A week ago, I had to work with Green revenues data and ESG related datasets. Realized that the terminology used in the feeds is something that I had never paid attention to. Managed to listen to a few webinars on EU Regulation and data feeds to understand stuff happening in this space. Here are some of my learnings:

Taxonomy Regulation - Europe

EU Taxonomy regulation is a classification system for environmentally sustainable activities.
The Taxonomy contains two climate objectives and four environmental objectives
- Climate Objectives
  - Climate change mitigation
  - Climate change adaptation
- Environmental objectives
  - Sustainable use and protection of water and marine resources
  - Transition to circular economy, including waster prevention, re-use and recycling
  - Pollution prevention and control
  - Protection and restoration of biodiversity
Taxonomy is used to translate the above objectives in to TSC for specific economic activities
For an economic activity to be environmentally sustainable, Taxonomy regulation requires it meets four conditions
- It makes substantial contribution to one of the objectives, based on TSC defined for each activity
TSC are defined for substantial contribution as well as DNSH
Climate Delegated act sets out TSC for determining the conditions under which an economic activity substantially contributes to the Taxonomy’s first two objectives related to climate change adaptation and clime change mitigation
- Climate delegated act covers sectors that are responsible for almost 80% of direct GHG
Nonfinancial companies meeting certain criteria must comply with the Corporate Sustainability Reporting Directive (CSRD), which replaced the Nonfinancial Reporting Directive (NFRD). These companies must disclose the share of their revenue (turnover), capital expenditure (CapEx), and operational expenditure (OpEx) associated with environmentally sustainable economic activities as defined in the Taxonomy Regulation and any associated delegated acts.

SFDR

Objectives is to increase transparency, avoid greenwashing and reduce asymmetric information
Requires participants to disclose information about the sustainability of their investments, as well as mention ESG risk impact
SFDR also includes provisions for the publication of principal adverse impacts
Asset owners have to report on the proportion of criteria aligned with EU Taxonomy regulation
Solutions to
- Manage disclosure and regulatory compliance
- Embed sustainable growth in their investment strategies
- Build portfolios aligned to sustainable investment mandates
Under SFDR firms must take both firm and product level disclosures about
- integration of sustainable risks
- consideration of adverse sustainability impacts
- promotion of environmental or social factors
- sustainable investment objectives
Article 8 products - Products that promote environmental and or social characteristics
Article 9 products - Products that have sustainable investment as their objective
Principal adverse impact

LSEG Green Revenues Feed

Global green economy is substantial and growing representing 7.1 percent of the market capitalization of global listed companies and is over 7T USD
Unique data solution enabling users to identify and quantify company exposure to green economy
Based on GRCS and green tiering system
Process
- Identify : 18k companies in research universe - does not mean that 18k companies have green revenues. 5k companies with green revenues
- Calcuate: Potential green revenue ranges from disclosed data
- Engage: All companies engaged with for additional disclosure
- Produce: Point estimates using a tiered approach
GRCS - decade of evolution
- 2008: Environmental Markets Classification system
- 2013: GRCS
- 2018: Green Revenues Data Model
- 2020: Green Revenues 2.0
- Governed by FTSE Russell Green industries
- 10 sectors, 64 sectors, 133 subsectors
Tiers
- Tier 1: Clear and Significant
- Tier 2: Net positive
- Tier 3: Limited
Use cases
- Overlap with EU Taxonomy
- Measure portfolio exposure to climate transition risks and identify investment opportunities
- Use for climate/TCFD
- Input into climate risk-adjusted indexes
Linked to EU Taxonomy solution
- Integral part of EU Taxonomy solution
- Embedding green revenue coverage and expanding on 18k companies, include Refinitiv company fundamentals data (36k companies with segment revenue data)
- Use GRCS for eligibility perspective
- Use TRBC taxonomy to improve the coverage universe
- Use ESG metrics for TSC for substantial contribution and DNSH
USP
- “What” of ESG , Regulatory Compliance, Enhancement to positive screening and impact investing
- For banking - green revenue is a good indicator of the past and future structure
  - key input to the sustainable finance and loans framework
  - alignment of infrastructure projects
  - key input into private banking and adviso
- Corporates - Benchmarking of other companies in a sector, Regulatory compliance and Supply chain resilience
Refinitiv has always talked about ESG. FTSE Green Revenues is no different.
Refinitiv ESG - How a company operates ? Metric or KPI on how a company behaves in the market. Green Revenues is not the same. How does company operates in ESG space ? What are the services that company provides in the market ?

