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It is crucial to direct investments toward sustainable companies in order to create a low-carbon economy. The EU Taxonomy is a reporting framework that will help investors assess the environmental performance of companies and their products or services so they can make better investment decisions. In the following Use Case, we will tell you how the EU Taxonomy works and how you can use it to optimise your investment portfolio.
The EU Taxonomy started out with a transition phase that has softer requirements than the final EU Taxonomy so all companies can get used to it. In the first year of application for 2021, only taxonomy eligibility was requested to be reported by companies, whereas in the following years taxonomy alignment is required to be reported.
So, what does that mean?
The six environmental objectives are the following:
Each of those environmental objectives has a list of respective sustainable activities and technical requirements for companies to match their own activities against.
The procedure is hence as follows:
Turnover: The revenue generated from sustainable activities (according to EU Taxonomy) of the company divided by its total revenue generated.
Capital Expenditure (CapEx): The amount of money invested in taxonomy-aligned sustainability activities divided by all capital expenditures.
Operating Expenditure (OpEx): The amount of operating expenditure (non-capitalized costs) associated with taxonomy-aligned activities or to the CapEx plan divided by all operating costs.
(You can find an example from the EU on how the final result of this can look like here.)
5. Lastly, the company reports its KPIs and gives further explanations on the procedure, context, and
After the companies report their KPIs, investment firms (PE, VC, M&A houses) can use such data to enrich their portfolio strategies. Investment firms can for instance compare portfolios with a high Green Asset Ratio (GAR) with brown portfolios, that is, portfolios that have a low green revenue (usually less than 1%). S&P Global Market Intelligence made such a comparison with 15,000 companies over a ten-year time horizon (also called “backtesting”). S&P found out that a portfolio of the top 20% of Green Revenue companies beats the bottom 20% of Green Revenue companies from that sample by 2.59% annually over a ten-year time horizon.
The advantages of using EU Taxonomy data for portfolio optimization are hence striking. Investment firms can…
However, one of the main challenges for investment firms when it comes to EU Taxonomy is collecting the data needed to assess their alignment. This data can be challenging to obtain, mainly if a large number of companies need to be evaluated (like in the example given) or companies of interest do not publicly share EU Taxonomy data.
There are a number of solutions to the challenges of EU Taxonomy portfolio alignment:
Firstly, you can appoint a lead person within your investment firm to coordinate the data collection process. Secondly, you can engage with external consultants to help you collect and assess the data. Finally, you can use software solutions to automate the data collection and assessment process.
Daato can support you in sustainability data collection from your portfolio companies through simplified workflows and integrations into your portfolio companies’ software landscape to simplify and automate data collection. Also, for companies that do not publish EU Taxonomy data, Daato can use innovative technology to share data securely between the potential investee company and you, the investment firm, so that you can evaluate the company’s sustainability efforts hassle-free.
Daato can analyse all data points with intelligent algorithms to provide you with personalised insights on where your investments stand and how you can improve your sustainability and investment performance.