EU Taxonomy

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ESG Data: To Proxy or Not to Proxy? Is this Still Really the Question?

The European Green Deal, through the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), introduced a complete paradigm change by mandating financial market participants (FMPs) to source ESG data straight from their eligible counterparties, for their own regulatory disclosures. Yet, what is the market status quo two years after the entry into force of the EU Taxonomy and SFRD? Are proxy data completely prohibited and if not, where can they still play a role? Read our article to find out more.

ESG Data: To Proxy or Not to Proxy? Is this Still Really the Question?

Since the introduction of the European Green Deal in late 2019, European companies have had to face drastic changes regarding their legal requirements to evaluate and disclose their overall sustainability levels. Indeed, the EU Taxonomy laid down the methodology to be used in order to evaluate and disclose financial and non-financial corporations’ sustainability level, while the SFDR aimed at improving the transparency around financial products sold in the EU market through regulatory disclosures. 

One key differentiating element surrounding both legislations is the need for FMPs to source sustainability data directly from their underlying assets’ counterparties if they fall under the Non-financial Reporting Directive (NFRD). Hence, forbidding estimates on that specific perimeter. In this article, we will explain the key distinctions between what is meant by reported or proxy ESG data in the context of the EU Taxonomy and the SFDR, explore whether proxy ESG data may still play a role in the disclosures of FMPS, and if so, how to properly conduct their estimation.

In this article, we will cover the following:

  • Reported vs Proxy ESG Data: What is the Difference?
  • But Why do FIs Need to Use Reported ESG Data from their Counterparties for their Sustainability Reporting Duties?
  • Are FMPs Truly Prohibited from Using ESG Data Estimates in their Official Disclosures?
  • What Are the Guidelines to Approximate EU Taxonomy Scores?
  • Substantial Contribution
  • Do No Significant Harm (DNSH)
  • Minimum Safeguards (MS)
  • To Summarize: ESG Estimates Are still Crucial in your Sustainability Disclosures


Reported vs Proxy ESG Data: What is the Difference? 

Reported data, in the sense of the EU Taxonomy and SFDR, is data regarding EU Taxonomy scores produced and disclosed by companies in the context of their regulatory reporting. As such, the data is not approximated in any way by a third party but rather internally monitored, computed, and or disclosed by the entity itself. 

Learn all you need to know in our Essentials of EU Taxonomy e-Book.

On the other hand, proxy ESG data (or estimated data) is data regarding a company’s performance on key sustainability KPIs which are generated by a third party based on data collected from multiple potential sources (other data publicly disclosed by the entity, externally derived data, etc.). 

The EU Taxonomy now mandates FMPs to base their own sustainability scoring on the reported data of companies underlying their portfolios.

But Why do FIs Need to Use Reported ESG Data from their Counterparties for their Sustainability Reporting Duties?

One of the main goals pursued by the EU Green Deal was to bring transparency around sustainable investments. To that end, they needed to ensure that financial players and non-financial companies (NFCs) would be able to speak the same sustainability “language” across the EU, facilitating capital flows toward truly sustainable activities. 

The EU Taxonomy defined which economic activities performed by NFCs had the potential to be sustainable (i.e. eligible), how to verify whether or not they were (i.e. aligned), and how to publicly disclose the results. Moreover, it also clarified how financial institutions (banks, asset managers, and insurers) could evaluate their own sustainability scores: namely by evaluating the extent to which they were actually financing sustainable activities performed by their counterparties.

By enforcing one unique, transparent, and comparable methodology to evaluate the sustainability of NFC’s activities and mandating the public disclosure of the results, The EU was able to mandate the use of the aforementioned data for FIs’ disclosures. In turn, this was the key foundation to reaching a state of full transparency and bringing so-called “greenwashing” to a minimal level. However, in practice, not all companies have to produce their EU Taxonomy scores, either because they don’t fall under the scope  of the NFRD or are based outside of the EU. Then, how can FMPs provide a truthful representation of their portfolio, isn’t there a case for the use of estimates then? 

Are FMPs Truly Prohibited from Using ESG Data Estimates in their Official Disclosures?

The answer is more nuanced than previously hinted and depends both on regulations and their underlying KPIs. 

Regarding the EU Taxonomy and the official disclosure requirements of FIs, the answer is yes, they are prohibited. Indeed, banks, asset managers, (re)insurance and investment firms can only include in their KPIs assets towards counterparties mandated to perform the EU Taxonomy (i.e. subject to the NFRD). 

