METHODOLOGYMSCI ESG RESEARCH LLC

MSCI EU Taxonomy
MSCI ESG Research
June 2024© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

MSCI EU TAXONOMY | JUNE 2024

Contents
Summary ..................................................................................................................... 3
MSCI EU Taxonomy alignment criteria ......................................................................... 3
Substantial Contribution to Environmental Objectives ..................................................... 3
Do No Significant Harm ...................................................................................................... 5
Minimum Safeguards .......................................................................................................... 6
Research process overview ......................................................................................... 6
Data sources ........................................................................................................................ 6
Coverage universe ............................................................................................................... 7
Quality assurance process ................................................................................................. 7
Ongoing monitoring and update cycle ............................................................................... 7
MSCI Sustainable Impact Metrics .................................................................................. 7
MSCI ESG Controversies and Global Norms ................................................................. 7
BISR (including Tobacco and Controversial Weapons Involvement) .......................... 8
Corporate actions and related changes .............................Error! Bookmark not defined.
Revenue estimation process .............................................................................................. 8
Taxonomy eligible revenue .......................................................................................... 8
Eligible revenue data review ............................................................................................... 9Company-reported EU Taxonomy data ......................................................................... 9
Non-Financial Reporting Directive................................................................................ 9
Exception from NFRD for subsidiaries............................................................................. 10
Financial information ........................................................................................................ 10
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MSCI EU TAXONOMY | JUNE 2024

Summary
The European Union taxonomy for sustainable activities (EU Taxonomy) is a classification systemfor environmentally sustainable economic activities. The purpose of the regulation is to enable
sustainable investments and to implement the European green deal.1
MSCI’s EU Taxonomy Methodology has been designed by MSCI ESG Research in response to the EU
Sustainable Finance Action Plan to identify companies generating revenue from business activities
that are eligible and “potentially aligned” with the EU Taxonomy.2 Revenue considered eligible for EU
Taxonomy alignment is the portion of company revenue associated with activities described in the
EU Taxonomy’s delegated acts, regardless of whether the revenue meets any or all of the technicalscreening criteria set forth in the EU Taxonomy.3 Our screen for identifying potential EU Taxonomy
alignment includes a list of companies and corresponding reported or estimated percentages ofrevenue from qualifying sustainable activities. Companies that fail to meet the Do No Significant
Harm (DNSH) and Minimum Safeguard criteria established by the EU Taxonomy methodology are
excluded from the list of entities identified for potential alignment with the EU Taxonomy.
This methodology document explains the screening process for data points listed in the following
table, and for information about the data directly reported by companies to be EU Taxonomy eligible
and aligned.

MSCI EU Taxonomy alignment criteria
MSCI EU Taxonomy Alignment Methodology identifies issuers that meet the minimum criteria (i.e.,
potential alignment) of the EU Taxonomy. The minimum criteria are: Substantial Contribution toEnvironmental Objectives, Do No Significant Harm, and Minimum Safeguards.

Substantial Contribution to Environmental Objectives
MSCI Sustainable Impact Metrics are designed to identify companies that derive revenue fromproducts or services with a positive impact on society and the environment.4 Issuers that are
1 European Commission, “EU Taxonomy for Sustainable Activities: What the EU is doing to create an EU-wide classification system

for sustainable activities,” https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainableactivities_en, last modified Dec. 3, 2021.
2 A potentially aligned business activity is one that is considered aligned but that cannot be fully verified as aligned. The concept ofpotential alignment was introduced in the Sustainable Finance: Technical Expert Group (TEG) final report on the EU Taxonomy toacknowledge the gap in available reporting that is needed to determine whether a business activity is completely aligned with the EU
Taxonomy. MSCI ESG Research is using the potential alignment approach to ensure the inclusion of all relevant companies in its
screen. Sources: European Commission, Communication from the commission to the European Parliament, the European Council, theCouncil, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions Action Plan:
Financing Sustainable Growth, COM/2018/097 final; and EU Technical Expert Group on Sustainable Finance, Taxonomy: Final Reportof the Technical Expert Group on Sustainable Finance, European Commission, 2020.
3 European Commission, Official Journal of the European Union L, “Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021

supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by specifying the content and presentationof information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally
sustainable economic activities, and specifying the methodology to comply with that disclosure obligation,” 443/9, December 10,
2021.

