Q2 REPORT

madrid esg team | august 2023

Q2 REPORT

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ESG DATA PROCESSES: QUARTERLY RESULTS

SFDR

SUSTAINABLE ATTRIBUTES

EET

DISCONTINUATION OF SFDR L2

In June 2023, the Morningstar product group made a request to discontinue the collection of the European ESG SFDR (Sustainable Finance Disclosure Regulation) Level II Fund Data for commercial reasons. Instead, they will focus on using the European ESG Template (EET) in its entirety, which contains elements of SFDR Level II data. This decision was based on the belief that the EET adequately fulfils the majority of clients' SFDR Level II fund data requirements and use cases. As of June 1st 2023, the data points supporting SFDR Level II data have been removed from the Lake. Later on the 15th of June 2023, the ESG Team officially discontinued the data collection of SFDR Level II datapoints. This means that out of the 49 SFDR datapoints, we have continued the collection of 3 datapoints – the so called SFDR Level I. It is worth noting that no products had yet adopted the SFDR Level II data sets, which means the impact of removing these data points has been minimal. Any references to SFDR Level II datasets and data points have been removed. However, it has been ensured that SFDR Article 8 and Article 9 identification fund data is still maintained and included in products.

EET PROJECTS (STALE & WHITELIST)

EET STALE DATA RENEWAL PROJECT

EET process is officially one year and a month old! But, apart from celebrations, that also means some EET data uploaded into our database is at risk of not being up to date. Team members have been performing solid analysis about the various ways of determining the validity of EET inputs, for the past months. Elaborating codes and procedures for when the time came, they’ve been preparing a full methodology to keep track of stale data from now on whenever we haven’t heard of a company in 13 months. And that time begins now. Some companies haven’t shared any updates with us for the past 13 months already, and a new approach has emerged as a need for EET process: that is, actively reaching out for recent inputs of the template. Whereas up until now we have had a more passive approach, the team felt that keeping stale data was inconsistent with other processes, and also that it could result in a significant reduction of quality. The project has been launched already and so far ( 21st of July 2023) our team, divided between Madrid and Mumbai, has outreached to 100% of the companies that last shared a template with us 13 months ago. 19% of which have already updated their data inputs! A tough road lies ahead, but the process has successfully integrated this mechanism that allows us to keep a closer eye on the validity of the information received.

EET NEW WHITELIST SYSTEM

Being a new process for the company, European ESG Template (EET) is still in development on some aspects. Up until now, file reception was followed by an automatic parsing and upload of inputs into our database. This system was perhaps fast and easy but it clearly came with risks. Risks that we absolutely needed to avoid. ESG members Cheo González and Chris Cosmas, performed a solid research on the methods that other systems used to avoid undesired providers or potentially untrustworthy data. Analyzing also the path the document actually follows from Data Manager to product for EET process. Understanding the role of the mailbox and it’s automatic relation with Processing in WebDM, they were able to establish a “white list” of sorts that would allow automatic processing for usual providers stopping non verified or unusual ones. But, the goal was not to block or establish a “black list” for other unknown or new providers; it was to be able to monitor them and establish a system that would allow the team to discuss internally and greenlight (or not) such unknown providers. With this in mind, and the importance of not losing any document (even undesired ones) they were able to move all non-identified providers into the Mailbox folder “ignore”, avoiding automatic processing. There, the files would be saved and the team would be able to, either resend them into the automatic processing flow, as well as adding the provider identification so their future files could go directly into the automatic stream, or disregard them. Hence, and thanks to the hard work of the tech team that made it possible, the so called “white list” system is now operative, and the risk of undesired providers sending us templates has been reduced enormously.

Foro MEDCAP 2023 BY BME

The Medcap Forum is an event for European investors and listed medium/small-cap companies in Spain. The event features debate panels and discovery meetings between companies, investors and analysts and other financial personalities. On behalf of our ESG Team, Anna and Marta joined the event and you can read the points discussed in the following section.

read the report

ESG LAB: ESG DASHBOARD

TEAM CELEBRATIONS, GATHERINGS AND HIGHLIGHTS

...to Marta, for succesfully passing her CFA CCI!

May 2023

Congratulations...

Congratulations to all our members on their individual achievements throughout Q2. Together, you all make for a safer, more productive work environment. Thank you!

