ESG Data Signals
The Trucost EU Taxonomy Revenue Share Dataset

Highlights• Using Trucost’s
EU Taxonomy
Revenue Sharedataset, investors
can calculate theproportion of acompany’s “green”
revenues that have thepotential to contributeto the low carbon
transition.

Authors• Constructing a “Green”& “Brown” portfoliowith a green revenue
percentage factor
derived from Trucost’s
EU Taxonomy Revenue
Share dataset results
in an average spread
between the Greenand Brown portfolio
over the time periodof just -3bps, which isstatically equivalentto zero.

• Within equities thathave exposure togreen revenue ofgreater than 1%, theequities with thehighest exposure(Quintile 1) outperform
those with the lowest(Quintile 5) by 2.62%
on average annually.

Liam Hynes
EMEA Head,
Capital Markets
Product Specialists
S&P Global
Market Intelligence
Matyas HorakManager,
ESG Innovation
and Analytics
Trucost, part of
S&P Global

The EU Taxonomy for Sustainable Activities

The EU Taxonomy for
Sustainable Activities
In March 2018, the European Commission adopted anaction plan on sustainable finance as part of a strategy
to integrate environmental, social and governanceconsiderations into its financial policy framework andmobilize finance for sustainable growth. In May 2018, theCommission released the first legislative package under
the action plan and established a Technical Expert Groupon Sustainable Finance (TEG) to inform its development.
One of the proposals under the legislative package was
the development of a unified EU classification systemor ‘EU Taxonomy’ (‘Taxonomy’) that would define which
economic activities are environmentally sustainable. In
March 2020, the TEG published its final report outlining
its recommendations on the design and implementationof the Taxonomy.

A tool to navigate the low carbon transition
The Taxonomy is essentially a tool that will help
companies and investors navigate the transition to a
low-carbon, resilient and resource-efficient economy.
It sets performance thresholds for economic activities
that make a substantive contribution to one of six key
environmental objectives (outlined in Table 1 below),
do not negatively affect the other five and meet
minimum safeguards.

Enhanced disclosure requirements
for financial market participants
To date, the Taxonomy considers economic activities
that contribute to climate change mitigation and/oradaptation objectives by outlining 67 business activities
that are linked to seven NACE1 macro sectors. The TEG isplanning to address the other environmental objectives infuture iterations. Financial market participants offering
financial products in the EU will be required to complete
their first set of disclosures using the Taxonomy, covering
climate change mitigation and/or adaptation, by the endof 2021. Companies will be required to disclose in thecourse of 2022.
For financial market participants, disclosures should
be made as part of pre-contractual and periodic
reporting requirements. For companies, disclosures
should be made as part of the non-financial statement,
which may be located in annual reporting or in a
dedicated sustainability report.
The Taxonomy is one of the most significant
developments in sustainable finance and may havewide‑ranging implications for financial institutions(notably pension funds, insurers, banks and assetmanagers) and issuers working in the EU, and beyond.

Table 1: Six environmental objectives of the Taxonomy
1

Climate change mitigation

4

Transition to a circular economy

2

Climate change adaptation

5Pollution prevention and control

3

Sustainable and protection of waterand marine resources

6

Protection and restoration ofbiodiversity and ecosystems

Source: EU Taxonomy: Final Report on the Technical Expert Group on Sustainable Finance, March 2020

1 NACE (Nomenclature des Activités Économiques dans la Communauté Européenne) is a European industry standard classification system of economic activities
adopted by the TEG.

2

Trucost’s EU Taxonomy Revenue Share Dataset

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 theTaxonomy. The dataset covers 15,000+ listed companies
representing 98% of global market capitalization,
in Trucost’s Core Plus universe including company
revenue data going back to 2005.
Trucost uses a blended approach to assess the alignmentof company revenues with the Taxonomy. Firstly, Trucost
has conducted a direct mapping between the 464
business activities in its proprietary sector classification
system with the 67 business activities mentioned above.
The Trucost proprietary sector classification system
is based on the North American Industry Classification
System (NAICS), which is similar to the European
NACE system.

