Alignment needs eligibility, substantial contribution, no significant harm and minimum safeguards at each company, then a value-weighted sum at the fund, and a single finding can move it by most of its value.
A fund's EU taxonomy alignment is the value-weighted share of its investments' activity that is taxonomy-aligned: for each company, the aligned share of its turnover times the value of the holding, summed and divided by the fund's total investments. On an illustrative five-company buyout fund, 21.67 million of aligned value over 172.0 million of investments gives 12.6 per cent taxonomy-aligned. Count eligible activity as aligned and the same fund claims 26.5 per cent; one company failing minimum safeguards takes it to 3.8.
Worked in full in The ESG Manager in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Article 8 and Article 9 funds report the share of their investments that is taxonomy-aligned, and many commit to a minimum in their pre-contractual disclosure. For a private equity fund every input is produced by the ESG team: portfolio companies rarely publish taxonomy KPIs, so the fund has to assess each activity against the technical screening criteria itself. The arithmetic is short. The judgement is in which turnover clears all four tests, and the result is concentrated in very few companies. Where a test cannot be evidenced, the activity is not aligned; where a figure rests on an estimate, the disclosure should say so.
An activity is aligned only if it is eligible (listed in the delegated acts), makes a substantial contribution to an objective under the technical screening criteria, does no significant harm (DNSH) to the other five objectives, and the company meets the minimum safeguards. Eligible is the first test, not the result.
| Activity | Turnover | Eligible | Substantial contribution | DNSH | Aligned |
|---|---|---|---|---|---|
| Installation of energy efficiency equipment | 18.0 | Yes | Met | Met | 18.0 |
| Installation of renewable energy technologies | 6.0 | Yes | Met | Not evidenced | 0.0 |
| General building maintenance | 26.0 | No | 0.0 | ||
| Total | 50.0 | Eligible 24.0, 48% | 18.0, 36% | ||
Turnover KPI = aligned turnover / total turnover = 18.0 / 50.0 = 36%
Eligible share = 24.0 / 50.0 = 48%; eligible but not aligned = 6.0, 12%
Capex KPI, same company: 2.2 of 4.0 million of capex is aligned, 55%
The renewable installation activity meets its screening criteria but the company could not evidence one of the DNSH conditions, so its 6.0 million is eligible and not aligned. Which KPI to use matters: capex runs ahead of turnover in a company investing into the transition, and the disclosure has to say which one each figure is.
Fund alignment = Σ (holding value × company aligned share) / total investments
Excel, with values in B2:B6 and aligned turnover shares in C2:C6: =SUMPRODUCT(B2:B6,C2:C6)/SUM(B2:B6)
| Company | Value | Weight | Aligned turnover | Aligned value | Eligible turnover |
|---|---|---|---|---|---|
| Industrial services | 42.0 | 24.4% | 36% | 15.12 | 48% |
| Software | 40.0 | 23.3% | 0% | 0.00 | 0% |
| Logistics | 35.0 | 20.3% | 8% | 2.80 | 30% |
| Building products | 25.0 | 14.5% | 15% | 3.75 | 60% |
| Healthcare clinics | 30.0 | 17.4% | 0% | 0.00 | 0% |
| Fund | 172.0 | 100% | 12.6% | 21.67 | 26.5% |
21.67 / 172.0 = 12.6 per cent. Measured on total assets including 8.0 million of cash, 180.0 million, it is 12.0 per cent; state the denominator, because both appear in practice and they are not comparable. Use holding values at the reporting date and each company's KPIs for its latest financial year, and keep the two dates in the file, because an LP will ask why the figure moved between reports. The industrial services company supplies 69.8 per cent of the aligned value on its own.
| Case | Fund alignment |
|---|---|
| Base | 12.6% |
| DNSH evidenced for the renewable installation activity | 15.5% |
| Industrial services fails minimum safeguards | 3.8% |
| Software holding marked up by 20.0 million | 11.3% |
| Eligible counted as aligned (wrong) | 26.5% |
| Simple average of company shares (wrong) | 11.8% |
Two of these are not about the environment at all. A minimum safeguards failure, a human rights or anti-corruption finding at one company, removes 15.12 million of aligned value and leaves 3.8 per cent; a fund that committed to a 10 per cent minimum goes from 2.6 points of headroom to a shortfall of 6.2. And a valuation uplift on a company with no aligned activity dilutes the figure with nothing changing in the real economy, the same denominator effect the third case in the companion files shows for carbon intensity per euro invested.
A DNSH condition that is met but not evidenced counts as not met. Getting the evidence for the 6.0 million activity is worth 2.9 points of fund alignment, more than any operational change available in the year.
The book's carbon cases, including the fund-level target that a growing portfolio cannot meet, are in the free companion files for this book; the value-weighted carbon equivalent is worked in how to calculate weighted average carbon intensity.
Eligible means the activity is described in the delegated acts; aligned means it also makes a substantial contribution under the technical screening criteria, does no significant harm to the other objectives and the company meets minimum safeguards. An illustrative company with 50.0 million of turnover is 48 per cent eligible but 36 per cent aligned, because one activity could not evidence a DNSH condition.
Multiply each holding's value by the company's aligned share, add them and divide by total investments. In an illustrative fund that is 21.67 over 172.0 million, 12.6 per cent; a simple average of the five company shares gives 11.8 per cent and ignores holding size. State whether cash is in the denominator: with it the figure is 12.0 per cent.
Yes, because alignment is a value-weighted share. Marking up a holding with no aligned activity by 20.0 million takes an illustrative fund from 12.6 to 11.3 per cent with no change in any company's activities. Report the drivers alongside the figure so a fall is not read as a change in the real economy.
This article is one calculation from The ESG Manager in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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