ISS ESG was commissioned by the German Federal Ministry for the Environment, in the context of Germany’s Presidency of the EU Council in 2020, to assess the current state of alignment of listed European companies and banks’ lending activities with the EU Taxonomy for sustainable finance. The project was conducted in partnership with the climate-focused sustainability consultancy, adelphi, and the resulting report is being presented at the European Sustainable Finance Summit on 28 September 2020.
The key objectives of the project were to assess the extent of Taxonomy alignment, to identify challenges to and solutions for measuring Taxonomy alignment, and to raise awareness and build capacity regarding the Taxonomy. The project survey drew from three sources of evidence: ISS ESG data and publicly available information; responses to an online questionnaire; and in-depth interviews.
The assessments carried out in the course of the project were based on the final report of the Technical Expert Group on Sustainable Finance (TEG) from March 2020 which contains criteria for the first two objectives (out of six) — climate change mitigation and climate change adaptation. Project assessments were restricted to activities contributing to those two objectives, as the full technical screening criteria for all six are not yet available and will be issued in final form as legal requirements from the European Commission by the end of 2020. The Taxonomy defined performance thresholds cover technical screening criteria for economic activities which substantially contribute to at least one of the environmental objectives and do no significant harm (DNSH) to any of the other objectives, and also comply with minimum social safeguards.
To shed light on the current state of Taxonomy-alignment of European listed companies, ISS ESG measured the Taxonomy alignment of three European indices using ISS ESG data for the EURO STOXX 50, CAC 40, and DAX 30. Data from the ISS ESG SDG Solutions Assessment, ESG Company Rating and Norms Based Research, as well as publicly available information, was used to identify relevant activities, quantify respective revenues, verify if screening criteria are met, and further check DNSH and social criteria. In total, 75 selected companies were included in the final project report. In tandem, adelphi conducted a Europe-wide survey sent to 421 companies, and 25 in-depth interviews with companies were also held. To obtain insights into the current application of the EU Taxonomy to banks’ lending activities, adelphi conducted in-depth interviews with six European banks.
The report includes identification and analysis of 48 different taxonomy activities and can be found here. Key findings include a disparity between the taxonomy and company reporting with regard to the granularity of information necessary to assess taxonomy alignment. There were also limitations in the availability of sufficiently granular data – almost all of the results produced in the study were based on estimations and build on ISS ESG’s long standing expertise in retrieving and interpreting ESG information and checking for data resilience. The average share of taxonomy aligned relevant revenues was calculated as 22% of companies with a median of 5%. Substantial challenges in applying the taxonomy have been identified and developments are already underway to address some of the current obstacles through enhanced reporting requirements as well as further developing the taxonomy itself.
Currently it is challenging to assess Taxonomy alignment and investors and other stakeholders have to rely on approximations when calculating taxonomy aligned revenue shares of companies. With legislative clarity in the future, this will be less of a challenge, but it does not appear likely for the time being that company reporting will evolve to the point where all companies report comprehensively on their taxonomy alignment and investors will have to continue to rely on external assessments. There are challenges directly linked to the Taxonomy and the difficulty in fully understanding and applying it which are relevant both for ESG data providers assessing companies’ Taxonomy alignment from the outside as well as for the companies assessing their own alignment. The EU is currently setting up a Platform on Sustainable Finance which will be tasked with further developing the Taxonomy.