More details regarding the MSCI Sustainable Impact Metrics methodology can be found on MSCI’s ESG Manager
platform.
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considered for inclusion in the screen must generate revenue from products and services that
address one or more of the six environmental objectives within the EU Taxonomy. The
environmental objectives listed below correspond with a number of MSCI ESG Research’s
Environmental Impact Solutions that are assessed under the MSCI Sustainable Impact Metrics.
Exhibit 1: EU Taxonomy environmental objectives versus MSCI Sustainable Impact Metrics
Environmental Impact Solutions
EU Taxonomy Environmental
Objectives

MSCI Sustainable Impact Metrics
Environmental Impact Solutions•

Alternative Energy•

Carbon Energy and Efficiency•

Green Building•

Sustainable Agriculture (e.g., forest
management, no-deforestation
provisions)•Sustainable Water (e.g., smart
metering)•

Pollution Prevention (e.g., waste
treatment)•

Carbon Energy and Efficiency (e.g.,
insulation solution)•

Green Building•

Sustainable Water

Sustainable Use andProtection of Water andMarine Resources•

Sustainable Water•

Pollution Prevention & Control

Transition to a Circular
Economy•Sustainable Water•

Pollution Prevention & Control (e.g.,
recycling)

Pollution Prevention andControl•

Pollution Prevention & Control•

Sustainable Water

Protection and Restoration of
Biodiversity and Ecosystems•

Sustainable Water•

Sustainable Agriculture•

Pollution Prevention & Control

Climate Change Mitigation

Climate Change Adaptation© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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The EU has defined activities that contribute to climate change mitigation and climate change
adaptation within the European Commission’s Delegated Regulation 2021/2139 (the Climate
Delegated Act), while details of the remaining four environmental objectives were published in June
2023 within the European Commission’s Delegated Regulation 2023/2485.5
Revenue generated from contributing to climate mitigation focuses on products and services that
reduce greenhouse gas emissions. Such activities include solar power generation, battery storage
and smart metering. Revenue generated from contributing to climate adaptation includes revenue
from products and services that reduce the risk of impact from climate change. Insulation products,
a subcategory captured by Sustainable Impact Metrics, are an example of revenue-generating
activities that reduce the impact of severe weather events and temperature changes.
Insulation products also provide energy efficiency for homes and businesses resulting in a reduction
in energy demand and greenhouse gas emissions. This highlights how a Sustainable Impact Metricsubcategory can apply to multiple environmental objectives, a principle put forth by the EU
Taxonomy regulation.

Do No Significant Harm
As outlined in the final report on the EU Taxonomy of the European Commission’s Technical Expert
Group on Sustainable Finance (TEG report),6 an economic activity which contributes to one
environmental objective should not be made at the expense of the other five environmental
objectives. At a minimum, companies are expected to comply with applicable environmental
standards and regulations and avoid significant adverse impact on the environment. The EU
Taxonomy Delegated Acts have developed, in aggregate, 121 broad technical screening criteria
selectively applied to each economic activity and environmental objective that need to be met toprevent harm.
MSCI ESG Research is enhancing its DNSH estimation model by adding an “ESG practice” screen to
its existing “ESG controversy” screen with the aim of providing a more precise assessment ofcompanies’ alignment with the EU Taxonomy DNSH technical screening criteria beyond a simple
entity-level controversy screen.7
We reviewed and analyzed each DNSH criterion published in the EU Taxonomy Delegated Acts,8 andmapped them to existing MSCI ESG policy, program and process indicators.

5 European Commission, Official Journal of the European Union L, “Commission Delegated Regulation (EU) 2021/2139 of 4 June

2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technicalscreening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climatechange mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm toany of the other environmental objectives,” 442/1, Dec. 9, 2021.
6 EU Technical Expert Group on Sustainable Finance, Taxonomy: Final Report of the Technical Expert Group on Sustainable Finance,

European Commission, 2020.
In the current model, MSCI ESG Research excludes issuers with MSCI ESG Controversies Red & Orange Flags for environmental
controversies (Environmental Controversy Score of 0 or 1) which identifies companies involved in specific events or practices withsevere and very severe adverse impacts on the environment as a proxy to estimate significant harm.
7

8 As of February 2023. All Sustainable Impact Metrics categories used to estimate substantial contribution to the EU Taxonomy arelinked to the Climate Change Mitigation objective and, thus, such economic activities would need to meet the DNSH criteria of theremaining five environmental objectives. Thus, we limited this review to Climate Change Adaptation, Sustainable Water, Pollution
Prevention, Circular Economy and Biodiversity DNSH technical screening criteria.

