Earlier this year, the US signed the biggest climate bill in history, the Inflation Reduction Act. It offers enticing incentives for climate founders to head stateside, like incentives for battery manufacturers and tax credits for climate tech more broadly. Ursula von der Leyen recently acknowledged that the continent “needs to do its homework” to keep up in the climate tech race.
But how? Marilyn Waite is director of the Climate Finance Fund and venture partner at Aera VC. She also sits on the board of the European Financial Reporting Advisory Group. Here are her suggested reforms.
1/ Remove barriers for retail investors to invest in climate
Bureaucratic hurdles at the national level and a lack of coordination at the EU level make life hard for retail investors. For example, the Spain-based renewable energy project platform, Fundeen, requires retail investors to obtain a Spanish social security number to invest, meaning that one must physically travel to the nearest Spanish consulate. This is a barrier that the EU could easily fix by mandating that any EU member state’s social security number be acceptable for EU-based crowdinvesting platforms.
2/ Make it easier to hire
Feedback from climate fintech startups indicates that there's an uneven playing field for talent. The cost of hiring is overly burdensome for green economy innovators competing with large companies for software engineers. One solution is to subsidise or forgo the employee social security tax during the first three years of revenue-bearing operations for climate startups. These “social charges” are around 45% on top of the employee’s salary in France.
3/ Launch pan-European fund-of-funds
A pan-European climate fund-of-funds could be launched, removing the capital barrier for emerging fund managers. When Munich Venture Partners attempted to set up a pan-European fund in 2020, they came up against the EuVECA Regulation which requires one country as the fund location, resulting in a long list of regulatory, operational and tax issues for the fund partners and employees located in other countries.
A pan-European fund-of-funds could help establish European climate tech companies before they move abroad, where they face strong competition from startups operating within a single financial system such as the US.
4/ Reform the European Venture Capital Fund (EuVECA) regulation
The EuVECA Regulation is prohibitive for emerging climate fund managers, given the requirement to always have €50k untouched, sitting in a bank account. “In Europe, we know women and minorities are 73% more likely to create impact ventures and are more represented in investing in themes such as climate, but these fund managers also face more obstacles in raising sufficient capital,” notes Thea Messel, partner at Denmark-based Unconventional Ventures.
Enacting these reforms will allow the EU’s climate innovation to flourish and for the benefits — employment, decarbonisation, investor returns, and a long-term viable tax base — to flow.
