EU a Step Closer to a Social Taxonomy

    Stockholm (NordSIP) – On 28 February, the Platform on Sustainable Finance (PSF) submitted its final proposal for a social taxonomy framework to the European Commission. Tuning in to the official report launch, NordSIP learns about the new developments since the first draft of the taxonomy was unveiled in July last year. Although much of the original proposal still stands, the PSF has done extensive work to capture the response from businesses, investors, NGOs, etc., that it has received during the prolonged public consultation.

    According to the PSF rapporteur for the social taxonomy work, Antje Schneeweiß of EKD’s Church Investors Working Group, the feedback from the public has been predominantly positive, with as many as 78 % of the 300 respondents recognising the merits of a social taxonomy. Importantly, the majority agrees that a common framework strengthens the definitions and measurement of social investment and supports investing in social sustainability and a just transition. There have been some major concerns, too, however. Among those, worries about increasing administrative burden and interference with national legislation are the ones PSF has attempted to address in the revamp of the proposal.

    For those sustainability experts already well-versed in the structure and vocabulary of the green taxonomy, it is a relief to find out that the final proposal for social taxonomy adopts a path similar to its predecessor. There are clearly defined social objectives, types of substantial contributions, ‘do no significant harm’ (DNSH) criteria and minimum safeguards. Gone are the originally suggested two dimensions: a horizontal one focused on processes for implementing human rights and a vertical one covering products and services for human needs. Instead, the new taxonomy proposal splits ‘substantial contribution’ into two types: activities avoiding and addressing the negative impact and those enhancing the positive impact inherent in economic activity.

    The suggested structure consists of three simple objectives, and just like with the existing green taxonomy, activities will be deemed in line with social taxonomy if they make a substantial contribution to these:

    • decent work (including for value-chain workers);
    • adequate living standards and wellbeing for end-users;
    • inclusive and sustainable communities and societies.

    This structure not only covers the three stakeholder groups of workers, consumers, and communities but also follows the European Financial Reporting Authority Group’s (EFRAG) draft approach to non-financial, sustainability reporting by companies under the proposed Corporate Sustainability Reporting Directive (CSRD).

    According to the proposal, DNSH criteria will be linked to specific activities. Minimum safeguards will be employed to avoid inconsistencies for topics that cannot be linked to an activity and must be linked to an economic entity instead. An example of such discrepancy would be counting a substantial social contribution for a company acting against social and/or governance principles in a different area.

    The useful framework of availability, accessibility, acceptance, and quality (AAAQ), introduced in the original draft, is still part of the proposal. Availability and accessibility are used primarily for defining substantial contribution, while acceptability and quality are essential for assessing the DNSH criteria.

    Following the official report launch, a panel of experts attempts to address various questions from the audience. One of the panellists, Marcel Roy, Secretary-General of the European Association of Public Banks, compares the attempt to organise socially sustainable activities into a taxonomy framework to “squaring the circle”. No wonder it is challenging and takes time. The PSF has done a tremendous job so far. The ball is now in the court of the European Commission.

    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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