The world is witnessing an exciting and necessary surge in climate tech startups, with the impact tech sector up by 64% since the end of 2020. And with that increased supply, a new breed of investor has come to the fore: the impact VC.

As an impact specialist working within a VC, I’m committed to supporting founders in achieving their ambitious goals and invoking positive change. To help drive more trackable impact investments, here are five key questions that all founders should consider asking impact investors competing for a space on your cap table.

Are you actually an impact investment fund?

First things first, you need to learn the jargon. The recent implementation of the Sustainable Finance Disclosure Regulation (SFDR) in the EU has brought clarity to fund categorizations. It’s important to discern whether the investor is an Article 6, 8, or 9 fund; understand the difference and know what this means for you, as a founder.

Article 9 funds, like us, are exclusively focused on sustainable investments, with impact as an investment objective. They’re also called “dark green funds.” One level down, we have Article 8 funds, which aim to promote environmental and social characteristics without an exclusive commitment to sustainability. That’s a “light green fund.” Lastly, there’s Article 6, otherwise known as “gray funds.” They make no claims of impact or sustainability, though they might dedicate some aspect of their funds to sustainable investments.

In addition to regulating funds under SFDR, the EU has provided guidance on what economic activities they consider to be environmentally and socially sustainable, and especially impactful. This is what’s called the EU Taxonomy, a classification of business areas that warrants more capital, innovation, and attention, as these will truly move the needle for our planet and humanity.

Choosing between Articles 8 and 9

Most VCs operating today will fall into the Article 6 category, as generalists, so we’ll exclude them outright here. For climate tech founders, opting for specialist impact investors (Article 8 or 9 funds), it’s advisable to stay impact aligned. Currently, it’s around 50-50 in Europe for impact VCs complying with either Article 8 or 9.

When dealing with Article 8 funds, they will likely ask you to show that you align with several environmental or social criteria that they’ve defined as especially important, such as the Principal Adverse Impact (PAI) indicators, which assess negative sustainability impacts of investment decisions or advice. They’ll also show you how to identify and work to mitigate sustainability-related risks.

Article 9 funds do this and more, asking you to walk the talk. They’ll demand more tangible evidence of what environmental or social impact your company is having, and how you can measure this over time. They emphasize the need to avoid causing significant harm and to run the business responsibly, both with internal operations and throughout the value chain.

It sounds like hard work but opting for an Article 9 fund offers several advantages. In many ways, Article 9 funds are often perceived as the “real deal” in the market, providing an impact stamp of approval within the investment syndicate that builds brand credibility in your startup. As your company grows, this status should give you access to pools of more diverse capital that non-impact companies cannot obtain.

Which impact key performance indicators (KPIs) do you prioritize?

Given the nuance of SFDR regulation, it’s important for founders to challenge investors in defining what they call “impact” and how they measure it. This is not a perfect science and is especially challenging when measuring the potential impact of early-stage companies that might be both pre-product and customer.