Making the EU Taxonomy Fit for Cleantech Innovation
September 24, 2021
Cleantech for Europe is an initiative giving a voice to the vibrant ecosystem of EU cleantech innovators and investors, who are developing technologies and business models that can help us lead the race to net zero. Our community includes pioneer EU cleantech venture capital investors, with decades of track record of investing in early-stage technologies for decarbonisation and sustainability. The start-ups and scale-ups (innovative SMEs) in which they invest are high-risk, often capital-intensive and need significant support to scale up. According to the IEA, these technologies that are not yet on the market could deliver almost half of the emission reductions needed to get to a net zero path.
Scaling up the EU’s clean technologies is key to our future climate and industrial leadership, but for this scale-up to succeed, we need strong demand signals for clean technologies, an appropriate regulatory framework and the right financing environment. The EU Taxonomy is an important tool to direct funding towards sustainable innovation.
In this context, Cleantech for Europe and 9 co-signatories, all leading EU cleantech venture capital funds and investment experts, would like to provide feedback on the draft report by the Platform on Sustainable Finance on preliminary recommendations for technical screening criteria for the EU taxonomy.
Our analysis concludes that:
As a result, we propose to widen the scope of activities considered by the Annex, especially on enabling technologies, and to add a streamlined verification process for innovative SMEs engaged in sustainable activities.
1. Enabling technologies are critical to climate change mitigation
In the context of cleantech, enabling technologies are digital or hardware technologies, or combinations of the two, that indirectly enable economic activities to decarbonise. They are instrumental in the transition to net zero, as they provide the foundation for sustainable technologies to be widely deployed.
For example, the uptake of electric vehicles depends on the development of charging infrastructure, as well as enabling technologies such as software for battery management, for charging optimisation and for communications between charging stations and the electricity grid. Although these technologies only provide indirect carbon reductions, it is appropriate and important for them to be eligible in the Taxonomy.
2. Important enabling technologies are missing from eligible activities
Cleantech for Europe affiliates identified among their portfolios more than 30 cleantech start-ups and scale-ups active across 23 such sustainable enabling technology activities. A list of these companies and activities is available in Annex 1.
While the draft report by the Platform on Sustainable Finance makes a significant effort to identify a number of enabling activities and technologies, we found that more than half (14) of the 23 activities we listed are not covered by either the June 4 Delegated Act of this draft report.
We recognise that the European Commission intends to extend the list of eligible activities at a later date; however we believe this carries a risk of putting the sustainable activities not included at a funding disadvantage.
Below are examples of activities we believe should be considered:
The annex containing the full list of Technical Screening Criteria (Part B) lays out considerations for the manufacture of renewable energy and low-carbon heating devices. However, the facilitation of sales and installation of renewable energy and low-carbon heating for EU households is not covered.
Founded in 2018, Czechia-based innovative SME company Woltair is an online marketplace helping homeowners and tenants switch to renewable energy and low-carbon heating. The company helps clients find the right energy solution for their home, provide financing and maintenance services, as well as help to claim state subsidies for transitioning. The marketplace provides independent comparisons of different brands, allowing consumers to choose the most effective and cost-efficient solution. Woltair has 90 employees. The company is preparing to enter the Polish market, and aims to expand into other EU countries. Woltair has facilitated over 1,000 installations and repairs in Czechia, and calculates that this has resulted in CO2 savings of 3,500 tons/year.
Currently, neither section 2.9 (Manufacture of equipment generating electricity and/or heat) nor section 3.3 (Electricity generation using solar photovoltaic technology) mention this enabling activity.
Another example is sustainable agriculture. The annex lays out criteria for sustainable agriculture, without listing relevant enabling activities. We believe that technologies such as sensors and software analytics are key to making a more sustainable agriculture possible.
