- It’s still early days for taxonomy reporting, but Capital Monitor discovers some discrepancies in the way different data providers are approaching it.
- For instance, FTSE Russell puts Spanish utility Iberdrola’s eligible revenues at 9.7%, while Sustainalytics gets 40.1% and ISS ESG gets 61.5%.
- The number one issue with ESG ratings’ taxonomy alignment appears to be the sequencing of the EU’s sustainable finance regulatory package.
Unwelcome as they are, variation in ESG ratings and scores is in part accepted by sustainable investors who value diversity of opinion and acknowledge that no two asset owners will have the same investment objectives.
But the same should not be said for the regulatory products that data vendors offer. Assessing whether a portfolio is aligned with the EU’s banner green taxonomy, for example, should in theory yield more consistent responses, given it is highly prescriptive. Yet, as Capital Monitor has established, this is not the case (see results in chart below).
To be taxonomy-aligned, an activity must be contributing to sustainable development in some way as determined by the European Commission. To be “eligible” simply means the activity the company undertakes is covered under the taxonomy.
Capital Monitor constructed a sample portfolio of listed and highly liquid European companies – about which plenty of data is widely available – and sent it to ten data providers requesting their taxonomy eligibility or alignment scores for each stock.
Most vendors were reticent to provide the data sought. Bloomberg did not respond to requests. Brussels-based Greenomy said it only reports data coming straight from issuers and would not rely on proxies so could not yet share results. Moody’s declined to provide the data. Fitch Ratings and RepRisk said they did not provide such a service. Both MSCI and S&P Global said that they did provide the service, but only to paying customers.
Those that did share their analysis – ISS ESG, FTSE Russell and Sustainalytics – provided varying levels of detail. Data on corporate activities eligible for taxonomy alignment consideration was much easier to come by than that on activities actually aligned with the taxonomy.
There are, however, still major discrepancies between even eligible revenues as calculated by the three providers. Because of the nature of the taxonomy, carbon-intensive companies provide the best illustration.
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For instance, FTSE Russell puts Spanish utility Iberdrola’s eligible revenues at 9.7%, while Sustainalytics gets 40.1% and ISS ESG 61.5%. According to its annual report, Iberdrola’s own assessment puts it at 50.2%.
Meanwhile, Italian utility Enel gets 12.67% from FTSE Russell, 35.08% from Sustainalytics and 40.8% from ISS ESG. Its own calculation puts eligible revenues at 34.8%.
FTSE Russell gives French oil supermajor TotalEnergies 0.84%, while Sustainalytics gives it 4.5% and ISS ESG 1.01%. These discrepancies are not wildly out of kilter with each other, but they do differ significantly from the company’s own assessment, which it puts at 27% for 2021.
Falling at the first hurdle?
All three vendors were sent these results. Sustainalytics pointed out that Iberdrola, Enel and TotalEnergies were all reporting data from fiscal year 2021 whereas its own research represented earlier financial years, during which time less reported data was available. The company is currently working on fiscal year 2021 data and will incorporate alignment data reported for that year in those results.
These results should prove worrying. Given the restrictiveness of the framework, the average portfolio is expected to be no more than 5% to 10% aligned with the taxonomy. Even still, most expect that once all reporting is in place, fund managers will predicate their mandates in part on taxonomy alignment.
“These differences are a threat to the success of the [EU’s] regulation,” says Arjan Ruijs, senior responsible investment officer at €22bn Dutch asset manager Actiam, which viewed our results.
“If it takes another year or two for the data problems to be sorted, we might see investors not daring to say they have sustainable funds because they cannot prove what they need to according to the EU,” he adds. “The risk is that this confusion acts as a barrier to sustainable investment.”
All in the timing
There may be a number of reasons for the differences in results.
A major problem is timing. From January this year, asset managers that market investment products as sustainable (under the Sustainable Finance Disclosure Regulation) need to report the taxonomy alignment of these products. But the highly granular data they need to be able to report this must come from the companies themselves, which are not required by law to provide this until early 2024, under the Corporate Sustainability Reporting Directive. Asset managers complain of being caught in a limbo between interconnected but misaligned pieces of regulation.
ESG data providers differ slightly in their methods at almost every stage of the data collection process, says Isobel Edwards, Amsterdam-based green bond analyst at NN Investment Partners, who has conducted a similar experiment. She says data providers calculate revenues differently, map those revenues to different activities and, of course, have different methods for assessing alignment – some of which they are not particularly transparent about.
Some of this is down to providers wanting to use the data they already have, but all of them categorising a given company’s activities in slightly different ways.
For this reason, representatives from both MSCI and Sustainalytics said they were not surprised that such discrepancies existed. For instance, Sustainalytics puts Linde in the materials sector, while ISS has it under chemicals.
“We already had our own less technical internal taxonomy focused on broader categories, so it was natural for us to start with that,” says Olga Emelianova, head of ESG research at MSCI.
Edwards says: “Because of the way the taxonomy is written, there’s a lot of interpretation required, and it’s ultimately humans doing that interpretation. It’s the same as [with] ESG scores – investors will have to use their own judgment, which is why transparency from the providers is important. Without that, you’re going to struggle.”
That may be the case, but if even prescriptive reporting is making it hard for data vendors to find parity, then it’s a far cry to expect any consistency with more general ESG rating services.
This is part one of a two-part series on taxonomy alignment assessments by ESG data vendors. Part two, which digs deeper into the reasons for these discrepancies, will be published in the coming week. Sign up to Capital Monitor’s newsletter to get it straight to your inbox.