Any business activities not mapped directly through thisprocess are reviewed using a bottom-up assessmentof their alignment with the objectives of the Taxonomy.
During this step, Trucost reviews company reported
revenues and emissions data from its Core Plus universe
to verify that only business activities that have a carbon
mitigation and/or adaptation potential are included in thedataset. Any business activities remaining after this step
are not considered to be aligned with the Taxonomy.

Creation of a GreenRevenue Factor
Using Trucost’s EU Taxonomy Revenue Share dataset,
investors can calculate the proportion of company
revenues that have the potential to contribute to the low
carbon transition. With a binary flag on the alignmentof business activities with the Taxonomy, it is possible
to aggregate the percentage of ‘green revenue’ for eachcompany. For example, American Electric Power Co (AEP)2
currently has 12.9% of its revenue stream from activities
that align with the Taxonomy.

This ‘Green Revenue Factor’ can now serve multiple
purposes, including:Identifying companies that are bestplaced for the low carbon transition

Back testing
the Green Revenue Factor

2 Trucost Data from S&P Global Market Intelligence, Period End Date Dec 2018.

3

Factor Back Test

FactorBack Test
Is there any difference in the Top/
Bottom return spread by actively
investing in companies with
exposure to green revenue? To test
this hypotheses S&P Global MarketIntelligence carried out a back test on
the Green Revenue Factor.

World Developed Market (DM) Basket
Developed Markets Only3
Large & Mid Cap Equities(>$2 Bln in M Cap)

We looked at the ~15,000 companies
in Trucost’s Core Plus Universe
representing 98% of global market
capitalization and created adeveloped market basket to test.

“Green” Basket“Brown” Basket

Total exposure
to Green Revenue
greater than 1%

Total exposure
to Green Revenue
less than 1%

We then did a cross sectional split
along the median of the Green
Revenue % (~1%) to create a Brown
basket and Green Basket:

1.8

Cumulative Log Returns

1.6
1.4
1.2
10.8
0.6
0.4
0.2
00

902
03
,2901
09
,2801
03
,2801
09
,2701
03
,2701
09
,2601
03
,260109,250103,201

5Green Sector/Country Neutral EW Return09,240103,2401
09,2301
03,2301
09,220103,2201
09,210103
,2101
09
,2001
03
,201
09
,20-0.201

The average spread between theGreen and Brown portfolio over
the time period is -3bps, which isstatically equivalent to zero.5 Basedon this analysis over the past 10 years
the difference in the return spread ininvesting in equities with exposure
to green revenue of greater than 1%
and investing in brown equities (anexposure of green revenue less than1%) was negligible.

Fig 1: Developed Markets (Mid & Large Cap) Green vs Brown Cumulative Log Returns
203,2“Green” & “Brown” portfolios
were created by matching thecountry|sector exposures in thestarting DM Large & Mid Cap basket
that we created, equally weighting
the constituents4 within the countrysector exposures and rebalancing
monthly over the past 10 years.

Brown Sector/Country Neutral EW Return

Indices are unmanaged, statistical composites and their returns do not include the payment of any sales chargesor fees an investor would pay to purchase the securities they represent. It is not possible to invest directly in anindex. Past performance is not a guarantee of future results.

Source: Trucost analysis. Current as at June 2020

3 Developed Markets – AUS, AUT, BEL, CAN, DNK, FIN, FRA, DEU, HKG, IRL, ISR, ITA, JPN, NLD, NZL, NOR, PRT, SGP, ESP, SWE, CHE, GBR and USA
4 Green & Brown portfolios were country/sector neutralized and rebalanced monthly. There was a binary flag into each portfolio (> 1% Green Revenue <). DM Basket
Average Constituents ~2,400 (Average Green ~ 1,055/Average Brown ~1,258)
5 Green – Brown Average spread: -0.034%, std dev: 1.126% t = -.334, p 0.3694. Back tested performance has inherent limitations. The returns shown are hypothetical,
do not represent the results of actual trading of investor assets, and are constructed with the benefit of hindsight. Thus, the performance shown does not reflect theimpact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Returns do not include
payments of any sales charges or fees. Such costs would lower performance. Past performance is not a guarantee of future results.

