6 steps to solving the EU Taxonomy for investment firms

Kommentar: How green is your portfolio? Now the EU requires you to disclose it, within January.

Kommentar - 6 steps to solving the EU Taxonomy for investment firms
Kommentar - 6 steps to solving the EU Taxonomy for investment firms

Bildnachweis: Pixabay.

For everyone who likes obscure abbreviations, sustainability regulations these days are a gold mine. NFRD, SFDR, CSRD, ESRS, TCFD — name a four-letter abbreviation and there’s a fair chance some organization or legislative body has already made use of it.

As an investment firm, one of the abbreviations you should really care about is SFDR: the
Sustainable Finance Disclosure Regulation. Already in effect, the EU regulation requires
alternative investment funds (AIFs) that market in the EU to classify themselves as one of
the following:

  • Article 6 fund: Sustainability not considered as part of investing
  • Article 8 fund: Sustainability is considered
  • Article 9 fund: The fund has a sustainability objective (e.g. the fund was created to help reduce climate gas emissions)

Article 6 funds are required to disclose a statement on why sustainability is not considered.
If you choose to classify your fund as article 8 or 9, there are three main groups of
disclosure requirements:

1. EU Taxonomy
2. Principle Adverse Impact indicators
3. Process and procedures disclosures, such as sustainability due diligence process, investment strategy, etc.

Of these, 1) and 2) will require data collection from your portfolio companies, with the EU
Taxonomy being the most challenging (and the focus for the recipe to come, just hold on!).
While you can always estimate a company’s EU Taxonomy score based on publicly available
data, getting a correct and precise score will require accurate data.

Ready to engage your portfolio companies, you’ve got to make the process efficient
and hassle-free for them. You want to be a cool investor, adding more value than red-tape
to your investees. With these 6 steps, you’ll save both yourself time and money — and, not to forget, you’ll get it right:

1. Screen your portfolio companies for eligibility with the EU Taxonomy

Before finding a solution to your challenge, figure out how big the challenge is. Likely,
somewhere between 10% and 40% of your portfolio companies may be fully or partially
eligible for the EU Taxonomy and will have to be assessed. Eligibility screening can be tricky and is done the fastest with the help of experts. In this step, you try to match what your portfolio companies do with one of the 115 activities defined in the EU Taxonomy.

2. Structure each company in reporting units and match with EU Taxonomy activity

The last step gave you a shortlist of companies to progress with. Now, hit up those
companies and verify that the activities that you mapped to them in fact represent the full
extent of activities they conduct. Often, they do more. Then, define the natural “reporting units” of the company. Typically, this should follow sites, product lines or projects. Before moving on to the next step, map the relevant activities to each of the reporting units.

3. Match reporting units with financial data

The EU Taxonomy is linked to companies’ financials in the same way that your fund’s
performance is linked to your investment allocations. Now, match each reporting unit with its associated turnover, capital expenditures (CapEx) and operating expenses (OpEx). Remember, no double counting!

4. Assess each activity against the technical criteria

Qualifying for an activity (thus being eligible) is not enough. You’ve also got to be compliant with the criteria in order to be considered sustainable. If you’re both eligible and comply with the criteria, you’re EU Taxonomy aligned. For an activity, there may be 20–30 criteria. Most of them, you as an investor very likely won’t be able to answer. So, if you haven’t already engaged them, get your portfolio companies’ operations folks to help you — or you won’t get past this step.

5. Aggregate fund results

You did it! You’ve assessed the eligibility of your portfolio companies and received the
required data from the ones that qualified for the taxonomy. Based on each reporting
unit’s EU Taxonomy alignment and the weights of turnover, CapEx and OpEx, you have
calculated weighted average taxonomy scores for each portfolio company. It’ll get easier
from here. To get to disclosure-ready data, use each company’s score and the latest market value of each investment as weights to get the weighted average score for the entire fund. This is the fund’s EU Taxonomy score.

6. Report results as part of product and periodic disclosures

Hold it, you’re not done yet. Now you’ve got the data — the last step is to report it correctly. The EU has specified formats for how it should be done, in pre-contractual disclosures and for website and periodic reports. As with financial reporting, taxonomy score data should be updated at least annually.


That’s it. Good tools can help you get it done correctly in a fraction of the time it takes without them. Not by cutting corners and potentially providing the wrong information to investors, but by easing data collection both for you and the portfolio company, and guiding them through what would otherwise be a long manual process, run by you. And, again like accounting: the job can be done in spreadsheets (which will be a lot better than slides and emails), but like accounting, a purpose-built tool will save you and your portfolio companies time (and frustration).

About the author:

Celsia is a Norwegian software company that simplifies sustainability reporting for VC and PE firms. Celsia works with investment firms like Summa Equity or Eurazeo to make data collection from portfolio companies and reporting in accordance with SFDR simple (incl. EU Taxonomy and PAI indicators). More about Celsia here.