EU Social Taxonomy: A Year On

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    Stockholm (NordSIP) – A whole year has passed since the Platform on Sustainable Finance (PSF) submitted its final proposal for a social taxonomy framework to the European Commission on 28 February 2022. At the time, the PSF rapporteur for the social taxonomy work, Antje Schneeweiß of EKD’s Church Investors Working Group, assured everyone that the feedback collected during the public consultation had been predominantly positive, with as many as 78 % of the 300 respondents recognising the merits of a social taxonomy. The majority seemed to agree that a common framework would strengthen the definitions and measurement of social investment and support investing in social sustainability and a just transition.

    Despite the positive response to the PSF’s commendable efforts, however, the process has stalled. Last autumn, rumours started circulating that the European Commission had essentially shelved its plans for a social taxonomy. Although the Commission has never officially confirmed setting aside the ambitious project, their (lack of) actions speaks louder than words. Public assurances that they intend to publish a report on the merits of extending the taxonomy to cover social issues “in due course” and, in the meantime, would “continue pursuing other policy initiatives that promote investments with a positive social impact” are widely perceived as mere attempts to appease left-wing MEPs and NGOs.

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    “I don’t expect the Commission to take any action on the social taxonomy this year,” says Sean Kidney, CEO of Climate Bonds Initiative and a long-time member of the PSF. “It is not part of the new Platform’s mandate. So, I would say it is put ‘on hold’ for now.” According to Kidney, there are two main reasons for this, “because it is difficult, and the current taxonomy still has problems that need to be fixed.”

    It is indeed a challenging task to organise socially sustainable activities into a taxonomy framework. Upon unveiling the final proposal last year, Marcel Roy, Secretary-General of the European Association of Public Banks, compared it to “squaring the circle”. Whereas the basic principles behind the green taxonomy are science-based, a social taxonomy attempts to tackle different types of questions, such as human rights, living standards or sustainable communities. These are far more subjective, far from everyone across the EU agreeing on how to approach them.

    Apart from the absence of common international standards and definitions, lack of data on social parameters is also often cited as a major hurdle. Over time, the EU’s Corporate Sustainability Reporting Directive (CSRD) should start to improve corporate sustainability data availability. Yet, for the time being, investors would be struggling to collect the necessary information.

    As Kidney points out, there is also the question of the state of the EU taxonomy in general. According to some NGOs who chose to leave the PSF in September last year, the credibility of the whole project has been heavily damaged, especially by adopting the Complementary Delegated Act (CDA) on gas and nuclear power. “With the CDA, the Taxonomy has been transformed from a gold standard into an instrument of institutional greenwashing, and it now lags behind other taxonomies in China, Colombia, South Africa, and Bangladesh, amongst others,” wrote the disappointed experts in a letter sent to Mairead McGuinness, the EU commissioner for financial services, upon exiting the PSF.

    Given such a backdrop, it is perhaps unsurprising that the social taxonomy remains on the shelf for the time being. Meanwhile, work on addressing social issues has not stopped altogether. Other pieces of regulation, including the minimum social safeguards project and a proposal for supply chain due diligence, are developing in the EU. “At Climate Bonds, we are working on a ‘resilience’ extension to our taxonomy that will cover social aspects,” comments Kidney. “Work moves ahead anyway.”

    Image courtesy of Jon Tyson on Unsplash
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