Even before the health crisis that began in 2020, there was a growing realization that we would not last long on this planet without contributing to achieving the climate goals. Today, the war in Ukraine, the tense geopolitical situation and the energy crisis have inevitably caused polarization in this way of thinking. Some are ready to throw the entire idea of the green transition in the trash to find quick solutions, while others are prepared to invest in it as much as possible to immediately start moving towards future solutions.
Sille Pettai, a member of the management board of SmartCap, shares the understanding that we can no longer manage without investments in the green economy and living arrangements: “It is the last time to make a strong contribution to change. Already today, the state can significantly change direction – through knowledge and awareness raising, by example and financial contribution. Although more money circulates in the start-up sector than ever before, private fund managers are still quite conservative when it comes to investing in science-intensive physical technologies, which are a prerequisite for the green transition. This is where a public fund can make anchor investments and attract additional private money.”
State investments inspire private investors
This spring, a market survey among entrepreneurs and investors in the green field, conducted on behalf of SmartCap, confirmed that research-intensive green technologies and products/services aimed at mitigating climate problems have a long development cycle, are often non-software solutions, and have a high level of technological risk associated with them. Thus, private investors often need additional motivation.
Taking these assumptions into account, SmartCap started investing in a new national investment fund – the Green Fund. “From the 100-million-euro fund created using the resources of the European Recovery and Resilience Facility, we plan to invest – mainly through venture capital funds – in companies that deal with the creation of technologies for solving environmental problems and achieving a climate-neutral circular economy,” Pettai describes.
In the first phase, the resources of the Green Fund will be made available to private-sector green investors and will be put in professional investment funds specializing in green technologies. “We are ready to invest into two green technology investment funds, the main purpose of which is to support early-stage green technology companies with high growth potential operating in Estonia.”
Thus, one prerequisite for the green transition in Estonia has been created. “In addition to establishing funds, we plan to start making direct investments in green technology start-ups in the near future, so that green solutions reach the market even faster. Today, we can use public money to give momentum to companies whose business ideas need money, and our actions could also encourage other investors to join,” notes Sille Pettai.
A separate and very important question is how we define green start-ups, business ideas, technology and investment. “There are already a few hundred innovative technology companies in Estonia today, whose product, service or business model contributes to solving environmental problems. The question is whether their activities also comply with the principles of a sustainable and climate-neutral economy – the taxonomy of the European Union.”
The company’s activities as a whole must be green
“Let’s try to define what is green in general. According to the taxonomy of the European Union, it includes initiatives related to climate change mitigation and adaptation, water resources protection, circular economy, pollution prevention and reduction, as well as protection and restoration of natural diversity and ecosystems.” This list is important – it helps to understand whether the company contributes to one of these goals and allows both entrepreneurs and investors to define which activities are environmentally sustainable.
The rules of the taxonomy even more precisely define what must be achieved and what conditions must be met. “Therefore, if you want to know whether (and to what extent) the technology and the company are green, you must first compare the goals and taxonomy rules stated above with the company’s tech, goals and activities,” explains Pettai. The technical criteria also include specific numerical values to help assess whether the company is sufficiently contributing to the objectives of the taxonomy.
In addition, the “do no significant harm” (DNSH) principle must also be considered. It means that the company’s economic activity does not cause damage to the environment as a whole. It is also necessary to make sure that the company also complies with the so-called minimum requirements in terms of human rights, company management practices and work culture. While also ensuring that the entire supply chain and its partners follow these same standards.
To sum up, when trying to answer the question of what a green company is one should first make sure whether its activities contribute to the achievement of at least one of the environmental goals set out in the taxonomy of the European Union and that it does not cause damage to the environment as a whole. Since it may be difficult to follow the EU taxonomy exactly in the start-up sector, where the product is often still in the development phase and there is no sales turnover, we also try to simplify its evaluation for market participants when establishing the Green Fund.
SmartCap Green Fund is financed by the European Union NextGenerationEU Recovery and Resilience Facility funds.
The article was first published in Estonian language in a publication called Green Footprint (Roheline Jalajälg) and it is also available in Delfi green news subsite Roheportaal.
