Ahead of the implementation of an ambitious EU classification system for sustainable activities, known as the EU Taxonomy, FTSE Russell this week launched a Green Revenues 2.0 model to classify the “green” revenue exposure of global listed companies, a segment of the economy that FTSE Russell estimates is worth approximately $4 trillion.
A final Taxonomy report, published by the EU technical expert group on sustainable finance in March 2020, set out detailed criteria for 70 economic activities that contribute to climate change mitigation and 68 to adaptation activities.
Some 6,000 large EU companies are subject to the EU’s Non-Financial Reporting Directive and will be required to disclose if their activities are Taxonomy-aligned, and to what extent, by January 2022.
The entire initiative “is an important component of ESG (environmental, social and governance) investing,” said Arne Staal, global head of research and product management for FTSE Russell.
“We see very strong interest in Europe, and growing interest in the U.S.,” he said in an interview.
A recent FTSE Russell survey found the evaluation and implementation of sustainable investment within asset owner portfolios in North America increased by more than 20 percentage points since last year, to 63 percent.
“The first wave of green investing was more a full combination score of ESG,” Staal said. “Now climate is becoming a more important component of the mix, and asset owners are challenging companies to do more.”
The EU’s directive may prove challenging for investors. While the Taxonomy lists green criteria, it leaves it to the markets to assess individual companies against it. A recent FTSE Russell study, “Sizing the Green Economy: Green Revenues and the EU Taxonomy,” showed less than 30 percent of companies with green revenues provide disclosures that are specific enough to allow investors to quantify companies’ green business activities.
To counter that knowledge gap, the Green Revenues 2.0 model quantifies a company’s contribution to the green economy in a single percentage of revenue figure, Staal said.
The model assesses 16,000 stocks for exposure to green business activities in 10 sectors that include energy generation and equipment, environmental resources and support, food and agriculture, transportation equipment, waste and pollution control and water infrastructure.
“We’ve worked very closely with the markets in the development of the model,” Staal said.
“We’ve also heard feedback from regulators, and they see a big role for this type of solution,” he said.
FTSE Russell’s first Green Revenues model was launched in 2015 and underpins several green index series, including the FTSE Russell TPI Climate Transition Index and the FTSE Environmental Markets Index Series.