Founded in 2016, Denmark-based innovative SME Nordetect provides instant nutrient analysis of water and soil samples. The company is developing a device which allows growers to analyse samples on-site without the need for laboratory analysis. The device can analyse water, soil and plant tissue, measuring nitrate (NO3), phosphate(PO4), calcium (Ca). Growers can monitor the state of their soil, plants and water more easily, leading to a reduction in the application of fertilisers and pesticides. Nordetect’s solution also includes a data platform so that trends can be monitored and analysed. This enables transfer of knowledge and best practice, and therefore proactive avoidance of future pollution due to fertiliser over-use.
The current scope of activities in section 1.2 (Crop production) of the Annex of the Taxonomy pack does not include measurement and analysis activities and therefore we conclude that Nordetect would not be eligible for Taxonomy alignment.
In the annexed table, we identify a number of other innovative enabling activities that are not covered in the Full List of Technical Screening Criteria detailed in the report annex (Part B). Examples include:
The fact that these activities are not yet covered will reduce innovative SMEs’ ability to raise funding to develop these technologies and deploy them in the EU.
3. Keeping the list of eligible activities in line with the vast portfolio of technologies being developed to get to net zero is a near-impossible task
As the sample list above shows, new enabling technologies for sustainability are constantly being developed at a fast pace, inventing or adapting technologies from other sectors to sustainability challenges. Predicting what enabling technologies and applications may emerge in the coming years is not possible.
The task of maintaining an up-to-date list of enabling technologies for sustainability will be very challenging, if not impossible. However, it is very important that newly emerging enabling technologies are Taxonomy-eligible, so they can raise the appropriate financing to develop and enable climate leadership.
To remedy this challenge, we propose to include a general provision about enabling technologies for sustainability, making them eligible by default if they provide a significant contribution to sustainability objectives.
At a minimum, a less desirable option would be to include an annual revision mechanism to consider new enabling technologies or new applications of existing technologies. Cleantech for Europe affiliates would be happy to provide input to such revisions. Venture capital investors are constantly exposed to emerging technologies while evaluating potential portfolio investments and as such are well placed to identify technology trends which are still under the radar for other parts of the economy.
4. For eligible activities, Screening Criteria should be fit for innovation
As venture capital investors, our affiliates invest in and support the growth of early-stage, sometimes pre-revenue companies and technologies. These start-ups and scale-ups (innovative SMEs) are typically on fast growth trajectories; this growth provides the opportunity for important future climate change mitigation. We believe they align very strongly with the Taxonomy’s objectives.
Documenting Taxonomy eligibility and alignment can be an onerous task for small companies. We propose to add a streamlined verification process for innovative SMEs engaged in activities enabling sustainable impact.
In particular, innovative SMEs report the following issues with measuring and documenting Taxonomy alignment:
Estonia-based start-up Reverse Resources develops a software platform to track and trade textile waste. Textile waste is separated and categorised at source to optimise reuse rates and value for each type of material, meaning that waste is reused in the best possible way, with cascading impact throughout the waste hierarchy. The company aims to ensure traceability for all materials, and to provide materials at a cost not exceeding virgin material, ensuring that implementing circular economy principles becomes financially viable.
Reverse Resources was founded in 2014 and currently has 14 employees. The company is at a critical stage of development as it works to convert initial positive customer validation into material market traction.
The company’s activity is covered by section6.6 of the TSC annex.
To meet the proposed technical screening criteria the company would have to:
These verification procedures require significant time and resources. Typically a start-up at this growth stage needs to invest all of its limited resources into developing its solution and gaining market traction in order to be successful: it is a critical stage in which start-ups which do not grow sufficiently fast become unable to raise the capital they need to finance their scale up stage.
We therefore suggest a streamlined verification process for companies developing solutions under a certain TRL (for example, TRL 6), or below a certain number of employees (for example, 50). Based on ‘Nature of the activity’ criteria, we believe companies should be automatically considered as Taxonomy aligned during this critical early growth stage.
We thank the Platform on Sustainable Finance for their attention and are available to discuss any of these questions in more detail, or to organise a follow-up discussion with cleantech investors and/or start-ups at your convenience.
Signatories
Read the full analysis of enabling technologies in Cleantech for Europe Leaders portfolio companies, and their coverage in the first Taxonomy Delegated Act and current Taxonomy pack for feedback here.
