Social Taxonomy Proposal Unveiled

    Stockholm (NordSIP) – The Draft Proposal for a Social Taxonomy, developed by the EU Platform on Sustainable Finance, was published officially on July 12th. “In the face of a pandemic, unanswered social questions around a sustainable transition, continuing human rights abuses and continuously rising costs for housing, the time is right to identify economic activities that contribute to advancing social objectives,” argue the authors of the proposal.

    The report offers few surprises for the initiated few watching this space, partly because it was leaked in advance. Nevertheless, it is impressive just how far the workgroup has come in developing a comprehensive and granular proposal.

    To explain the main features of the proposal and launch the consultations period (to be held until the end of August), Antje Schneeweiß of EKD’s Church Investors Working Group and Rapporteur for the relevant workgroup presented the new social taxonomy at a well-attended webinar yesterday. Another two of the experts involved in designing the new framework, Bryan Coughlan, Sustainable Finance Officer at BEUC and Gaia Ghirardi, Head of Sustainability at Cassa Depositi e Prestiti, presented specific aspects of the proposal.

    The new EU social taxonomy is an ambitious and sophisticated framework inspired by and aligned with the green taxonomy that most investors have already gotten to know. In her presentation, Schneeweiß guided the audience pedagogically through the main differences between the green and the social taxonomy. She pointed out that the new framework is built on the foundation of international norms and principles like the sustainable development goals (SDG) and the UN guiding principles for businesses and human rights, rather than on scientific grounds, as the green taxonomy. Another feature that differs between the two is the social taxonomy’s focus on entities and their processes rather than activities.

    That said, the social taxonomy proposal encompasses both activities and processes, organised in a vertical and a horizontal dimension. The contribution to social objectives made through products and services based on the right to an adequate standard of living constitutes the vertical dimension. The contribution made through processes in a company installed to respect stakeholders’ rights, on the other hand, is the horizontal dimension of the taxonomy. The proposal assumes a stakeholder-centric approach reflecting both the positive and negative impacts companies have on workers, customers, and communities.

    Introducing the concept of availability, accessibility, acceptance, and quality (AAAQ) provides a valuable framework for organising the qualifying criteria. Availability and accessibility are used primarily for defining ‘substantial contribution”, while acceptability and quality are essential for assessing the ‘Do no Significant Harm’ (DNSH) principle.

    An interesting point raised at the webinar by Ghirardi was the workgroup’s ambition to avoid adding unnecessary regulatory burden on companies and investors. Therefore, the new social taxonomy aims to adopt a pragmatic and minimalistic approach, looking for simple, transparent, and readily available indicators that “do not drive perverse incentives or unintended consequences.”

    As with any evolving legislation, plenty of question marks remain. One of those is how to incorporate governance factors relevant to both the environmental and social taxonomy. Another issue that remains to be solved is how the two taxonomies themselves are to relate to each other. For the moment, the social taxonomy fits in the green one through the provision of minimum safeguards. A possible way forward would be to do likewise once the minimum safeguards for the social taxonomy are formulated. Another alternative that the group discusses is consolidating the framework into one taxonomy with a list of social and environmental objectives and DNSH criteria.

    At the end of the presentation, Nathan Fabian of Principles for Responsible Investment, the Chair of the EU Platform on Sustainable Finance, reminded the participants about the road ahead. There is still time to get involved and influence the development. It is not until the end of 2021 that the Commission decides whether there should be a social taxonomy or not. Let us hope that the stakeholders act responsibly and contribute to an already promising proposal.


    Image by Ernesto Velázquez on Unsplash

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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