Low Carbon Transition Rating
EU Taxonomy Solution
Glossary of Terms Used Within the Research Report
December 2023
| Term | Explanation |
|---|---|
| Aligned, Taxonomy-Aligned | Revenues, capital expenditures and/or operational expenditures associated with an activity that is: i) included in the EU taxonomy; ii) compliant with Substantial Contribution criteria; iii) passing Do No Significant Harm and Minimum Safeguards screening. |
| Auto Aligned | A signal indicating that any revenue―capital expenditures and/or operational expenditures―is associated with an activity, which is directly classified as reported or estimated in alignment with the EU taxonomy (once they pass the corresponding Do No Significant Harm and Minimum Safeguards screening). |
Breach | Within the EU Taxonomy report of a company, a breach refers to a signal that indicates whether any breaches to "Do No Significant Harm" or "Minimum Safeguards" criteria have occurred. |
Coefficients (Taxonomy Alignment Coefficients) | Coefficients represent a portfolio-level expected percentage of aligned revenues―capital expenditures or operational expenditures―toward a given objective for a sufficiently large and diversified portfolio. They are expressed as a percentage value ranging from 0% (i.e., the activity is never aligned) to 100% (i.e., the activity is always aligned). They are derived at the sector and regional level and based on aggregate adaptation investments. They are currently used for Climate Change Adaptation only. |
| Coefficients Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are estimated via a coefficient to be aligned with the EU taxonomy. This share is computed for each activity but does not represent an activity-specific estimate of alignment. |
| Coefficients Not Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are estimated via a Coefficient, or breaches of Do No Significant Harm and/or Minimum Safeguards, to be not aligned with the EU taxonomy. This share is computed for each activity but does not represent an activity-specific estimate of alignment. |
| Cross-objectives (CRO) |
Share of eligible/aligned revenues/capex/opex across all taxonomy objectives. |
| Default Inclusion | Default inclusion safeguards are related to inherently sustainable activities. As such, any revenue generated from activities linked to these safeguards is considered aligned. |
| Eligible (Activity), Taxonomy-Eligible | Sustainalytics' methodology is based on the taxonomy-eligible activities as defined by the latest Climate Delegated Acts. The detailed list of activities covered is provided in the Appendix of this document and in the mapping file that is part of our client deliverables (it also contains the detailed definitions of these activities). As described by the Delegated Act, activities generally correspond to the Statistical Classification of the Economic Activities in the European Community classification as defined by Eurostat but may divert from it where they are either more or less granular. |
| Estimated Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are estimated via a Green Safeguard to be aligned with the EU taxonomy, or auto-aligned activities. |
| Estimated Not Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are estimated via a Green Safeguard, or breaches of Do No Significant Harm and/or Minimum Safeguards, to be not aligned with the EU taxonomy. |
| Event, Event Indicator | An indicator that provides a signal about a potential failure of management as reflected by an involvement in controversies. We categorize events with negative ESG stakeholder impacts and business risk into five event categories: Category 1 (low); category 2 (moderate); category 3 (significant); category 4 (high); and category 5 (severe). |
| Global Standards Screening (GSS) | The Global Standard Screening (GSS) product assesses the impact that companies have on stakeholders and the extent to which companies cause, contribute or are linked to violations of international norms and standards. Specifically, GSS provides Morningstar Sustainalytics' opinion as to whether a company is violating, or is at risk of violating, a principle(s) of the United Nations Global Compact. |
| Green Safeguards (GS) | A Green Safeguard (GS) represents a set of criteria for assessing the ‘greenness’ of an activity and its contribution to the transition of the economy. While not being as stringent as the EU Taxonomy Technical Screening Criteria, green safeguards assure that a given activity is performed at a best-in-class level. If the requirements of a Green Safeguard are met, an activity gets incorporated under the ‘estimated aligned’ category only. |
| Incident(s) | A data point that reflects a company’s involvement in cases of specific alleged misconduct with negative environmental and/or social impacts. Incidents form the most granular level of analysis that we conduct. They are identified based on a comprehensive daily media analysis. Our analysts provide two assessments at the incident level, a stakeholder impact assessment and a reputational risk assessment. |
