By Will Martindale, Director of Policy and Research, PRI
Regulators in Europe, South Africa, China and Malaysia are increasingly turning their attention to taxonomies. The PRI considers taxonomies a generational shift in how we think about sustainability issues. Taxonomies are here to stay.
Convened by the PRI, over 40 investors have implemented Europe’s taxonomy in anticipation of incoming European regulation. The progress made by the group is encouraging, and today we publish the first ever comprehensive set of case studies on how to use the EU taxonomy.
We started by implementing the EU taxonomy as it is the most advanced:
- It has regulatory approval. By the end of 2021, investors that market their funds as environmentally sustainable will be required to disclose against the taxonomy.
- The framework is clear. Environmental activities must make a substantial contribution to climate mitigation or climate adaptation, must do no significant harm to other environmental goals and must meet minimum safeguards.
- It is the most developed. The proposed economic activities and performance measures cover 94% of Europe’s carbon emissions and follows substantial research by the EU Technical Expert Group (TEG).
The case studies cover most major asset classes, geographies (including global funds) and investment styles. We hope that by sharing the main findings with financial market participants and policymakers, the case studies will support confidence, and greater ease, in the implementation of the taxonomy.
In their case studies, investors have addressed multiple questions, including:
- How to measure taxonomy-eligible investments
- How to compare sustainability performance with taxonomy thresholds
- How to undertake analysis on Do No Significant Harm (DNSH) and Minimum Social Safeguards requirements
- What were the data gaps
- What were the results
It’s worth noting that all investors started work on their case studies before the taxonomy had formally been made law. In doing so, they have been working at the cutting edge of policy design. But it’s also clear that to optimise taxonomy applicability, policymakers and regulators need to do more. The PRI recommends EU policymakers:
- Develop disclosure frameworks to make sure that investors have the right data, at the right granularity, for the right issuers to undertake taxonomy analysis.
- Provide more guidance and clarity about supervisory expectations for taxonomy disclosures.
- Continue with ongoing development of the taxonomy and work to harmonise it with international efforts.
Among the list of case studies is Neuberger Berman (NB). NB implemented the taxonomy in an actively managed US Equity Impact portfolio, comprising 41 companies and identified 12 of 41 companies that were taxonomy eligible. In other words, the 12 companies undertook some economic activities consistent with taxonomy criteria.
To test whether the company met DNSH criteria, NB undertook primary research supported by third party data and created an internal rating system of green, yellow and red based on levels of compliance. For social safeguards, they undertook three sets of assessment: company policies, past instances of complaints or controversies, and third-party data.
While not all case studies published total portfolio alignment, NB did. NB assessed company turnover in determining 20% taxonomy alignment. A further 1% was potentially aligned, but company disclosure was incomplete. A further 3% is potentially eligible as the taxonomy extends to the further four environmental objectives.
In addition, Axa implemented the taxonomy in a global fund of both equities and corporate bonds. The DNSH criteria were assessed through their minimum ESG standards, which excludes companies with UN Global Compact (UNGC) violations and companies of poor ESG quality. For social safeguards, Axa undertook their own analysis, which was supplemented by third party data.
They also used third party data to split revenues, and additional third-party data to assess future green revenues.
Impax’s case study is a little different, undertaking a deep dive of five companies in Europe and China to assess taxonomy usability.
First, Impax mapped their own stock classification against the taxonomy, supplemented with third-party data. To assess DNSH criteria, they used a company-level proxy test, backed by data from third parties. For social safeguards, Impax analysed companies for social and governance impact, across four sub-pillars: customers, human rights and community, labour rights, and corporate governance.
Impax then assessed the latest publicly disclosed revenue data to determine taxonomy alignment, splitting revenues based on assumptions where the data was incomplete.
The case studies are a good demonstration to the market of the practical application of the EU taxonomy which we hope will inform policymakers and investors alike.
It’s also important to recognise that the investors that prepared case studies committed to doing so prior to the publication of the EU Commission’s delegated acts which formalises the environmentally sustainable activities and performance measures (due later this year), prior to publication of the Technical Expert Group (TEG) report, and in some cases, prior to the political agreement of the taxonomy regulation. And did so during a global pandemic!
We consider this real leadership, and we thank all the investors involved.
You can read the current list of case studies here.
To read PRI’s analysis and policy recommendations, click here.
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