To that end, they need to source data straight from their official disclosures, or from the counterparty directly in case of non-publicly disclosed data (principally, green loans alignment scores). Hence, Banks will restrict the evaluation of their Green Asset Ratio (GAR) to the counterparties aforementioned and will need to exclude  from the numerator of the ratio, any exposure to Non-NFRD counterparties. The same logic applies to the Green Investment Ratio (GIR) of asset managers, investment firms, and insurance undertakings. 

However, financial undertakings may publish a separate EU Taxonomy assessment integrating ESG estimates for two specific use cases: 

  1. Non-European companies not subject to the NFRD
  2. European companies not subject to the NFRD

The goal is to allow FMPs to provide an overview of their sustainability performance on a broader, more exhaustive scope (i.e., including all their counterparties which are not obligated to publish their EU Taxonomy scores). 

For banks, it means that they will be allowed to add the scores of non-NFRD counterparties included in their banking book and recompute a voluntary GAR corresponding exactly to the Banking Book Taxonomy Alignment Ratio (BTAR) defined by the EBA Pillar III legislation. 

Following the same logic, the SFDR allows using estimates of EU Taxonomy scores for disclosure requirements of ART.8 and ART.9 funds (i.e. sustainable funds), but contrary to the EU Taxonomy, the SFDR allows reporting directly in the official disclosure and not separately. 

Overall, while ESG data proxies are tolerated to some extent for the EU Taxonomy and SFDR, the Platform on Sustainable Finance (PSF (1)) has defined guidelines on how to properly conduct their estimation for them to be considered “valid”, or in their own terms, provide “equivalent information” to reported data. 

What Are the Guidelines to Approximate EU Taxonomy Scores? 

The methodologies to approximate EU Taxonomy scores depend on the three steps of a Taxonomy screening.

Substantial Contribution

In order to approximate the substantial contribution to an environmental objective, FMPs need to source data from the company, hence metrics should be sourced from the company's own disclosure and cannot be approximated. Entity-level disclosure can however be used to estimate the substantial contribution at the activity or a business unit level using a top-down approach provided that a conservative approach is applied. 

Do No Significant Harm (DNSH)

The PSF has identified four market practices and provided their view on each:

  • Use of Environmental Controversies: If a company is not in violation of a common, global environmental standard then they ‘pass’ DNSH.
  • Compliance with Local Environmental Laws or Official Standards: If a company complies with the local environmental laws and standards associated with its operations, then they ‘pass’ DNSH.
  • Use of ESG scores for Environmental Criteria:Self-define a tolerance on an ESG score or rating (internally produced or externally bought) in order to proxy to DNSH.
  • Grading a Company’s Compliance with the DNSH Tests in the Taxonomy and/or Conducting Due Diligence: examining if a company demonstrates, within their corporate sustainability reporting practices, that they partially meet DNSH criteria to induce a % of compliance.

In summary, the PSF advises against using techniques defined in the first and second points on a stand-alone basis but rather as input of a more refined modeling approach. However, the third and last points can be used on a stand-alone basis if it is demonstrated that they are well aligned with the underlying criteria of the DNSH. 

Minimum Safeguards (MS)

To approximate the MS compliance of a company the PSF advises using Company-reported social and governance policies, management systems, metrics, and remediation processes while discouraging controversy-only based approaches.

To Summarize: ESG Estimates Are still Crucial in your Sustainability Disclosures

In short, reported ESG data are the new golden source of data for sustainability reporting. Yet, estimates still have an important role to play for FIs (especially for SFDR) but should be properly generated to be considered “equivalent information” to reported data and applied only to non-NFRD companies. 

Sourcing reported ESG data from corporates directly can be a challenging process. Greenomy helps corporates, credit institutions, and asset managers measure, disclose and improve their sustainability according to new EU sustainable finance standards (EU Taxonomy, SFDR, and CSRD). Our ESG infrastructure allows investors and lenders, through the Lender and Investor Portals respectively, to easily source reported data from public sources or through Greenomy’s Company Portal (tailored for non-financial undertakings). 

By digitalizing the data capturing and reporting process, the Greenomy solution establishes an all-encompassing sustainability data and analytics ecosystem that connects stakeholders and facilitates the redirection of funds toward sustainable projects. Our technology helps companies reduce compliance costs and risks associated with a new and ever-evolving regulatory landscape, as well as improve their access to financing.

Our solutions were recently recognized with the SWIFT first prize for Sustainability at SIBOS in 2022 in Amsterdam as well as winning first prize in Milan in 2021 at the G20 TechSprint competition for Sustainable Finance solutions. 

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(1) The Platform on Sustainable Finance (PSF) is a permanent expert group of the European Commission that was established to assist the development of sustainable finance policies, including the EU Taxonomy.


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