Part 2.2: Classification of products

EC research brief

The study will identify main categories of sustainability-related products and services, using a transparent categorisation method. Each category should present common characteristics and trends.

For the purposes of the classification, the contractor should assess:

  • the objectives pursued (e.g. measure of risk, impact, performance, compliance with standards, other) by the sustainability-related products/services;
  • how the 'sustainability' considerations are measured and how Environment, Social or Governance (ESG) factors are defined, in particular the degree to which providers intend to use the future EU taxonomy13 to design sustainability-related products/services;
  • whether the sustainability-related services and products are forward (looking at future investments, targets, technological developments, climate scenarios) or backward looking (looking at history, public disclosures, activities in previous years, carbon emissions, intensity).

Furthermore, the contractor should assess whether there are differences in the methodologies deployed depending on the size of the company (e.g. SMEs vs. large companies). The contractor should also identify overall geographical, sector or size (e.g. towards bigger companies) bias in the coverage of products and services offered.

For carrying out Task 1, the contractor should contact and exchange practical experiences with sustainability experts, including:

  • researchers,
  • academicians and
  • market participants.

The development of the classification system and definition of terms should be done following interaction and conversation with the industry and having regard to the acceptance and existing use of the notions.  The study will also establish trends in the developments.

 

What are the main categories of products?

  • EC interest: "The study will identify main categories of sustainability-related products and services, using a transparent categorisation method. Each category should present common characteristics and trends.”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We will ask research providers whether their products and services all fits into the categorization system that we have developed below.

What we (think we) already know => Context

The main categories of sustainable investment products are presented in the table below.  In our research, we will explore whether all products currently available in the market fit easily into one of these classifications or whether additional categories exist.

Product type

Subcategories

Definition

Sustainable investment data

Raw data

Cleaned data

Analysed data

Screening & weighting services

Sustainable investment data is quantitative or qualitatively derived data points on the environmental, social, economic and corporate governance exposures and practices of companies.

It may be presented in raw form to users (Raw sustainable investment data).  It may be ‘cleaned’ and gap-filled before presentation (‘Cleaned sustainable investment data’).  Or it may be used directly in the production of ESG ratings or sustainable investment research.

Such data may relate directly to individual companies, but may also relate to individual assets, to countries or cities, to regulations or to many other aspects of industrial activity.

Where it is presented as a focused set of datapoints for the purpose of screening out or weighting companies or issuers on account of their exposure to a given set of criteria (such as involvement in arms production or intensive carbon emissions), we define this as ‘screening & weighting services'.

Sustainability ratings

ESG ratings

Climate-related rankings and ratings

Other (non-climate) issue-focused rankings and ratings

ESG ratings are weighted, banded, sector combinations of sustainable investment data produced with varying degrees of rule application and analytical judgement

ESG ratings are used for ex-ante investment decision-making and ex post analytics and attribution.

Some ratings do not cover the broad ESG criteria but seek to tackle a specific issue. The most prevalent of these are climate-related rankings and ratings, looking at, for example, climate risk, GHG emissions or low-carbon products.

Other (non-climate) rankings might include ZSL’s SPOTT rankings for corporate policies on palm oil and other deforestation-related commodities. These ratings are used to feed into a broader suite of ESG criteria, or as a basis for screening, or for engagement support research.

Sustainable investment research

Supportive sustainable investment research

Stimulus (or ‘contextualised’) sustainable investment research

Integrated sustainable investment research

Engagement support research

Sustainable investment research is contextualized, data-informed analytical opinion designed to complement financial investment research and support the making of sustainable investment decisions

It is primarily used for ex ante investment decision-making.

Some sustainable investment research will simply explore and analyse the exposure of a particular company or sector to one or multiple sustainable development issues.  We call this ‘supportive sustainable investment research.

Other research will make an explicit link between sustainability factor(s) and identified value drivers of a company or sector and will analyse the strength of this link.  It will, however, stop short of making an investment recommendation.  We call this ‘stimulus’ or ‘contextualised sustainable investment research’.

Some research will fully integrate the sustainability analysis with financial research and give rise to an investment recommendation.  We call this ‘integrated sustainable investment research’

Where the primary purpose of research is to encourage a change of corporate behaviour, we call the research ‘engagement support research’

Controversy alerts

Controversy alerts

Controversy alerts are corporate conduct assessment which highlights involvement of a company in practices which may lead to reputational and/or business risks and/or non-compatibility with investor policies.

Issuer-solicited work

Issuer solicited ratings

Services for green & sustainable bonds

Issuer-solicited work is the provision of second-party opinions on whether a green or sustainable bond meets the criteria which it is claiming to. For example, this may be alignment with Green Bond Principles or verification of use of proceeds

Are there differences in the methodologies pursued depending on the size of the company?

  • EC interest: “The contractor should assess whether there are differences in the methodologies deployed depending on the size of the company (e.g. SMEs vs. large companies)”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have questions for research providers about whether the size of the company affects:

  • The process to produce sustainable data, ratings and research?
  • The level of estimates you have to use to produce sustainable data, ratings and research?
  • The level of resource committed to creating sustainable data, ratings and research?

What we (think we) already know => Context

Large-cap companies are generally better at disclosing sustainability information than small-cap companies - largely because they have the resources to publish more data, the resources to respond to information requests and the incentive to do so (as corporate reputation in wider society is typically of more important to them. Reputation is still important to smaller companies but it perhaps limited to reputation with direct stakeholders such as customers and employees).

As smaller companies provide less information pro-actively, there is a likelihood that estimates have to be used to fill more gaps in data. We will investigate this.

We will also explore whether methodologies for data collection, ratings generation and research production differ dependent on company size.

Is there bias in the coverage of companies based on their size, sector or geography of listing?  What causes this?

  • EC interest: "The contractor should “identify overall geographical, sector or size (e.g. towards bigger companies) bias in the coverage of products and services ”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

  • We have questions for investors about whether the coverage of sustainable data, ratings and research providers is sufficient to meet your investment needs?
  • We have questions for companies whether you perceive there is sufficient coverage from sustainable data, ratings and research providers?
  • We have questions for both companies and investors about whether they perceive there to be a bias in the selection of companies covered in relation to size, sector or geography?

What we (think we) already know => Context

A number of factors influence whether any investment research firm covers a company:

  • Primarily, the level of interest by the firm’s investor clients in (paying for research on) that company
  • To complete a coherent universe of coverage
  • For investment banks, because the bank transacts (or wants to transact) capital markets business for that company and needs to publish research in order to retain access to the market
  • For grant-funded research providers … because the funder is paying for that coverage
  • For issuer-sponsored research providers … because the issuer is paying for coverage

It is well recognised that, as a result of these factors, there is better coverage (in all investment research - not just sustainability-related investment research) of large-cap companies in developed markets.  There tends to be more investor interest; they are more central to more investment universes; they meet the liquidity requirements of larger funds and investment banks make more money out of them.  In the converse, there is much commentary (although we have not validated the veracity of this) about the impact that the MIFID II Directive has had on coverage of smaller companies and smaller markets may also suffer.

In general terms, issuers want to be covered by research providers because such coverage typically generates investor interest in their stock.  We suspect that, in the case of sustainability data and ratings, the case may be reversed: the ESG ratings agencies and data providers gather much more sustainability data from and publish ratings on more companies than investors ever access.