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Which ESG investments are truly sustainable?

Elena Philipova
Elena Philipova
Global Head ESG Proposition, Refinitiv

As the world starts to recover from the COVID-19 pandemic and we celebrate this year’s World Environmental Day, the United Nations is encouraging the world to act #ForNature. The European Commission is looking to encourage public and private funds to be channeled towards a socially just and green recovery. How can data inform investors to effectively identify sustainable investment options?


  1. The EU Taxonomy, part of the European Commission Action plan on financing sustainable growth, is a classification tool to help investors and companies consistently determine whether an economic activity is environmentally sustainable. The primary objective is to steer the flow of public and private capital towards sustainable investments.
  2. To qualify as EU Taxonomy compliant, an economic activity must deliver a substantial contribution to one of the six environmental objectives without harming the others, as well as ensuring social-safeguards.
  3. Data and insights from Refinitiv ESG in combination with other datasets, such as company fundamentals and industry classification data, can be useful tools to start evaluating investor portfolios against the EU Taxonomy.

In December 2019, the European Parliament and the Council confirmed the creation of the world’s first ‘green list’, a taxonomy for sustainable economic activities. The list will serve as a common language for market participants to use when investing for a positive impact on the environment.

The EU Taxonomy is an essential tool for financial institutions in the future. Market participants will be required to channel capital to finance the transition to a sustainable and resilient economy and support the EU goal of climate neutrality by 2050.

All market participants need to consider the role they play in the transition, leveraging the tools developed by the European Commission like the EU Taxonomy to enable them to channel capital appropriately at the scale and speed required.

Quote by Elena Philipova. Which ESG investments are truly sustainable?

ESG Data: Putting ESG thinking at the heart of your investment process

What makes an ESG investment truly sustainable?

The ‘green list’ lays out a framework for what can be classified as environmentally sustainable. For an activity to quality, first it must make a substantial contribution to one of the six environmental objectives:

The six environmental objectives chart. Which ESG investments are truly sustainable?

Second, the activity must not significantly harm (DNSH principle) any of the remaining five objectives, when relevant to economic activity.

The third condition, is to meet minimum social safeguards, for example OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

Data and insights from Refinitiv ESG in combination with other datasets, like company fundamentals and industry classification data, can be useful tools for investors to start evaluating the degree of alignment of portfolios to the EU Taxonomies, with additional due diligence. This should continue until corporate disclosure standards are aligned with the EU Taxonomy regulation requirements.

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Across the six environmental objectives and themes, companies currently report on several key performance indicators that can unveil insights into the direction of travel of the companies.

Climate

The Refinitiv ESG database contains many environmental metrics that can be incorporated into research processes, including climate metrics that vary from Emission Scores, policies and targets, to Scope 3 emissions data.

Refinitiv’s Emission Score measures a company’s commitment and effectiveness towards reducing environmental emissions in production and operational processes.

In our recent research, based on a sample of 3,611 companies with ESG data for at least five years*, we found that 85 percent of companies have Emission Scores compared with 76 percent five years ago. The remaining companies did not have any reporting across this category and we assigned a score of zero for the respective fiscal year.

Our research also found that the average global score increased by more than 10 points over the same time period.

We looked at the relative performance of companies in the STOXX 600 with the highest Emissions Score, and compared them with the STOXX 600 benchmark. Over a five-year duration, the companies with higher Emissions Scores performed better than the benchmark.

Figure 1: STOXX 600 Emission Score

STOXX 600 Emission Score chart. ESG metrics. Which ESG investments are truly sustainable?
Source: Refinitiv Eikon

Unsurprisingly, when we looked at companies’ Scope 3 emissions over the last five years, we saw major increases in the level of disclosure. As scope 3 emissions are significantly material for some industries, different stakeholders are increasing the pressure for more disclosure.

However, significant data gaps still remain, and we expect the inclusion of Scope 3 emissions in the EU regulation to narrow the data gap relatively quickly.

Listen: ESG and Long-Term Planning Can Play a Pivotal Role in the Post-Crisis Recovery

Water

To evaluate if market participants are investing in companies that are using water efficiently, our database has several metrics that can help. However, the we are seeing a growing focus on water.

Nearly three-quarters (72 percent) of companies have emission policies, according to our data, compared with 59 percent that have water-efficiency policies. And 42 percent of companies report on emissions targets, while only 21 percent have water-efficiency targets.

We conducted a brief analysis of relative performance of the companies in our sample that have a water-efficiency policy and targets in place versus companies without a policy and targets. Our findings revealed that companies ultimately performed better against those without targets and policies.

Figure 3: Water efficiency policies and targets for research sample

Water efficiency policies and targets for research sample
Source: Eikon

Pollution

From waste metrics to emissions, Refinitiv ESG data offers a variety of factors which can be incorporated into the investment decision-making process.

Renewable energy use may be a primary factor in many climate-focused investment decisions.

From our relative performance analysis of the S&P 500, we saw that its constituent companies that report using renewable energy have performed better than the S&P 500 as a whole.

Figure 4: S&P 500 renewable energy use

S&P 500 renewable energy use. Which ESG investments are truly sustainable?
Source: Eikon

Biodiversity and ecosystems

Companies are making commitments to protecting and restoring the ecosystem that they work in, but this is an area where we see room for improvement.

Our recent analysis found that over the last five years the number of companies reporting on their impact on biodiversity or on activities to reduce their effect on the natural ecosystem has increased from 21 percent to 29 percent.

This finding highlights that we need better disclosure on biodiversity metrics.

The Refinitiv Contributor Tool

However, with more pressure from investors we should see the rate of reporting increase. Corporates have an easy way to get their ESG data in front of investors by using the Refinitiv Contributor Tool.

The tool enables corporates to easily review, update and publish your firm’s ESG data in the Refinitiv ecosystem. Updates are sent to our ESG Content Specialists to audit, the data is then published to our products and services in a timely manner.

ESG Data: Putting ESG thinking at the heart of your investment process

* Analysis is based on 3,611 companies that have ESG data for five years. Countries/industries with less than 40 companies reporting are removed from analysis


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