EU Green Taxonomy Data – A First Vendor Survey

1 What is the EU Taxonomy on Sustainable Activities?

As of the 12th of July 2020, Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, namely the EU Taxonomy of Sustainable activities (henceforth “EU Taxonomy”), is in force. It is part of the EU Action Plan on Financing Sustainable Growth and directly links to existing legislation such as the EU Green Bond Standard.^[1] The European Commission aims to redirect capital flows into sustainable activities by providing this common classification system. The reporting tool has the ambition to act as a transition instrument and inventory for the future. The EU Taxonomy can be interpreted as a dictionary defining a list of economic activities qualifying as sustainable with regard to defined environmental criteria.

One important caveat on activities is that the EU Taxonomy does not take an entity perspective. Instead, alignment with the EU Taxonomy will be expressed as a share of the sum of an entity’s activities, i.e. company A’s activities are 20% EU Taxonomy-aligned. Given the scope of large companies, most will engage in more than one activity resulting in non-binary classification.

This reporting tool with mandatory disclosure applies to large public companies. Its scope includes revenues, operating expenses (“OpEx”) and capital expenditure (“CapEx”); thereby not only providing insights into the past or current state of an entity but also its future trajectory.

Due to being anchored in official EU Regulation, the EU Taxonomy is legally binding and automatically and uniformly applies to all EU countries, without needing to be transposed into national law.

The specific regulation mandates the EU Taxonomy to be science-based and dynamic in its design. Therefore, the European Commission appointed an expert panel to provide advice on the EU Taxonomy, the Platform on Sustainable Finance. The over 50 members come from a range of backgrounds, including corporations, Non-Governmental Organizations (NGOs), lobby groups and some members appointed in personal capacity.^[2]

Checking for Eligibility of an activity is the first step of the EU Taxonomy assessment process for an economic activity. It establishes whether there are criteria established to assess the sustainability of the respective activity. If a company’s activities are 80% eligible it means 20% of the company’s activities are not assessable in terms of their sustainability (yet).

The next step, for those 80%, is then to assess EU Taxonomy Alignment by applying the so-called Technical Screening Criteria, which are published in Delegate Acts by the European Commission. This step evaluates whether the eligible activities make a “Substantial Contribution” (SC) to one of the six environmental objectives as set in the original EU Taxonomy Regulation. Besides two climate objectives, “Climate Change Adaptation” and Climate Change Mitigation”, these include “Biodiversity & Ecosystems”, “Water & Marine Resources”, “Circular Economy”, and “Pollution Prevention”.^[3] It is important to note that these are all equally weighted. In this aspect, the EU Taxonomy is the most ambitious among others under development around the globe.

Subsequently, the activity additionally needs to pass the “Do No Significant Harm” (DNSH) criteria and “Minimum Social Safeguards” (MSS). The former reflects the equally weighted nature of the different EU Taxonomy objectives: It is not sufficient to substantially contribute to one, at the same time none of the other ones may be significantly harmed. These two additional requirements echo the complex and multidimensional nature of sustainability. In total there are four steps for an activity to be considered sustainable as part of the EU Taxonomy, as visualised in Figure 1.^[4]

Figure 1:

Step by step process to EU taxonomy alignment for an activity.

So far, data on both Eligibility and Alignment of firms is scarce. On the one hand, this is due to the lack of company disclosure specific to the EU Taxonomy criteria. This is expected to gradually become better over time. Secondly, there are further issues regarding the treatment of companies base outside of the European Union. These will not be directly subject to mandatory European reporting requirements.

Data vendors can play a crucial role in filling reporting gaps. The data vendors which provided responses to the underlying survey of this paper all use different methodologies and approaches. Usually these are not publicly disclosed. For an example see MSCI’s guide.^[5] It refers to its existing metrics such as the MSCI Sustainable Impact Metrics, Green Bond Methodologies, ESG Metrics, and Business Involvement Screening criteria. Frequently, ESG controversy screening is referenced for proxying passing DNSH and MSS.

Moody’s points towards corporate reporting for their data collection, which is validated and complemented through direct engagement with companies by Moody’s analysts.^[6] Similarly, ImpactCubed points to issuer level data as disclosed by the firm themselves as well as ImpactCubed’s own dedicated estimates and models.^[7] Bloomberg provides a table which contrasts reported and estimated data and for example for Eligibility outlines the mapping of the Bloomberg Industry Classification (BICS) against the NACE codes using in the EU Taxonomy.^[8]

In the following the paper will first explain the design of the vendor survey which was carried out. Subsequently, its results are explained and visualised. Moreover, implications are outlined, and policy recommendations provided. Lastly, this paper finishes with an overall conclusion.

