At the start of September, the UN-PRI released its report "Testing the Taxonomy" providing early insights from its practitioner group. One of its key recommendations was for investors to work collaboratively with ESG data providers to build the data, tools and processes necessary to make the Taxonomy a success. In this spirit, Vigeo Eiris (V.E) has just released a beta-version of their Taxonomy Alignment Screening data alongside a Request for Comment from market participants. Here, V.E Product Developers Catherine Bellamy and Hasan Cerhozi provide insight into their new product as the Taxonomy enters the implementation phase.
So, what has V.E been working on with regards to the Taxonomy? (Hasan)
We established a new team last year to build a product to support investors in their Taxonomy work. This team has now produced a first research dataset covering just over 1,500 European companies. This month, we've released this publicly alongside a Request for Comment (RFC) in order to gather feedback before we then scale up this work further next year. The dataset offers investors a transparent and comprehensive view on the three components required for Taxonomy alignment. Taxonomy integration is a big undertaking for investors, as the PRI stated themselves. We see it as a key part of our role to support investors as they start their Taxonomy journey and to provide them with the tools to move forward.
Talk me through the process for determining taxonomy alignment (Catherine)
The first step is to determine whether a company is engaged in an activity (such as reforestation or thermal energy storage) that is relevant to the Taxonomy. Then our researchers check whether the Taxonomy's technical criteria are met and determine a level of involvement based on related revenues.
As a second step, we determine for each activity whether the Taxonomy's 'Do No Significant Harm' and 'Minimum Social Safeguards' principles are breached by screening our proprietary Controversy Risk Assessment database for controversies. We launched this database back in 2015 to support investors with a norms-based, ESG controversy screening tool which now forms a key part of our Taxonomy service.
What kind of research challenges have you faced? (Catherine)
The quality of corporate disclosures is the most fundamental challenge. Our experience shows that a sufficiently detailed revenue breakdown is rarely available for each Taxonomy activity that we identify. In addition, assessing the level of involvement in an activity on the basis of revenue only provides a point in time view. Assessing capital expenditure (CAPEX) and operational expenditure (OPEX) would provide a forward-looking view of both potential and future activity levels, but corporate disclosures on CAPEX and OPEX are still very limited. Providing this type of information is going to be a serious undertaking for corporates. Those that manage to do this successfully are likely to be better positioned within the Sustainable Finance market
What is coming next for V.E's Taxonomy Alignment research? (Hasan)
In their recent report, UN-PRI recently asked market participants to work together to develop the tools that will be necessary to support the adoption of the EU Taxonomy. We are committed to that process and are making the first iteration of our Taxonomy Alignment Screening widely accessible to market participants. We want people to test, to challenge and to provide us with feedback on everything from the research to data usability and ease if integrating it into workflows. Following that, we'll be working to scale our Taxonomy Alignment coverage significantly in 2021.
What other challenges lie ahead for EU Taxonomy? (Hasan)
It’s been a long time in the making but now the rubber really hits the road. The immediate challenge for investors is going to be the integration, execution and reporting on Taxonomy elements. Corporates will need to build the capacity to report on their business operations through the lens of the Taxonomy. Looking further ahead, the Taxonomy is currently focused on Environmental activities. In the context of COVID-19 and the way the pandemic has highlighted social risks, the Taxonomy will probably mature over time to include other social and societally sustainable activities.
About Vigeo Eiris
Vigeo Eiris is a global leader in ESG assessments, data, research, benchmarks and analytics. Leveraging our extensive proprietary database, we equip market players with the ESG insight they need to manage risks and better understand and address their social and environmental impact. Since 2019, Vigeo Eiris has been an Affiliate of Moody’s Corporation.