4

Developed Market “Green” Basket Back Test

Developed Market “Green” Basket
Back Test
1.4

1.2

1

0.8

0.6

0.4

0.2

• Independent/Dependent Variable:
Green Revenue Percentage/Forward Returns

00

902
,203

901
,209

801
,203

801
,20901,27

Quintile 403

701
,209

601
,203

601,20901,25

Quintile 303

501,20901,24

Quintile 203401,209

301,203

301,20901,22Quintile 103

201,209101,203

101,209001,2030101,203• Green Revenue Percentage
bucketed into 5 Quintiles(Highest Green Revenue
Percentage in Quantile 1),20-0.2

09

We ran a 10-Year Back Test juston the Green Basket using thefollowing criteria:

Fig 2: Developed Markets (Mid & Large Cap) Green Revenue Quintile Cumulative Log Returns

Cumulative Log Returns

After analyzing the return profile ingreen versus brown revenue equities
and seeing no difference in the return
profile, is there any outperformance/underperformance within green
equities that exhibit higher/lower
percentages of green revenue?

Quintile 5

Source: Trucost analysis. Current as at June 2020

• Quantiles are Country& Sector Neutral• End of Month Rebalancing

Fig 3: Annualized Average Monthly Return by Quintile, Trucost “Green” Large & Mid Cap
Mar 2010 - June 2020

• 1 Month Forward Equally
Weighted Quintile Return

T-Stat: 2.34 (Confidence Level 1%), Monthly Top - Bottom Spread: 0.22%
10.0%

Average Return (%)

9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%

Quintile 1

Quintile 2

Source: Trucost analysis. Current as at June 2020

5Quintile 3

Quintile 4

Quintile 5

Results

Quintile Performance
Quintile 1 (which contains the companies that havethe highest exposure to green revenue from theGreen Basket) outperforms Quintile 5 on average by
22bps/month, or an average Top/Bottom Spread of
2.59% annually.

This back test suggests that within companies that haveany exposure to green revenue (>1%), the companies
that exhibited a higher percentage of green revenue
outperformed those with the lowest exposureto green revenue.

Results
Interestingly in the first back test on Green versus
Brown Portfolios, there is no sacrifice in the return
profile. Based on this, in the 2nd back test one could
expect that after drilling into the exposure of green
revenue percentage in the Green basket that there
would be minimal differences across quintiles,
yet there is. There is a monotonic relationship between
the quintile performances and quintile 1 outperforms
quintile 5 at a 1% confidence level; this would warrant
further investigation as to ascertain why.

6As the momentum builds globally in environmental,social and governance policies, governments arestarting are starting to design and implement theframeworks that will regulate these policies increasing
the transparency of ESG risks and opportunities acrosscapital markets.
The EU Taxonomy being one of these frameworks.
Companies in the EU will be mandated to report on
their environmental impact. Trucost data can help
support the reporting process, facilitate back testingand isolate companies that are best placed for the low
carbon transition.

References

References
1. EU Technical Expert Group on Sustainable Finance (TEG), (2020), Taxonomy: Final Report of the TEG. Available at:https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200309sustainable-finance-teg-final-report-taxonomy_en.pdf
2. EU Technical Expert Group on Sustainable Finance, (2019), Taxonomy Technical Report. Available at:https://ec.europa.eu/info/publications/sustainable-finance-teg-Taxonomy_en

For more information visit
www.spglobal.com/marketintelligence/esg

7

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