The EU Taxonomy is a leading science-based classification system expected to become the global standard for determining whether an economic activity can be considered environmentally sustainable.
The EU is developing a set of regulatory reporting requirements that all EU funds with a sustainability objective have to comply with. Beyond these reporting requirements that are still being finalized, investors globally are looking to the framework to support their approach to sustainable investing and to report on the funds’ impact, regardless of where these funds may be situated.
Learn more about how our Sustainalytics’ EU Taxonomy Solution, which provides investors with granular information on companies’ alignment to the EU Taxonomy’s Climate Mitigation objective.
An Overview of the EU Taxonomy
One of the cornerstones of the EU Sustainable Finance Action Plan is to bring clarity to the market regarding which economic activities can be considered sustainable with the aim of encouraging sustainable investing and preventing greenwashing. The EU Taxonomy is an ambitious attempt to define these activities and the related technical standards for six environmental objectives (see diagram).
Sustainalytics’ EU Taxonomy Solution assesses companies’ alignment to the Climate Change Mitigation objective, supplementing reporting data with sophisticated estimation and proxy approaches to give a more holistic picture of a company’s overall alignment where reporting is limited. It will evolve to cover changes in the regulatory requirements as well as the additional environmental objectives when the relevant standards are defined or, in the case of Climate Change Adaptation, when sufficient data becomes available to build reliable models.
Key Features and Benefits
High Quality Research and Reputable Research Partner
The EU Taxonomy Solution builds on our existing suite of well-established ESG and controversies research products.
Holistic View of Alignment
Sustainalytics supplements reported company data with sophisticated estimation and proxy approaches to give a better overview of a company’s overall alignment, enabling investors to move beyond the regulatory requirements.
We will cover more than 12,000 companies across 80+ Taxonomy activities by the end of 2021.
In 2020, we strengthened our existing research capabilities by hiring more than 40 additional analysts that are dedicated to EU Taxonomy research.
Intuitive Online Company Profiles
The research is available in Global Access where users can see granular insights in each issuer’s involvement activities.
Portfolio and Fund Expertise
Now part of Morningstar, we are co-developing the solution from the start to ensure alignment and to leverage Morningstar’s fund/portfolio capabilities.
EU Taxonomy Activity-Based Research Framework
The EU Taxonomy introduces a new approach to assessing sustainability that focuses on economic activities.
Determine whether the company is involved in activities that could make a Substantial Contribution to the EU Taxonomy’s Climate Change Mitigation objective. These activities are based on the EU’s NACE Classification system.
Example: A company involved in the construction of buildings could contribute to climate change mitigation through the construction of green buildings.
Assess the eligible activities against the EU’s technical screening criteria to determine what percentage of these activities meets or exceeds the minimum threshold to classify as make a substantial contribution.
Example: Assess the construction company’s green building activities against the EU Taxonomy’s technical criteria for the “Manufacture of low carbon technologies – Green buildings”.
For an economic activity to be aligned to one of the environmental objectives of the EU Taxonomy, in this case Climate Change Mitigation objective, it is not sufficient to meet the technical screening criteria for that objective. It is also important to ensure that through the pursuit of this activity, the company does not detrimentally affect the other five environmental objectives.
Example: For the company to make a positive contribution through the construction green buildings, it must do so in a responsible way so it does not harm the other environmental objectives, such the EU’s objective of Pollution Prevention and Control.
Make sure the company operates in a responsible way and has Minimum Safeguards in place to avoid negatively impacting societal stakeholders. Sustainalyitcs assesses whether the company operates in a way that complies with global standards for responsible business, including the UN’s Global Compact Principles and OECD’s Guidelines for Multinationals
Example: If the company is building new buildings in a “green fields” project, is it being done in a way that respects the local community’s rights, does it get the right permits without instances of bribery and corruption?
The report shows alignment data in terms of revenue from products and services, investment measured by capital expenditure (CapEx) and in terms of its operational expenditure (OpEx).
For Revenue, CapEx and OpEx, it shows the percentage of activities that are aligned, that are not aligned and that are not eligible. These overviews differentiate between reported data and estimated data. Aligned activities are broken down by “own contribution”, “Enabling”, and “Transition” activities. For not aligned activities the reason is given. In other words, whether it is the “Minimum Standards”, “Do No Significant Harm” or “Technical Screening” criteria that are not being met.
For Revenue, CapEx and OpEx, it shows an overview of all the underlying activities and corresponding data on eligible revenues (%), Alignment (%), Substantial Contribution Type, and Do No Significant Harm screening criteria.
Deep dive into individual contributing activities with an overview of relevant criteria and a qualitative analysis of the activities’ contribution.
Investor Use Cases
Portfolio Management and Reporting
- Report on portfolio alignment to EU Taxonomy framework and underlying criteria. The solution will evolve to fully cover regulatory reporting requirements should these diverge from the scientific framework.
- Manage or improve Taxonomy alignment of portfolios on an ongoing basis.
Leverage the research in your discussions with issuers when there is an indication of non-compliance with DNSH or MS criteria or data gaps related to SC criteria.
Product and Fund Construction
Consider Taxonomy alignment in the construction and management of ESG & impact funds that focus on climate change.
Create compliant investment universes by screening out companies that do not meet DNSH or MS criteria.
The company reports can be accessed via Global Access with user-friendly online tools.
The research can be accessed as an Excel delivery or data file with three different data packages showing increasingly granular information.
A Single Market Standard
Consistent approach to ESG assessments across the investment spectrum.
Award-Winning Research and Data
Firm recognized as Best ESG Research and Data Provider by Environmental Finance and Investment Week.
End-to-End ESG Solutions
ESG products and services that serve the entire investment value chain.
25+ Years ESG Expertise
350+ ESG research analysts across our global offices.
Largest Second-Party Opinion Provider
As recognized by Environmental Finance and the Climate Bonds Initiative.
Related Insights and Resources
EU Taxonomy Developments and the EU’s Renewed Sustainable Finance Strategy
On July 6th, the European Commission published its Strategy for Financing the Transition to a Sustainable Economy, the successor of the EU’s Sustainable Finance Action Plan, which launched in 2018. The strategy focuses on transforming the financial system and financing transition plans, building on the 2018 Action Plan, which centered on developing the EU Taxonomy, putting in place disclosure regimes, and developing tools for the market to develop sustainable investment solutions and prevent greenwashing.
Sustainalytics Weighs in on EU Taxonomy’s State of Flux
On May 7th, the European Commission published draft rules on how corporates and financial institutions should report on their alignment with the EU Taxonomy. The draft rules are laid out in a very technical document and not an easy read. This might explain why certain changes with significant impact on timelines and scope of the EU Taxonomy Regulation have flown under the radar of media and investors. Some of the impacts even escaped the attention of financial market participants responding to the consultation on the rules.
New Draft Disclosure Rules Change Timelines and Scope of EU Taxonomy
In recent months, a lot has been said and written about the EU Taxonomy, the green classification system of economic activities that aims to drive capital flows to sustainable investments supporting the EU’s policy goals on climate and the environment. Political, corporate, and civil society lobbying reached its peak when the EU published draft rules last December, which deviated substantially from expert recommendations. However, the latest draft delegated act with rules on Taxonomy reporting published by the European Commission on May 7th has received far less attention even though some of the proposed changes affect the practical implementation timelines as well as the scope and ambition of the regulation.
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