2 The First Data Vendor Survey: Design

The first data vendor survey commenced in October 2021 with the intention to better understand where the market currently stands with regards to EU Taxonomy reporting.

It was carried out by the authors of this paper, in relation to their engagement on the Platform on Sustainable Finance. Participation was encouraged through an open call. This means all types of data providers, established commercial data vendors as well as smaller niche players, were invited to submit a response.

At the time of the survey only the delegated act related to the two climate objectives^[9] was adopted. Thus, this survey covers only substantial contribution to the “Climate Change Mitigation” and “Climate Change Adaptation” objectives. The additional DNSH criteria cover all environmental objectives as published at the time.

The survey is designed to cover both Eligibility as well as Alignment, with granular steps in between that capture passing DNSH as well as MSS criteria. This set up allows to assess where and to what extent eligible firms that engage in substantially contributing activities gradually drop out due to not passing either of the additional criteria.

The survey covers Eligibility and Alignment of revenue, OpEx and CapEx. Especially the latter is of high importance as it provides insights into companies’ future path; CapEx is forward-looking.

Given the four steps – Eligibility, Substantial Contribution, DNSH, MSS – over these three measures, the survey contained 12 questions. Participants were asked to provide responses for a universe consisting of 200 firms, the sum of the top-50 large European companies, mid-sized European companies, large non-European companies as well as mid-sized non-European companies. Having a universe with these four subcategories allows to assess whether there are systematic biases for either larger or smaller firms, and European or non-European firms.

3 What the Data Says: Preliminary Evidence from Literature and This First Data Vendor Survey

Despite Lucarelli et al. (2020) reporting over 160,000 papers in EU Taxonomy-related areas, there is very little literature on the EU Taxonomy itself as it only has been published in March 2020. A Scopus search results in only 27 hits for articles using the term “Taxonomy”, out of which the majority is from 2022.^[10] The majority of these papers is qualitative, looking at taxonomies as an instrument (Becchetti, Cordella, and Morone 2022 (Dusík and Bond 2022)) or the links to ESG ratings (Dumrose, Rink, and Eckert 2022) and specific asset classes such as fixed income (Edenhofer et al. 2022; Esposito, Mastromattei, and Molocchi 2021; Gibson et al. 2020).

Quantitative research revolving around the EU Taxonomy is even more scarce. Alessi and Battiston (2022) estimate overall low (2.8%) Alignment numbers for financial portfolios of euro area investors in 2022. Furthermore, two working papers are worth mentioning in the context of this survey. Specific to revenue Alignment, Bassen et al. (2022) demonstrate that higher Alignment correlates with positive stock market effects, especially if the EU Taxonomy related performance is higher than existing ESG ratings. Complementarily, Sautner et al. (2022) find that firms with higher revenue Alignment paid lower interest rates on the syndicated loan market.

In Q4 2021 dozens of data vendors were invited to submit responses to a first EU Taxonomy survey consisting of 12 questions on EU Taxonomy Eligibility, Substantial Contribution, Substantial Contribution and DNSH full pass, and Substantial Contribution, DNSH full pass and MSS full pass related to the two climate objectives.^[11] The last category equals EU Taxonomy Alignment as outlined in Figure 1. For each of those four steps, vendors were asked to provide their data on revenues, CapEx and OpEx for the given 200 firm universe.

Nine vendors were able to provide responses to at least one question. These vendors were guaranteed anonymity of their individual responses, which is why results are only presented at the aggregate level. The following vendors participated: Bloomberg, Clarity AI, Iceberg, Impact Cubed, ISS, LSEG, Moody’s, MSCI, and Sustainalytics.^[12] Responses including “potential” substantial contribution or “partial” pass of DNSH or MSS were disregarded.

Figure 2 relates to the first question of the survey, on revenue Eligibility. The x-axis represents each of the 200 companies of the given universe. The y-axis here indicates the number of vendors that provided data for the respective firm on the x-axis with regard to revenue Eligibility. All companies have revenue Eligibility data from at least six vendors.

Figure 2:

Number of vendors that submitted data for revenue eligibility.

