Issuer Gateway Knowledge Hub

EU Taxonomy Research

Guide to Key Metrics 

Involvement in Taxonomy-Eligible Activities

The first step for the EU Taxonomy assessment is to identify the share of a company’s revenues, capital expenditure (capex) and operating expenditure (opex) attributed to economic activities covered by the EU taxonomy framework. For this purpose, we conduct Activity-Based Research. The fundamental idea behind this research is the representation of a company as a portfolio of activities, rather than as a monolithic entity.

Through this process, we identify any company involvement in Taxonomy-eligible activities, which then underpins our taxonomy-alignment assessments. At the current stage, our activity-based research covers all Taxonomy-eligible activities for climate change mitigation and climate change adaptation (apart from nuclear and gas activities) broken down by revenues, capex and opex. 

Substantial Contribution (SC)

As a next step, we determine whether a company’s identified taxonomy-eligible activities meet the Technical Screening Criteria (TSC). This assessment is based on so-called Green Safeguards (a proxy to activity-specific technical screening criteria) for the Climate Change Mitigation objective. To assess Green Safeguards, we use Morningstar Sustainalytics’ established Sustainable Activities Involvement (SAI) research, where appropriate. Currently, 18 activities have Green Safeguards estimations based on Sustainable Activities Involvement Research.

For Climate Change Mitigation activities without a mapped Green Safeguards (e.g., steel manufacturing), we take a conservative approach and consider the activity to be not aligned. Some economic activities are considered inherently green according to the EU regulation (e.g., Production of Electricity from Solar PV) and thus will receive an automatic ‘Pass’ under Green Safeguards. We currently have 12 of these so-called Auto-Aligned activities for Climate Change Mitigation.

For the Climate Change Adaptation objective, we use our "coefficients" approach for estimating alignment. Coefficients represent a portfolio-level expected percentage of aligned revenue, capex or opex toward a given objective for a sufficiently large and diversified portfolio. Coefficients are expressed as a percentage value ranging from 0% (i.e., the activity is never aligned) to 100% (i.e., the activity is always aligned). They are derived at the sector and regional level and based on aggregate adaptation investments. Therefore, they do not convey company-specific information and should not be interpreted as a company-level estimate of Taxonomy alignment, nor should they be considered equivalent to reported data or company-specific estimates we conduct for Climate Change Mitigation. Coefficients can be applied when estimating the alignment of a large and well-diversified portfolio.

Note that we do not assess the technical screening criteria that underpin Substantial Contribution in the EU Taxonomy as such. Currently, there is insufficient disclosure within corporate reporting to assess those criteria, which are specific and granular in nature. Furthermore, the final Substantial Contribution assessment also rests on the condition that the Do No Significant Harm (DNSH) and Minimum Safeguards (MS) criteria are met.

See descriptions of select metrics below. 

Climate Change Adaptation Metrics