Impact investing is coming to the CEE, with several funds pioneering the space and looking for impact-driven entrepreneurs to support. Across the world, VC investing in sustainability is growing, with investments in climate tech reaching a record annual level of ~$31 billion. Here, The Recursive looks at:
The most recent investments in the space;
How investors refer to the dual goal of profit and impact;
What investors are targeting in terms of geographies, themes, and criteria for investment.
New impact funds and investments in CEE
The first Croatian VC for impact investing, Feelsgood is targeting Croatian and Slovenian startups that add in measurable social impact to typical private equity/ venture capital profit goals. They recently backed BE-ON with €1.3 million. This will support the expansion of the startup, which helps financially-excluded citizens deal with credit obligations and regain access to financial markets.
The fund has also invested in AGRIVI, the Croatian-founded agritech startup digitizing agriculture to increase resilience in global food chains. By using farm management software solutions, farmers gain access to real-time agronomic and economic insights. By 2030, farmers in the EU need to produce the same yields with 50% less pesticide; so, AGRIVI is now building an AI-driven agronomic adviser to support farms in meeting these requirements.
At the beginning of the year, Czech-Republic based Rockaway Ventures launched aiming to invest €100 million in Central and Eastern Europe startups that are both digitalising traditional industries and also following environmental, social, and governance (ESG) principles. They are looking for tech disruptors across retail, media, telecom, digital logistics, cybersecurity, fintech, and digital healthcare. One of the main investors is Rockaway Capital, which has been investing in the digital economy since 2014.
Also recently launched, World Fund is the biggest climate tech VC in Europe, with a €350M target size. It was launched by German tech startup Ecosia, after gathering the support of 60 investors in less than a year. They are looking to invest in the themes that have the highest potential for decarbonization: energy, food and agriculture, manufacturing, transport, and buildings.
Other funds invest predominantly in certain sustainability themes. Luxembourg-based with Bulgaria team PostScriptum Ventures has been investing in the green energy transition since 2006, eyeing mainly more mature companies with solutions in large scale renewable energy, energy storage, energy efficiency, distributed/ off-grid distribution, and digitalization. One of their successful investments is the Slovenian company Resalta, a leading energy service company in Central and Southeast Europe helping clients such as cities improve their energy footprint.
Based in the Netherlands, with a team in Sofia, Bulgaria, Urban Impact Ventures will be closing their first fund in Q1 2022. The fund aims to direct 65% of its investments in Northern and Western Europe (The Netherlands and Germany), and the rest across Europe-based startups and the U.S. diaspora). They are specifically interested in urban innovations focused on decarbonization (energy transition, energy efficiency, urban logistics) and the circular economy (water, materials, waste).
The dual goal of profit and impact returns
For Urban Impact Ventures, impact investing is “the only meaningful path the investment industry should go now and in the near future. There’s a huge and very urgent need to put more capital at work for the better of our humankind and the planet,” Nadia Soultanova, Head of Urban Network and LP Support at UI Ventures tells The Recursive.
At minimum, it can relocate capital from sectors and businesses with largely negative non-financial impact to others working towards matching sustainability requirements, while at best it can empower impact-driven entrepreneurs to find solutions for a more sustainable future, she adds.
For Feelsgood Social Impact Investment Fund, the dual goal is to help startups on the road to becoming “impact unicorns”, companies valued at over one billions dollars that improve the lives of one billion people.
A shared view among impact investors is that taking an active ESG or impact approach to their investments is not only socially responsible, but will increase value in the long-run. Investing in companies with added social impact ensures long-term operations, by improving the performance of portfolio companies and reducing the fund’s exposure to risk.
Common sustainability investing lenses and themes
There are various sustainability investment strategies, i.e. ways in which funds integrate sustainability considerations in their investment processes and daily operations, ranging from negative screening (excluding companies in certain industries), to positive screening (selecting companies that score high on certain ESG criteria), ESG integration (integrating ESG and financial data systematically), and impact investment (looking for social, environmental, and financial returns). Some use proprietary developed frameworks of investment.
“We examine and evaluate the sustainable development goals that companies are contributing to when shaping their businesses. Achieving a positive social and environmental impact is mandatory for our companies, while in parallel we don’t compromise impact results on the financial return,” Renata Brkic, Managing Partner at Feelsgood tells us.
Aside from excluding certain industries and businesses, the fund evaluates target companies along growth and ESG criteria. When it comes to environmental impact, Feelsgood shares that companies need to comply with all applicable environmental regulations and standards and strive beyond compliance. They look for themes such as efficiency-aimed technological solutions, reducing energy consumption, waste, and emissions, and fostering the adoption of an environmental management system.
Regarding impact measurement, “Feelsgood is backed by the Impact Academic Panel, which helps our companies structure the impact they are making in clear impact criteria, and measure and report results on a yearly basis, in parallel with the financial results,” Renata adds.
Meanwhile, Urban Impact Ventures uses proprietary developed screening tools. They assess both the business and the impact potential of each investment opportunity they find in the urban sustainability space. They are eyeing startups with innovations in urban technology that bring contributions to 5 of the 17 UN SDGs: clean water and sanitation, clean and affordable energy, innovation and infrastructure, sustainable cities and communities, and responsible consumption and production.
“The impact potential is assessed with a score card along five main dimensions: contribution to our core sustainability goals; materiality of the impact; additionality of the impact; relevance to the benefiting stakeholders; and risks for underperformance. If an investment opportunity passes the minimum threshold of scores on both impact and business potential assessment, we may engage further in due diligence, deal structuring and investment,” Nadia Soultanova explains.
Later on, in the deal structuring phase, they set impact targets for companies that must be reached within their expected investment horizon. These are in line with the core impact of the business, and selected from relevant sources such as the SDG taxonomy, the IRIS Catalogue of Metrics or the Eurostat SDG indicators. Progress is then regularly measured, reported, but also linked to the performance fee of the fund.
“Setting the impact targets is always a joint effort between us, as an investor, and the management of the investee company, but it has to be aligned with the business expansion projections and embody a high enough level of ambition,” Nadia says.
Postscriptum Ventures further explains that their investments are by default positive for the environment. Metrics vary from business to business, often including the numbers of CO2 emissions removed or avoided, megawatt hours of green energy generated, or the coverage of households with renewable energy sources.
The World Fund has also developed its own methodology to assess climate performance potential, and aims to back those with the highest performance. To be eligible, startups need to save at least 100 million tons of CO2 emissions per year. Tim Schumacher, General Partner at World Fund, noted that his climate investments outperformed his other investments along the years.