SUSTAINABILITY IN FOCUS
How to Tap Green Revenues as Opportunities
Political pressure and the demand for solutions to the enormous ecological problems are steadily growing. We see “green revenues” as opportunities to invest in and incorporate them systemically into our investment process.
Solutions from the private sector are needed
Overuse of resources, pollution, climate change and deforestation are taking their toll. This has an impact not only on our society, but increasingly directly on the economy as well. It is estimated that over 50% of the world's economic output is directly dependent on nature. Companies have mainly been perceived as the cause of the problems, and this is mind-set is reflected in traditional ESG analysis, which focuses mainly on assessing risk factors such as CO2 emissions and water pollution. However, companies usually have a greater impact through their products and services. They do not only have a negative footprint, but increasingly, also offer positive solutions to environmental and social problems. In fact, achieving global climate targets depends heavily on more companies offering green solutions. This is where the strengths of private sector come into play: speed, flexibility, innovation and scalability. The larger and more tangible ecological problems become, the greater the social and political pressure will be, and the higher the demand for solutions will be. Companies that offer products that contribute to solving environmental problems have a competitive advantage. We try to identify these companies at an early stage and take advantage of the opportunities.
A clear definition of “green solutions” is the foundation
What are green products and services? And how do they contribute to solving environmental problems? These trivial-sounding questions are anything but clear in practice. For example, should transitional technologies such as gas be considered green? What about products and services that may well be an efficient solution to one specific problem (e.g. CO2 emissions), but have negative consequences in another area (e.g. biodiversity)? Until now, there has been little guidance and each financial institution has had to answer these questions for themselves. This has inevitably led to certain technologies and products being presented as greener than they actually are.
The EU Taxonomy provides a guide to “green” activities
The European Union's Taxonomy for the identification of green economic activities is a tool to help the real and financial economy alike to make the transition to a climate-friendly, resource-efficient and resilient economy. It is the foundation of the EU Action Plan for financing sustainable growth. The Taxonomy sets performance thresholds for economic activities that:
- Make a substantial contribution to at least one the of six defined ecological objectives
- Do not cause significant harm to the other five objectives
- Meet minimum social safeguards
The EU has set the following six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Protection of water and marine resources
- Transition to a circular economy
- Prevention and control of pollution
- Protection and restoration of biodiversity and ecosystems
Until now, the detailed technical criteria have only been defined for the two objectives climate of change mitigation and climate change adaptation. The other four objectives are to be covered in the next two to three years. The new EU regulation further lays out that large European companies and financial institutions will have to report their financial and ESG data in a Taxonomy-aligned format in the coming years.
How do we already measure green revenues today?
In order to be able to take advantage of the opportunities offered by green solutions, while anticipating upcoming regulations, our assessment of green revenues already takes the EU Taxonomy into account. In doing so, we map corporate revenue data to the environmental objectives of the Taxonomy. Through our proprietary Sustainability Matrix, we ensure that we do not invest in companies that cause significant harm to other environmental objectives. Moreover, our standard exclusion criteria fulfil the minimum social safeguards required.
In addition to collecting and importing external data, proprietary analyses is also performed. After considerable desk and data research, the next step is to exchange information company management in order to obtain as granular a picture of the green revenues as possible. Using the technical criteria of the EU Taxonomy as a basis, we then investigate what proportion of sales is based on green solutions. These are then incorporated into our measurements and can thus be aggregated and optimised at the portfolio level. Through this qualitative process, we strive to create sustainable and financial value for investors, tapping on the vast opportunities to invest in companies with green revenues.