The European Sustainable Finance Disclosure Regulation (SFDR) was designed with the goal to create a common understanding among all financial actors of funds’ sustainability claims. This regulation requires investors to be transparent about their fund’s sustainability-related investment processes, investment choices, and their sustainability data.
To address varying levels of sustainability ambition, a classification system was developed accompanied by corresponding reporting templates. Funds with high sustainability ambitions, are classified as Article 9 funds, and these must comply with the most stringent and complex regulatory requirements, including “Sustainable Investments” and demonstrating how these contribute to a fund’s specific “environmental or social objectives”.
In this Interview, Pierre Kiener and Juliette Raoul-Fortésa from Capagro’s investment team share feedback from their experience after having gone through the process of classifying their latest fund as a SFDR Article 9 fund together with the Cority team.
Capagro is a French leading venture capital fund dedicated to AgriTech and FoodTech. Established in 2014 and with 124M euros under management, Capagro’s mission is to foster sustainable agriculture and healthier food production, Capagro invests in innovative companies within these sectors.
Why did you choose to classify your fund as an Article 9 fund?
Since Capagro’s creation, our team has aimed to invest in companies which contribute to generating a more sustainable agriculture sector and healthier food sector. With the SFDR coming into force two years ago, we recognized that our goal aligns with the philosophy of an Article 9 fund. Therefore, classifying our latest fund as an Article 9 fund, was both a natural and relevant step for us to take.
As part of this process, we were required to define the fund’s expected sustainability outcome. This takes the form of environmental and social objectives to which our investments contribute. In order to comply with the SFDR we had to develop Capagro’s methodology of identifying “Sustainable Investments”. We also had to review our investment selection process accordingly.
We quickly realized that this work on formulating our investment targets and reviewing our investment selection criteria helped us attract committed investors. Specifically, those investing in Article 9 or Article 8 funds that have a sub-pocket of sustainable investments.
Can you explain the process you have followed to be classified as an Article 9 fund?
To ensure regulatory compliance with an Article 9 SFDR classification, we were aware of the time needed to define a “Sustainable Investment” methodology aligned with our investment thesis. However, we weren’t too restrictive for our investment team and target investments. We were also conscious of the challenges that awaited us especially with respect to the increasing complexity of reporting requirements. We also fear that our investments, our start-ups will not follow us in this more demanding reporting approach.
“We tried to develop our sustainable investment definition on our own, but Cority was a great help in decrypting the SFDR regulation.”
With these theoretical aspects in mind, we embarked on a transition that occurred in two stages. We first classified our existing fund as an Article 8 fund, and subsequently, we transitioned to an Article 9 fund.
Prior to reaching out to Cority, we tried to develop a methodology on our own, however it was challenging to disentangle the regulatory requirements of the SFDR regulation without the help of external SFDR experts.
Cority’s consultants helped us understand compulsory requirements, good market practices and how to develop an ambitious approach while maintaining our original investment thesis. We were therefore able to define a methodology in line with the regulation without restricting the potential investment targets.
Is the Article 9 classification easier if you have already created an impact fund?
Even before considering the Article 9 classification, we defined specific impact indicators for each of our investments, in order to track the progress and impact generated by investments.
Being an impact fund before becoming an Article 9 fund has enabled our investee companies to get used to reporting requirements. We have always collected ESG data from our start-ups. However, to be compliant with Article 9 reporting requirement and market practices, we had to increase the number of datapoints. Even though this year’s increased reporting burden, we were able to maintain our response rate at 85%.
What (high-level) approach did you take to defining Sustainable investments?
To define our sustainable investment definition, we decided to adhere to the European Green Taxonomy and its technical criteria. In the near future, this framework should cover all the sustainable activities. Therefore, it will provide a uniform and harmonized framework understood by all financial and corporate actors.
However, since the EU Green Taxonomy does not yet integrate all eligible activities, for instance agriculture and food sectors are not yet integrated, we have developed our own methodology using Capagro’s six proprietary environmental and social investment objectives (focused on providing healthier food, improving the circularity of production systems, reinforcing safety, health and well-being of consumers), which are also linked to UN Sustainable Development Goals.
In order to quantify as much as possible our “Sustainable Investments” we calculate the share of turnover or OPEX of investee companies. This contributes to our 6 sustainable investment objectives defined by Capagro. For our investments to be defined as sustainable, this share must exceed 60%.
Cority’s team supported us in defining this threshold based on benchmark data as well as data collected from previous investments. This allowed us to ensure that the thresholds defined are both feasible and yet ambitious.
What were the main challenges you have experienced in defining your sustainable investment definition?
The main difficulty in developing our sustainable investment methodology was to define sustainable investment objectives applicable to all our priority business sectors. Our concern was to exclude certain sectors of activity or certain investee companies due to their limited maturity or size.
For example, we decided to include pre-revenue amounts in our sustainable investment thresholds. This allows us to cover a wide range of company maturities and limited data availability.
“The use of benchmark data is key to defining an ambitious approach in line with regulations”
For the pre-contractual document, it was also difficult to define a minimum level of commitment to environmental and social objectives, before even launching our fund. However, as our fund specializes in environmental themes, we quickly were able to agree on an ambitious commitment level. We were able to define this by using benchmark elements and by testing it on our previous fund’s data.
What is your piece of advice for other investors embarking on the definition of a sustainable investment methodology?
We advise referring to publicly available investment methodologies of similar players to keep in mind the approaches followed, and the level of ambition expected in the market.
Similar to our approach which relies both on the EU Green Taxonomy and the UN SDGs, many actors nowadays build a “Sustainable Investment” approach on several frameworks and methodologies, in order to account for future investments’ different sectors of activity, sizes and data availability. Indeed, considering alternative methodologies allows you to ensure that your methodology is applicable to all types of investments.
Moreover, we suggest building on the existing DNA of the management company, its practices, and data as much as possible. This will enable you not to start from scratch and stay true to your original investment thesis. This also allows you to test your methodology on previous investments (if available), before putting it into action.
What is next for Capagro?
The main steps are to ensure that our investment teams are sufficiently trained on this approach. Besides, as all Article 8 and 9 funds, the next steps consist of collecting all relevant data and completing the regulatory periodic reporting templates, to be shared with investors.
Going forward, we are also planning to start calculating our portfolio’s alignment with the EU Green Taxonomy and to start the work on data availability with our portfolio companies.
Glossary:
- SFDR (Sustainable Finance Disclosure Regulation): A European regulation aimed at increasing transparency in the market for sustainable investment products.
- Article 9 Funds: Funds with the highest level of sustainability ambition under SFDR, required to have specific sustainable investment objectives.
- Sustainable Investments: Investments in economic activities that contribute to environmental or social objectives.
- EU Green Taxonomy: A classification system establishing a list of environmentally sustainable economic activities.
- UN Sustainable Development Goals (SDGs): A collection of 17 global goals designed to achieve a better and more sustainable future for all.
