It is fundamental to direct investments towards sustainable projects and activities in order to meet the EU’s climate and energy targets for 2030, according to the European Commission. To achieve this, a common language and a clear definition of what is sustainable is needed. The EU Taxonomy is a classification system that establishes a list of environmentally-sustainable economic activities, helping companies and investors navigate the transition to a low-carbon, resilient economy. Using the Taxonomy, financial market participants offering products in the EU will be required to complete their first set of disclosures covering climate change mitigation and/or adaptation by the end of 2021, while companies will be required to disclose in 2022.

The Taxonomy sets performance thresholds for economic activities that make a substantive contribution to one of six key environmental objectives, do not negatively affect the other five and meet minimum safeguards. The six objectives are: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems. To date, the Taxonomy considers economic activities that contribute to climate change mitigation and/or adaptation objectives by outlining 67 business activities that are linked to seven NACE macro sectors.

Trucost’s EU Taxonomy Revenue Share Dataset

Trucost’s EU Taxonomy Revenue Share Dataset provides an assessment of the proportion of company revenues linked to the business activities outlined in the Taxonomy. The dataset covers 15,000+ listed companies, representing 98% of global market capitalization, and includes history back to 2005 to help assess how the Taxonomy-eligibility of company business activities has evolved over time. Using the dataset, it is possible for financial institutions to aggregate the percentage of green revenue attributable to each company in their investment portfolios — that is, the proportion of company revenues that have the potential to contribute to the low-carbon transition. This can help financial institutions understand, optimize and report on their alignment with the EU Taxonomy.

Does Investing in Green Influence Spreads?

To determine if there was any difference in the return spread by actively investing in companies with exposure to green revenue, we conducted a back test from the third quarter of 2010 to the third quarter of 2020.  “Green” and “Brown” portfolios were constructed that had exposure to green revenue of greater than 1% and less than 1%, respectively. The analysis showed that over this 10-year period the average return spread was negligible at -3bps. 

Given this, we then conducted a 10-year back test on just the Green portfolio to see if there were differences in performance among equities that had a higher/lower percentage of green revenue. Five quintiles were created, with Quintile 1 containing companies with the highest exposure to green revenue. Results showed that Quintile 1 outperformed Quintile 5 on average by 22 bps/month, or an average top/bottom spread of 2.59% annually. 

This analysis shows that investors can potentially align their portfolios with the EU Taxonomy while maintaining their portfolio's return profile. In addition, investors could potentially target outperformance by identifying companies with a higher proportion of green revenues.

Click here to read the full report and learn more about this important dataset.

Check out other blogs in this series Tracking Progress On Meeting The Paris Agreement Goals and Financing Sustainable Development.

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