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As of September 2023, we found relevant ESG indicators for 44 DNSH technical screening criteria.
This represents over a third of the DNSH technical screening criteria published in the EU Taxonomy
Delegated Acts for the economic activities contributing to climate change mitigation (n=121), as ofFebruary 2023.

Minimum Safeguards
As referenced in Article 18 of the EU Taxonomy Regulation, undertakings are required to comply with
the Organisation for Economic Co-operation and Development (OECD) Guidelines on Multinational
Enterprises (MNEs) and the UN Guiding Principles on Business and Human Rights, with specificreference to the International Labour Organization’s (ILO’s) Core Labour Conventions. Also, theprinciple of “Do No Significant Harm” referred to in the EU Sustainable Finance Disclosure Regulation(SFDR) shall be taken into consideration.9
The Platform on Sustainable Finance put forward the “Final Report on Minimum Safeguards,”10
where it recommends assessing minimum safeguards, with the evaluation of human rights due
diligence processes, corruption, taxation, and fair competition. The EU Commission also published a
Commission Notice referencing SFDR principal adverse impact (PAI) indicators for social andemployee matters “as a minimum” for the EU Taxonomy minimum safeguards assessment.11
MSCI ESG Research enhanced its Minimum Safeguards estimation model by adding an “ESGpractice” screen to its existing “ESG controversy” screen to provide a more precise assessment ofcompanies’ alignment with the EU Taxonomy minimum safeguards criteria beyond a controversybased screen.
The enhanced Minimum Safeguards estimation model consists of six different screening criteria,
combining social policy indicators (with a special focus on human rights due diligence), social
principal adverse impact indicators from SFDR, as well as ESG controversies for certain aspects.

Research process overview
The MSCI EU Taxonomy Methodology builds on the underlying methodologies of MSCI Sustainable
Impact Metrics, MSCI ESG Business Involvement Screening Research and MSCI ESG Controversies
and Global Norms.

Data sources
We use a wide range of information derived from various tools and sources, including:•Company websites.

•

Company annual reports and regulatory filings.

9 European Commission, Official Journal of the European Union L, "Regulation (EU) 2020/852 of the European Parliament and of theCouncil of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU)2019/2088," 198/13, June 18, 2021.
10

Final Report on Minimum Safeguards, Platform on Sustainable Finance, October 2022.

11 Commission Notice on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links

to the Sustainable Finance Disclosure Regulation (2023/C 211/01), June 2023.

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MSCI EU TAXONOMY | JUNE 2024•

Government financial agencies and disclosures.

•

Financial data providers.

•Media and periodicals.

•

NGO reports and websites.

Coverage universe
MSCI Sustainable Impact Metrics, as of December 2023, cover more than 15,000 corporate equity
and fixed income issuers including constituents of the MSCI ACWI Investable Market Index (IMI).
MSCI ESG Business Involvement Screening Research (including tobacco and controversial weapons
involvement) covers global equity issuers, selected bond-issuing subsidiaries, selected corporatebond issuers and selected government-owned entities that operate as corporations.
The MSCI EU Taxonomy coverage universe, as of December 2023, for data disclosed directly bycompanies includes approximately 12,581 equity and fixed income issuers, including constituents of
the MSCI ACWI IMI.

Quality assurance process
Our initial company research and analysis is followed by a quality assurance process. Data accuracy
and company profiles are peer-reviewed by ESG analytical personnel, then sent to ESG reviewers for
final approval. In specific cases in which a company’s business activity is not clearly defined by
MSCI ESG Research’s methodology and there is no precedent, the case is escalated to the Head of
Screening Research. Cases that require further interpretation or an update to the methodology arebrought to the MSCI ESG Impact Screening and Methodology Committee.