Figure 3 visualises mean, median, standard deviation and minimum and maximum value for revenue Eligibility with regard to the two climate objectives of each company in the considered universe. Companies are ranked according to the mean Eligibility from left to right. It becomes obvious that very few companies have a mean of complete (100%) Eligibility. Around 50 companies are rated 0% Eligible by all vendors who provided data for the respective company, as visible in the right-hand quarter of the graph. The median drops a lot steeper and is more volatile than the mean. For around half the companies the maximum and minimum values are the complete opposite – while one vendor submitted 100% Eligibility another provided 0%.

Figure 3:

Revenue Eligibility within the company universe.

In an additional analysis, the four company groups are plotted separately, see Figure 4.

Figure 4:

Revenue eligibility with regard to the two climate objectives sorted by group (from left to right): EU Large, EU Mid, NonEU Large, and, NonEU Mid.

The mean revenue Eligibility for the four groups is as follows (left to right in Figure 4): EU Large (16.6), EU Mid (26.1), NonEU Large (17.0), NonEU Mid (27.3). It becomes obvious that the mean is substantially higher for mid cap firms than for large cap. The difference between EU and NonEU is much less emphasised.

Figure 5 plots all data points on revenue Eligibility submitted by the data vendors individually. This allows for assessing vendor deviation and data consistency.

Figure 5:

Vendor deviation in revenue eligibility data.

It becomes obvious that Vendor A has a much higher mean compared to the other participants. One conceivable explanation is a commercial conflict of interest due to the business model of certain vendor types. A possibly similar phenomenon has been described by Li, Lou, and Zhang (2022) for ESG ratings: Higher ratings were issued to existing paying clients of Moody’s and S&P by raters Vigeo Eiris and RobecoSAM after their respective acquisition by Moody’s and S&P, with the effect being stronger in line with the intensity of business ties to the acquirer.

Table 1 shows the correlation of each vendor pair. Correlation ranges from a minimum of 4% (Vendor A and D) to 73% (Vendor B and E).

For CapEx and OpEx Eligibility only one vendor submitted data.

For revenue Alignment, i.e. Substantial Contribution as well as full pass on DNSH and MSS, up to four vendors provided data (see Figure 6).

Figure 6:

Number of vendors that submitted data for revenue Alignment.

Figure 7 visualises revenue Alignment with regard to the two climate objectives for the given company universe. The overall mean comes to 2.9%, with individual vendor means ranging from 0.1 to 5.4%.^[13]

Figure 7:

Revenue Alignment within the company universe.

Figure 8 provides the split of revenue Alignment by company group. The mean revenue Alignment for the four groups is as follows (left to right in Figure 8): EU Large (0.7), EU Mid (5.8), NonEU Large (1.9), NonEU Mid (3.2). Similar to revenue Eligibility a substantial difference in mean between large cap and mid cap is noted. The difference between EU and NonEU is larger compared to revenue Eligibility.

Figure 8:

Revenue Alignment with regard to the two climate objectives sorted by group (from left to right): EU Large, EU Mid, NonEU Large, and, NonEU Mid.

For CapEx and OpEx Alignment only one vendor submitted data.

4 Recommendations

5 Conclusion

This paper aims to explain key concepts of the EU Taxonomy for Sustainable Activities and provides first insights on compliance with the EU Regulation from a data vendor survey.

The EU Taxonomy for Sustainable Activities is part of the EU Action Plan on Financing Sustainable Growth and is supposed to promote Green investment by establishing a common language and definition of environmentally sustainable economic activities. Preliminary data from a first data vendor survey suggests that mean revenue Alignment (the percentage-share of activities that fulfils the criteria set by the EU Taxonomy) assessed against the first Climate Delegated Act currently ranges in the low single digits. Mean Eligibility (the percentage-share of activities for which environmental criteria exist) was at least above 20%.

Especially the low Alignment figure is neither surprising nor undesirable as it reflects the current gap to where the economy needs to transition with regard to environmental sustainability. Yet the results raise important questions on whether mid cap firms may have advantages over large cap firms and if the business model of the assessor influences the assessment outcome. It will be crucial to repeat this exercise when the criteria for the outstanding environmental objectives have been adopted and the market has further matured.

We note a potential divergence in correlation of vendors based on their business model and call for disclosure of financial ties with assessed firms for every data vendor who sells EU Taxonomy related corporate assessments.

We recommend the application of the Precautionary Principle for the implementation of the EU Taxonomy. This means that while implementation should encourage high Eligibility figures, the Alignment assessment must remain stringent. We advocate for revising NACE codes as the basis for activity mapping and recommend dynamic, sector agnostic Do No Significant Harm criteria.