LSEG EU Taxonomy Feed

The reporting requirements under EU Taxonomy is different from financial market participants vs. Corporates. The latter have to report Revenue, Capex and Opex. For FMP, there are different metrics such as green asset ratio
The taxonomy regulation requires that all inscope companies that are under NFRD and CSRD to report KPIs related to environmentally sustainable activities that are EU taxonomy aligned. Taxonomy KPIs are different for financial and corporates
EU SFI regulations
- Listed and large corporations should start reporting on their sustainable investment activity by 2025
- NFRD and CSRD are the proposed directives to mandate corporate disclosures by large and listed companies with respect sustainability risks and impacts
  - CSRD is the reincarnation of NFRD regulation that is intended to cover a wider range of SFI activities
  - Additional disclosure on climate IP and human capital, forward looking metrics
  - Revenues, capex and opex that can be classified as environmentally sustainable
- EU Taxonomy is the guiding activity catalog that can be used for categorizing sustainable activities
- SFDR Level 1 and Level 2 requires specific firm level disclosures from asset managers and IA regarding how they address two key considerations - Sustainability Risks and Principal Adverse Impacts
LSEG is developing tools that helps companies and funds in reporting EU Taxonomy alignment
EU Taxonomy for Sustainable activities
- Provide clarity on ‘green’ and ‘mobilize activities’
- Taxonomy of green activites to achieve six environmental objectives
  - Climate change adaptation
  - Climate change adaptation
  - Sustainable use and protection of water and marine resources
  - Transition to a circular economy, waste prevention and recycling
  - Pollution prevention and control
  - Protection of healthy ecosystems
Use Cases
- Regulatory reporting
  - Connects to NFRD and CSRD
- Screening and Idea Generation
  - Seek investments in new green economies
  - Screen based on DNSH
  - Screen based on various components
  - Screen based on Eligible aligned revenue amount by various segments
- Benchmarking and Comparisons
  - Alignment of funds, but many clients wants to validate with third party
LSEG EU Taxonomy Solution
- Launched on [2023-06-26 Mon]
- Coverage of 76k organizations
- Setting a team to collect disclosure data
- Green Revenues data is the first level truth. Revenue is at Subsegment level
  - If Green Revenues exist, generate segment level and org level eligibility
- If Green revenues do not exist, use TRBC codes where EU Taxonomy activities have been mapped to TRBC codes
  - Fundamentals Revenue up to 4 TRBC codes is collected for 36k companies
- Test Sustantial contribution to EU objectives
- Use ESG data items to test DNSH test
- Test Minimum safeguards based on ESG metrics
- Take in to consideration controversies
- Minimum Social Safeguards are done at a company level and not at an activity level
What can LSEG offer ?
- Instrument and Corporate Hierarchy mapping
  - Ability to map fixed income and equity instruments
  - Combine with lipper fund holdings for fund look through
- Taxonomy aligned global classifications
  - GRCS and TRBC codes at segment level revenue provide framework for NACE mapping
- Granular Segment Revenue
- Weekly updated ESG data
EU Taxonomy solution data vendors
- LSEG
- MSCI
- Sustainalytics
- BBG
- S&P Global
- ISS
ESG Funds as of Mar 2023
- According to Lipper Fund data, as of 31st March 2023, of the 30,000 mutual funds & ETFs domiciled in EU 39.4% of funds were classified as either Article 8 (35.9%) or Article 9 (3.5%).
- Article 8 products alone account for =51.9%=($5.9 T) of assets with Article 9 products accounting for an additional 3.5% ($400 Mil). In terms of monetary value, the combined assets amount to $11.4 trillion.
- Transitioning from 8 to 9 - EU Taxonomy dataset is going to very valuable
GRPC should cover all the aspects of EU Taxonomy objects. Once the regulation comes in to force, one can then work on substantial contribution parts of the solution
From an LSEG Perspective: Advantage of using TRBC because it is an internal classification system and hence we are more quicker to incorporate the enhancements coming in EU Taxonomy
LSEG data - 36k back from 2016 coverage is very competitive
- 2016-2020: Eligible revenues but not aligned revenues
- 2021 - till date : Aligned revenues
Transparency is key in whatever data you buy from an ESG vendor
Research Universe is 16000 for Green Revenues dataset from LSEG
ESG data - is all as reported data.
EU Taxonomy reporting obligations
- For EU large corporates under NFRD, EU adopted two step approach
  - 2021 - Light reporting Revenue, Opex and Capex that are associated with eligible economic activities under EU Taxonomy
  - 2023 - EU large corporates are subject to full reporting. Turnover, capex and opex that are aligned and not aligned with EU Taxonomy. Banks need to do only light reporting
  - Article 8 and 9 funds taxonomy alignment disclosure as per SPDR templates made mandatory in 2022
    - Regulator has allowed to use the estimates.

Takeways

There is so much of new terminology around this topic that it is overwhelming and daunting for a newbie like me. May be the best way to get a better grasp at these terms is to work with the underlying metrics and data points that are being used by industry participants to adhere to the new regulatory environment.