3.2 Concepts and Principles Underlying the ESG Taxonomy

Double Materiality

The distinction between the impacts and risks of infrastructure companies follows from the notion of double materiality.

An infrastructure company - as a result of its activities, processes, operations and policies - can have a positive or negative impact on the environment and society. In addition to this, an infrastructure company faces risks from external actors within the boundaries of the environment and society, such as climate change, customers, communities, regulators, etc.

There is a circularity in this dichotomy between risk and impact: certain impacts can, directly or indirectly, create or increase risks for the party causing them. This notion of impacts directly or indirectly creating risks is referred to as double materiality.  Therefore, the exposure of infrastructure assets to risks is also a function of the magnitude of impacts. For example, a port whose purpose is to facilitate the import and export of goods has significant Scope 3 emissions. The shipping industry contributes about 10.6% of total transport emissions (Ritchie, 2020). These emissions cause a negative climate impact. In the new low carbon economy, the emissions of ports expose them to multiple transition risks, such as a potential carbon tax, regulations that require ports to provide sustainable fuel for ships, etc. Research (Chalmers and Basu, 2020) suggests that transition risks are particularly important for infrastructure assets, which face unexpected dynamics from regulatory, legal, market, technological and reputational risks.

Classification Theory

The ESG taxonomy is built following classification theory (Greenlaw and Liang, 2002), over three levels: a super-class, a class and a sub-class. The logic of classification theory requires that organising a domain of objects into classes must leave no two classes with any object in common; additionally, all of the classes together must contain all the objects in the domain. Further, the principles or objectives used to classify a domain of objects depend upon the nature of the objects themselves. For example, in the environmental pillar, the superclass of Nature is made up of the classes of Biodiversity, Oceans and freshwater, Land, and Atmosphere.

We followed this logic strictly when building the taxonomy. The super-classes within each pillar collectively define the actors, giving a complete understanding of all the potential impacts or risks from the perspective of infrastructure companies.

Similarly, the classes of any given super-class were defined to be unique, to provide a comprehensive overview of the themes pertaining to ESG impacts of risks, as were their nested sub-classes.

The classification was (where available) based on well-established theoretical frameworks and fundamental concepts or mechanisms. For instance, under environmental risks, the class of physical risk (acute and chronic) was classified into sub-classes of temperature-related risks, wind-related risks, water-related risks and solid-mass-related risks. This classification is the same as that followed by the Task Force on Climate-Related Disclosures (TCFD, 2020). Classifying the physical risks in this manner ensures that they are unique and cover all possible types of events that can pose an environmental risk to infrastructure companies as well as being compatible with the international frameworks and taxonomies already widely adopted globally.