| Legislation-based | A "Do No Significant Harm" provision which is backed up by relevant EU legislation, meaning that it can be assessed using Morningstar Sustainalytics’ events research at the company level under the assumption that it will be respected in a lawful business conduct. |
| List Safeguard | These safeguards are assessed using a closed list of requirements such as certifications, products, services, which are considered ‘sustainable’. The share of revenues from activities satisfying the requirements of the list pass the safeguard. |
| Minimum Safeguards (MS) | Principles under the EU taxonomy covering minimum requirements in terms of human and labor rights, etc., to be met in business conduct. |
| Non-Legislation Based | A "Do No Significant Harm provision, which is not backed up by relevant EU legislation, meaning that it needs to be assessed at the activity level. In the context of our current taxonomy solution, it is assessed at the company level for lack of data, reaching at best a ‘reasonable assurance’ conclusion. |
| Not Aligned | Revenues―capital expenditures and/or operational expenditures―for associated with an activity that is i) included in the EU taxonomy for Substantial Contribution to Climate Change Mitigation or Adaptation; ii) not passing TSC, Do No Significant Harm and/or Minimum Safeguards screenings. |
| Not Eligible | A signal that indicates, in the context of overall aggregation of financial metrics for a given company, the share of the metrics that are not covered by taxonomy-eligible activities. |
| Overall Do No Significant Harm (DNSH) Level | A summary assessment for DNSH that forms the most restrictive combination of objective-based requirements. The overall DNSH Level is assigned combining DNSH for all relevant objectives under the following assumptions: i) if any objective has a DNSH provision, then the overall level has a DNSH provision; ii) if any objective is ‘non- legislation based’, then the overall DNSH assessment is ‘non-legislation based’. |
| Own Performance (Activity) | A flag indicating economic activities that make a substantial contribution to a given environmental objective based on their own performance. For example, an economic activity performed in a way that is environmentally sustainable, such as the production of electricity from renewable sources. |
| Pass | A signal that indicates, in the context of "Do No Significant Harm" and/or "Minimum Safeguards", that an activity is satisfying the relevant screening criteria without raising concerns. |
| Principle 7 Flag | A flag that is raised when a company is assessed as Non-Compliant or Watchlist under Principle 7, 8, or 9 of the Global Compact in Sustainalytics' Global Standards Screening product. However, it does not lead to a Breach under Minimum Safeguards. |
| Qualitative Safeguard | Safeguards that are assessed by a rigorous judgement call from an analyst, who determines the share of revenues which is coherent with a given set of criteria, such as activities supporting disadvantaged groups, or the production of drugs and the development of therapies targeting major or neglected diseases. The share of revenues from activities satisfying the criteria passes the safeguard. |
| Reasonable Assurance | A signal that indicates, in the context of Do No Significant Harm (DNSH), an activity where no evidence of breaches is found, nor other warning signals apply, but the DNSH provision is ‘non-legislation based’ only. In this case a check of the provision at the activity level would be required, which is currently not possible due to the lack of available information. Hence, unless the respective DNSH provision is reported by the company itself, a ‘reasonable assurance’ assessment made by us can lead to an ‘estimated aligned’ call only. |
| Reported Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are reported by companies to be ‘aligned’ with the EU taxonomy. |
| Reported Not Aligned | Share of revenues―capital expenditures and/or operational expenditures―for a given activity that are reported by companies to be ‘not aligned’ with the EU taxonomy. |
| Sustainable Activities Involvement (SAI) | Morningstar Sustainalytics Sustainable Activities Involvement research measures companies’ level of involvement in economic activities that contribute to achieving a more just and sustainable world. |
| Transition (Activity) | A flag that indicates an economic activity for which there is not technologically and economically feasible low carbon alternative. However, it contributes substantially to climate change mitigation as it supports the transition to a climate-neutral economy consistent with a pathway to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels, including the phasing out greenhouse gas emissions. |
| Watch | A signal that indicates, in the context of Do No Significant Harm and Mitigation Safeguards, an activity where no evidence of a breach is found, but our findings suggest that additional scrutiny appears appropriate. |