Social Taxonomy - Where to find the ,,S''in ESG?
Since the 2000s, the three dimensions of sustainability—ecology, social, and economy—have been in focus. However, the ecological perspective has dominated so far. The EU Action Plan on Financing Sustainable Growth reflects this by prioritizing climate goals. However, the social implications of climate change are becoming increasingly evident, and the social dimension, which places people and society at the heart of sustainability, needs to gain awareness.
Three Core Pillars of the EU Sustainability Strategy
The EU Taxonomy Regulation ((EU) 2020/852) came into effect in July 2020. It is one of the three central components of the EU Action Plan for sustainability. Alongside it are the CSRD Directive (Corporate Sustainability Reporting Directive), which requires companies to report on the extent of their sustainability, and the SFDR, the Disclosure Regulation. The latter mandates financial service providers to disclose the sustainability factors in their financial products.
The Disclosure Regulation has been established in the financial industry and has become well-accepted. Fund companies publicly categorize their funds under Articles 6, 8, or 9—each indicating a certain level of sustainability and corresponding to varying levels of reporting obligations. With the CSRD Directive, companies still struggle to meet the extensive sustainability reporting requirements, though progress is noticeable. In contrast, the Taxonomy Regulation seems to be stuck halfway, with large gaps still evident in its framework.
The Focus Remains on Ecology
Following the debates on the green taxonomy and environmental goals, the social aspect remains neglected, causing challenges in practical application. A supplement for social goals is essential to make the Taxonomy Regulation truly comprehensive. The goal of the Taxonomy Regulation is to classify all economic activities by their degree of sustainability—sustainable in terms of ecology, social, and corporate governance, as captured in the ESG acronym. This is meant to provide investors with a benchmark. In the area of ecology, six environmental goals are defined, and detailed regulations now exist for all of them. These outline economic activities with technical assessment criteria, which allow for evaluating a company’s ecological sustainability. According to the taxonomy, economic activities of companies that significantly contribute to at least one of these goals without compromising any others are considered sustainable. While the environmental goals of the EU taxonomy are defined, social standards are still lacking.
Challenges of Social Sustainability
Social sustainability is harder to define than ecological standards, as it encompasses various criteria such as human rights, participation, equality, occupational safety, and more. This complexity makes regulatory measures and requirements more challenging and hinders regulation. The development of a Social Taxonomy, intended to provide a framework for social standards, has stalled. While environmental goals have clearly defined metrics, social goals lack measurable standards.
However, the European Union has committed to becoming the first climate-neutral and sustainably operating continent by 2050. Private capital investment is essential to achieve this, as governments alone cannot cover the financing. Massive investments from private capital are needed. Companies in the EU must report their sustainability in accordance with the EU taxonomy. The Taxonomy Regulation is the core of EU Sustainable Finance regulations—but it seems that the EU Commission has lost its courage here. The commission has only set environmental goals—after intense debates on the green taxonomy, particularly concerning nuclear energy and gas, further steps toward a unified definition of social goals have not yet been initiated. This has consequences.
Lack of Classification Creates Problems for Companies
A stakeholder survey by the SÜDWIND Institute among Sustainable Finance experts highlights the challenges financial institutions face due to this. The one-sided focus on environmental goals leaves many industries unaddressed. Only 50% of European economic activities are even eligible for taxonomy classification. Positive social aspects of economic activities for society cannot be made visible through the taxonomy, and investments with a social focus cannot be classified as sustainable. Therefore, the taxonomy regulation can only function with the addition of social goals. All stakeholders should be aware of this.
The Social Dimension of Sustainable Financial Products
The ÖGUT (Austrian Society for Environment and Technology) recently addressed the social dimension in sustainable finance as part of its webinar series "Green Money for Green Investments." The role of the "S" in ESG research and the EU Social Taxonomy were discussed. ÖGUT, which includes over 100 member organizations from business, administration, and the environment, supports market participants through its events by fostering exchange and networking. I am always happy to participate here as well. The webinar discussed how social aspects can be integrated into the evaluation of financial products, emphasizing that binding guidelines are essential to strengthen the social dimension in sustainability.
Conclusion: Binding Guidelines Are Needed
Social investments have the potential to address not only ecological and economic issues but also social problems, thus contributing to a more holistic definition of sustainable growth. Open questions remain, such as how social aspects can be strengthened within EU Sustainable Finance regulation, how a social investment framework can be advanced, and what role Social Bonds could play in this.
Original article:
Guest commentary by Dr. Susanne Lederer-Pabst in Börse Social Magazine #93_Ausgabe 10/2024