...to Bruno for succesfully passing his CFA IMC!

...to Noemi, for being accepted into the automation squad!

May 2023

May 2023

...to Adrien, for succesfully passing his CFA ESG!

June 2023

...and last but not least, to Kristiaan, for representing the ESG team in Madrids FIFA tournament and bringing it home!

June 2023

...to Marta, for succesfully passing her CFA CCI!

May 2023

Congratulations...

Congratulations to all our members on their individual achievements throughout Q2. Together, you all make for a safer, more productive work environment. Thank you!

...to Bruno for succesfully passing his CFA IMC!

...to Noemi, for being accepted into the automation squad!

May 2023

May 2023

...to Adrien, for succesfully passing his CFA ESG!

June 2023

...and last but not least, to Kristiaan, for representing the ESG team in Madrids FIFA tournament and bringing it home!

June 2023

Team building

Friday June 2nd, saw Madrids ESG team once again come together to celebrate and foster a safer, more inclusive work environment. Our latest team-building event entailed the use of 10 pieces of pasta, a meter long string as well as tape in an attempt to put together a holding structure aimed at supporting a marshmallow, all within 5 minutes! Congratulations to the winning team! (see figure 3) We'd also like to thank our Team Leader, Davide Capone, for organising this event. Additionally, we'd like to take this opportunity to extend an invitation to the rest of local teams and ask them to put themselves in touch with us, should they wish to organise a joint team-building event. We look forward to hearing from you!

QUIZ

THANK YOU! SHOULD YOU HAVE ANY QUESTIONS, REACH OUT TO US AT MIDMADRIDESG@MORNINGSTAR.COM

• The Spanish regulator, CNMV, is actively responding to disruptive changes and innovative technologies in the alternative market (BME Growth). Their focus is on supporting and enhancing capital markets in the transition to a sustainable economy. While their primary function is market supervision, they are also coordinating actions to streamline procedures, reduce charges for market players, and align with the European framework. Additionally, the regulator facilitates knowledge sharing and provides a support channel for queries related to initial public offerings.

• Spanish market players, including energy producers, banks, and rating agencies, are embracing this regulatory transformation and actively participating in debates and consultations to better adapt to the changes. This shift is not just an adaptation but a complete transformation of their business strategies and operations, becoming mainstream across organizations.

• From a regulatory perspective, the SFDR applies at the fund product level, while the CSRD applies at the corporate level, setting thresholds and technical criteria for companies to disclose their sustainability information. Small and medium-sized companies face challenges in reporting metrics without sufficient data availability, leading to the use of estimation models, which may raise credibility concerns. The lack of standardization and heterogeneity in ESG ratings could potentially lead to greenwashing, necessitating the European regulator's intervention to reduce confusion.

• The constant stream of regulatory changes forces companies to be flexible and responsive, which may be difficult for medium-sized companies with limited budgets. However, a period of stability is expected after the peak in regulations witnessed over the past decade.

• When reporting sustainability metrics, the focus should be on the quality of indicators and materiality assessment to identify financially significant areas for improvement, rather than just reporting for compliance purposes.

• From Sustainalytics' perspective, defining sustainability itself remains a challenge, considering the context of different sectors, industries, and business types. Acquiring sufficient ESG expertise is essential, and ESG roles are becoming more technical, transversal, and interconnected with business areas.

• Rating agencies scrutinize companies not only based on their investments in sustainable energy but also on sourcing raw materials. For instance, investing in photovoltaic aligns with the Taxonomy, but mining does not, even though the demand for minerals in solar panel production is set to rise substantially.

• Spanish medium-cap corporates in the renewable energy sector are expanding both nationally and internationally, particularly in the US and South America. Their financial model involves investing in clean technologies via suppliers and selling part of their portfolio to generate financing and avoid debt.

• The EU Green Deal aims to electrify the European economy by 2030 through investments in clean transport, energy transmission, and renewable generation. However, this transformation may lead to a market challenge: increased demand that supply cannot quickly meet, leading to higher energy prices. Reputation risk and societal benefits, such as landscape changes due to wind farms, also need consideration.

Fun fact: Mediatree, French financial roadshow and events agency and moderator at today's event, was calculating real-time carbon footprint of the event via cameras installed at recycling points to check waste emissions, among other data collection sources. They committed to offset these emissions investing in green projects.