meaning that they assess in some way potential negative impacts of the investment on environmental or social factors.

Despite the SFDR’s impact on transparency and accountability, investors still grapple with SFDR’s elaborate disclosure requirements. The challenges include the complexity of the regulation, inconsistent interpretation, data availability and quality, and the need for harmonization across jurisdictions. Take for example periodic disclosures under the SFDR. Data was collected at the portfolio companies by their investors and at the fund managers by their LPs for the first time this year to publish the first SFDR reports by June 30, 2023, but the uncertainty of the use, relevance, or control of this data is big.

For limited partners it is necessary to read carefully the “precontractual disclosures” of each financial product to know to what extent the fund managers have a serious approach of ESG and impact. Referring to a product category as such alone is not informative enough. Transparency requirements in the sector of venture capital is very complex, most products now belonging to the same product category of Article 8. Many managers claim to have an “Article 9 type product” but classify themselves as Article 8 product so that they do not have to meet all the requirements. It seems that Article 9 products are not yet considered a USP or are not demanded enough by the market.

Cleantech for Europe: What is key in bringing sustainable investment and measurement to the next level?

Isabelle Canu: To bring sustainable investment and measurement to the next level, I see four key factors:

• Firstly, it is vital to develop globally accepted standards and frameworks for assessing ESG compliance. Assessment models using red flags are more powerful than ESG ratings in which very negative impacts can be compensated by “plus points” gained through other aspects. The combination of the “principal adverse impacts on sustainability factors” and the “do no significant harm” are the key drivers for a meaningful assessment of ESG.

• Secondly, methodologies and tools to support the development of sustainable business models need to be improved, to enable accurate impact assessments of investments. Munich Venture Partners have adapted the science-based approach called “Triple Top Line” developed by William McDonough & Michael Braungart. With the Triple Top Line, we analyse the dynamic interplay of economic, ecological, and social equity targets. Thus , it shifts the focus from negative value judgements (risk minimisation) to questions of quality and enhancement (active value creation). Additionally, it offers a holistic approach. The goal of the exercise is to develop the business model with an equilibrium between the three dimensions of economy, ecology ans social equity, without disregarding any one of the dimensions. By doing this, we maximize value on all pillars and define a sustainability agenda with each portfolio company and define nine relevant impact KPIs bottom up and adapted to the specific business model.

• Thirdly, awareness and education among investors about the difference between ESG and impact – as well as about impact investing best practices – should be promoted

• Fourth, we should all encourage collaboration among stakeholders, including investors, fund managers, start-ups, supervisory authorities, and governments, so that they can drive sustainable investment forward.

Cleantech for Europe: What are currently the biggest regulatory challenges in cleantech investing?

Isabelle Canu: The biggest regulatory challenges in cleantech investing include regulatory uncertainty due to ongoing policy changes. After key regulations like the SFDR and the Taxonomy Regulation, all capital market regulations need to be adapted and Level II standards need to be defined. This means that fund managers need to continuously remain up to date. Of course, the taxonomy itself is an issue for two reasons: firstly, it currently only targets climate issues. Secondly, it has not been developed for small-scale companies, so it is not appropriate for early stage investments in start-ups. The biggest challenge is the coordination of all the regulatory frameworks with the various reporting standards and global goals. A reduction of complexity and of administrative burden is key to enable capital flows into cleantech. Tracking data on ESG and impact only makes senses if the data is relevant. By compiling all types of questionnaires to the most comprehensive questionnaire is for our type of investments into start-ups the wrong approach.

Is there a question that you find yourself not getting asked that you think, based on the conversations you have in your role with Green European Tech Fund, you should be asked more?

Isabelle Canu: I am surprised that the interdependency between SFDR and CSRD - the Corporate Sustainability Reporting Directive has not yet unfolded the full effect in our discussions with potential LPs complying with the non-financial reporting requirements. According to CSRD, corporates must disclose their sustainability risks and negative impacts and opportunities based on the Taxonomy in their non-financial reports. So, on one side the CSRD will enable financial market stakeholders to comply with the SFDR (thanks to the information public fund managers get on the underlying corporates). On the other side, the SFDR will enable the non-financial and financial corporates to comply with the reporting requirements on their financial assets. For the time being, this is not yet implemented in the asset allocation strategy of the corporates. The push on Article 9 products is not noticeable on the market. At some point stakeholders will analyse the discrepancy between sustainability strategies and the published allocation on the different product categories.

Another unasked question about investments in cleantech revolves around innovative financial instruments for sustainable projects, and the role of public-private partnerships in mobilising sustainable investments to develop the needed infrastructure for the eco-industrial revolution.

Cleantech for Europe: What’s on your sustainable finance regulation wish list?

Isabelle Canu: More so than a specific item on the sustainable finance regulation wishlist, we need the various regulatory elements which interact with each other to develop to their full synergetic effect. If that was the case, institutional investors would allocate more to sustainable assets.

We also need a consistent interpretation of the implementation of the regulation through different national supervisory authorities. This cooperation is necessary to develop and implement internationally (at least in Europe) harmonised standards for ESG assessment and disclosure, as well as for impact measurement and reporting. Providing regulatory certainty and stable policy frameworks will encourage long-term sustainable investments.

This interview is part of our ongoing series Voices of Innovation, where we convene cleantech investors to discuss challenges, opportunities and trends of the cleantech transition in Europe.

‍

‍

‍