Ongoing monitoring and update cycle
Updates to the MSCI EU Taxonomy alignment screen are based on updates to the MSCI Sustainable
Impact Metrics, MSCI ESG Controversies and Global Norms and MSCI ESG Business Involvement
Screening Research (BISR) assessments.
The frequency of updates for each are listed below:
MSCI Sustainable Impact Metrics
Companies are reviewed throughout the year, based on fiscal-year reporting cycles.
•

Constituents of the MSCI ACWI Index are reviewed within one quarter of their annual filings.
New constituents are processed within one quarter of their index inclusion.

•

The rest of the coverage universe is reviewed on a rolling schedule, within 12 months of anissuer’s filings. New issuers are processed within two quarters of when they enter the index
or coverage.

MSCI ESG Controversies and Global Norms•

Companies within the ESG Controversies coverage universe are reviewed, updated andpublished on an ongoing basis. Controversy assessments, scores and flags can change as© 2024 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.

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MSCI EU TAXONOMY | JUNE 2024

part of two separate research and updates processes: daily monitoring and targeted reviewsof very severe and severe cases, typically on either a quarterly or annual basis, depending on
the severity.12
BISR (including Tobacco and Controversial Weapons Involvement)•

MSCI ESG Research regularly reviews all companies in the BISR coverage universe.
Companies are reviewed throughout the year, based on fiscal-year reporting cycles.

•

Constituents of the MSCI ACWI Index are reviewed within one quarter of their annual filings.

•

The rest of the coverage universe is reviewed on a rolling schedule, within 12 months of theissuers’ annual filings.

•

New constituents to the MSCI ACWI Index, MSCI US IMI or MSCI China Indexes areprocessed within one quarter of their index inclusion. All other additions are processed
within two quarters of when they enter an index or brought under MSCI ESG Research’s
coverage.

Revenue estimation process
When companies do not report exact revenue figures for a business activity covered within MSCI
Sustainable Impact Solutions, MSCI ESG Research estimates revenue from the business activity
based on available disclosed or publicly available data, including segment revenue, product lines,
and product specifications.

Taxonomy eligible revenue
In addition to screening EU Taxonomy aligned revenue, we provide data for company's EU Taxonomy
eligible revenue and non-eligible revenue. Eligible revenue is an important component of the EU
Taxonomy framework because it defines a company’s level of involvement in activities that have theability to positively contribute to an environmental objective, regardless of whether those activities
meet any or all of the EU Taxonomy’s technical criteria.
The EU defines economic activities based on the Nomenclature Statistique des Activités
Economiques dans la Communauté Européenne (NACE) classification system. For each economic
activity that has been defined by the EU Taxonomy, there are several NACE codes that may apply. A
list of eligible NACE codes is available in the technical annex of the TEG report on EU Taxonomy
regulation.
We collect issuer-reported revenue segment data based on SIC codes. In some cases, where further
data granularity is needed, we make further distinctions within SIC codes to break down the revenue
category more precisely. As an example, revenue data from the electric services SIC code is further
broken down by us based on fuel source.
To estimate the percentage of revenue eligible for EU Taxonomy alignment, we map SIC codes to the
EU Taxonomy activities and their respective NACE codes for climate change mitigation andadaptation. Through this process, we categorize eligible SIC codes and non-eligible SIC codes.
12

Additional details can be found in: MSCI ESG Research, MSCI ESG Controversies and Global Norms Methodology – Process, 2023.

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MSCI EU TAXONOMY | JUNE 2024

We estimate total eligible revenue as the sum of revenue percentages from SIC codes that we haveclassified as eligible. Estimated non-eligible revenue is 100% of estimated revenue minus estimatedeligible revenue.
We also separately estimate the percentage of total revenue eligible for climate change mitigationand for climate change adaptation. In most cases, revenue is eligible for both mitigation andadaptation because the activities and eligible NACE codes overlap significantly. For this reason,
revenue eligible for climate mitigation and revenue eligible for climate adaptation cannot be added
together; to do so would mean double counting revenue. The revenue estimate for total eligible
revenue takes this into consideration to ensure no double counting occurs.

