SDI AOP Data and Regulatory Requirements

• The SDI standard is a framework identifying company revenues derived from sustainable products and services
  
  

• The growing patchwork of regulation in different markets and the piecemeal approach building out from climate disclosure requirements makes alignment of reporting at the activity level challenging
  
  

• SDI data can form the basis for setting objectives and identifying “sustainable” companies both under EU SFDR and future SEC requirements
  

European Regulatory Landscape

The EU Sustainable Finance Action Plan was originally created to align finance with the UN SDGs, along with other climate and sustainable transition policy commitments. With the advent of the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy on Sustainable Finance the practical implications of the plan are now hitting home.

Investors are using the SDI AOP framework to inform their SFDR disclosures. As the SDI AOP dataset takes a global view and uses the Sustainable Development Goals as its framework, it is broader than the initial focus of the EU Taxonomy on climate, which is to be followed by other environmental and then social topics. This step-wise approach is practical on the one hand, but may raise challenges in relation to the consistency and combination of interrelated environmental and social issues.

As a global platform, the SDI AOP is also mindful that there are regional perspectives on particular technologies, as witnessed in the debate on nuclear and gas in the EU. As a result the SDI AOP provides data around different technologies, but its classification does not necessarily align completely with all regional definitions of sustainable. The asset owners who oversee the platform have made their own choices as to what this entails. However, the granularity of the data does allow users to adapt information to a specific framework.

SFDR disclosure

The SFDR asks investors to disclose to what degree funds are aimed at contributing (significantly) to Sustainable Finance. Particularly if a fund indicates it considers environmental and social characteristics, or specifically has a sustainability goal, (so-called article 8 and article 9 funds), it has to meet requirements to substantiate their sustainability claims. Some of our community of users already use SDI data to contribute to their SFDR reporting. Examples of current uses within the context of SFDR are the following:

• Bridgewater articulates that the assessment of alignment of revenues with the UN SDGs forms the basis for their SFDR alignment with environmental and social objectives.
• PGGM uses SDI classification to determine which entities are eligible for is Investing in Solutions mandate.
• NN Investment Partners uses the data to feed into their proprietary frameworks and models to identify companies that are considered sustainable investments in the context of the Sustainable Finance Disclosure Regulation (SFDR) requirements.
• APG reports on the proportion of the Net Asset Value in each investment product that consists of SDIs.

SFDR also requires funds with a sustainability goal to consider Principal Adverse Impacts (PAI) – to ensure that the sustainable entities identified are not negatively impacting environmental or social objectives. The SDI data provides signposts for products which by their nature have clear negative impacts counter to the SDGs, such as fossil fuels, single use plastics, and tobacco. The SDI classification shows that there are a relatively small proportion of companies which have a mix of positive and negative products. These tend to be found in the utilities generation mix, the packaging sector and the waste management industry.

SFDR disclosure is a live challenge which many of our user community are dealing with. As a result each investor is going through a process of interpreting the requirements and defining what thresholds are for both positive and negative impacts. The provision of the raw revenue numbers in the SDI dataset facilitates this process, as users can apply their own policies and positions. As the regulations and guidance continue to evolve and reports start emerging, the approaches will no doubt evolve alongside them. 

European Taxonomy Regulation (TR) alignment

The European Taxonomy on Sustainable Finance stipulates which activities in the view of the EU contribute to Sustainable Finance. The initial Taxonomy is focused on climate related solutions. This will be complemented by a social taxonomy in due course (drafts were released in 2022). Under the EU Taxonomy, the products and services that contribute to sustainable finance have to pass various tests, which makes it quite difficult for an investment to be ‘Taxonomy aligned’. The Taxonomy is designed to be applied at a much more specific level, identifying a series of specific technical requirements for assets held by specific investments within a fund:

• Is the activity eligible under the EU Taxonomy?
• Does it “do no significant harm” to other environmental / social objectives?
• Are “minimum safeguards” adhered to?

Minimum safeguards (art. 18) are elements that pertain to the way in which the products and services are being produced. Under this element falls governance as well as adherence to international standards such as the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO conventions. The minimum safeguards test implies screening on the above frameworks. As such, because of its focus on products and services, the SDI AOP data does not screen for these attributes. Warning flags are provided where operational impacts need to be assessed, in the mining sector for example, but this needs to be done on a case by case basis. Many investors are using multiple data sources to cover these different taxonomy dimensions.

As alignment on the European Taxonomy is quite difficult and quite a few data points hitherto are missing, some investors consider whether to report an alignment percentage or to forego any alignment claims for the time being. Future regulations such as the Corporate Sustainability Reporting Directive (CSRD) will help deliver the required data in the future. Others will provide alignment data on a best effort basis.

The focus of the SDI data on sustainable revenues is in fact broader than the current EU focus on green revenues. However, filtering by SDG or themes would enable a subset of revenues aligned with climate or environmental focused activities. Given the delays to reporting guidance, and the level of interpretation required for companies to self-determine green revenues, it is currently challenging for investors to produce consistent portfolio-level data on green revenue exposure. The SDI data gives a consistent way of tracking this across a global portfolio which is not dependent on company disclosure, yet still relies on audited financial data.

Impending SEC sustainability regulation

While in the past there has been limited scrutiny of disclosures by funds claiming to have a sustainability or impact angle, this is changing due to growing concerns over greenwashing across all markets. According to proposed legislation, the SEC will require investors to back up their sustainability claims by providing evidence. The SDI AOP data is actually very well suited to set targets, get a baseline measurement and monitor and report progress against the SDG targets. Simultaneously, investors can use the framework to engage with issuers.

In a similar approach to the EU, the SEC separates out two types of sustainability funds: so-called integration funds that consider the sustainability risks in their investment approach and ESG focused funds. The latter category includes impact funds that have stipulated that they aim to achieve certain targets. The transparency and quality of the SDI AOP data makes it well positioned to support meeting such requirements.

Conclusion

All in all, we do see that investors are facing challenges in trying to report to several frameworks that have yet to mature. Having access to traceable and consistent data is important to be able to report under these frameworks, while at the same time maintaining the ability to inform the investment process with proprietary choices. The SDI AOP data helps to deliver on this and thus acts as a basis for global investors navigating the space.