Eligible revenue data review
Review by SIC code undergoes a complete quality review process. SIC-based revenue data isprovided to us from a third-party data vendor and confirmed for accuracy by a second third-party
data vendor.
Our Segment Data Platform (SDP) team further differentiates revenue segments into more-granular
categories and completes its own quality checks before the data is used by MSCI ESG Research.

Company-reported EU Taxonomy data
In addition to the screening methodology for EU Taxonomy aligned and eligible revenue, MSCI’s EU
Taxonomy data set includes company-reported EU Taxonomy key performance indicators (KPIs).
For nonfinancial companies, the indicators are based on total revenue, total capital expenditures,and total operating expenditures. For financial companies, aligned and eligible assets are collected
as a proportion of covered assets, in addition to underwriting activities for (re)insurance companies
and commission fees for investment managers. Additionally, MSCI provides data on eligible assets
and total assets.

Non-Financial Reporting Directive
The Non-Financial Reporting Directive (NFRD) aims to provide transparency of social andenvironmental information and to improve non-financial disclosure for large companies includingbanks and insurance entities.13 The European Commission considers non-financial information “vitalfor managing change towards a sustainable global economy” and companies required to disclose
EU Taxonomy key performance indicators are also subject to the NFRD regulation.14 MSCI partneredwith a third-party vendor to provide an indicator designating companies which are in scope for the
NFRD regulation. The methodology for flagging issuers subject to the regulation is based oncompany-disclosed data and eligibility thresholds set by the NFRD regulatory text.
To be in scope for the NFRD, a public interest entity (PIE) must have more than 500 employees on
average throughout the year as well as either (a) total assets of more than EUR 20 million and/or (b)13 European Commission, Official Journal of the European Union L, “Directive 2014/95/EU of the European Parliament and of theCouncil of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information bycertain large undertakings and groups,” 330/1, November 15, 2014.
14

Nora Hahnkamper-Vandenbulcke, Non-financial Reporting Directive. European Parliamentary Research Service, January 2021.

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a net turnover of more than EUR 40 million.15 A PIE is an EU limited liability company which either
has securities listed on an EU-regulated exchange, is a bank, and/or is an insurance company as
specified in article 2(f) of the NFRD regulation. Only companies with listed securities within MSCI’s
EU Taxonomy coverage are considered for review of NFRD eligibility.

Exception from NFRD for subsidiaries
An exemption for NFRD reporting applies to companies which are part of a corporate group that atsome level of majority ownership is required to publish a non-financial statement under the NFRD.16
This means that subsidiaries of PIEs are, in principle, excluded from the requirement to publish a
non-financial statement under the NFRD. The EU Taxonomy KPIs are collected and displayed for theultimate parent company and the data is propagated down to the subsidiaries. The NFRD flag is notpropagated down to the subsidiaries.

Financial information
Financial information (i.e., net turnover, total assets and number of employees) necessary to
determine the reporting obligation was retrieved from each company’s annual report covering theconsolidated figures for the relevant financial year:•

Net turnover means the amount of revenue derived from the core business activity — i.e.,
sale of products and the provision of services — after deducting sales rebates and value
added tax and other taxes directly linked to turnover.17•

Total assets means the balance sheet total at the closing date of the financial year stated in
the profit and loss account included in the consolidated financial statements.

Company-reported average number of employees can be presented using several definitions, suchas employee headcount, full-time equivalents (FTEs), or number of employees at year end andaverage number of employees during the year. When both headcount and FTEs are provided,
headcount is used. Moreover, when only end-of-year figures are provided, the average is estimatedusing the current and previous year-end employee numbers.
Any company which meets the outlined requirements is flagged as subject to the NFRD regulation.

15 European Commission, Official Journal of the European Union L, “Directive 2014/95/EU of the European Parliament and of theCouncil of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information bycertain large undertakings and groups,” 330/1, November 15, 2014.
16 An undertaking is a majority shareholder if it exercises significant influence over another undertaking through the control of the

majority of its capital (more than 50%).
17 As defined in Article 2(5) of: European Commission, Official Journal of the European Union L, “Directive 2013/34/EU of theEuropean Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements andrelated reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council andrepealing Council Directives 78/660/EEC and 83/349/EEC,” 182/19, June 29, 2013.

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