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September 12, 2022updated 13 Sep 2022 4:33am

Why the social taxonomy is no longer an EU priority

With just over a year left on its term and facing a deepening energy crisis, the current European Commission is prioritising regulatory initiatives other than the social taxonomy. This is fuelling concerns in some quarters.

By Elizabeth Meager

EU Social Taxonomy
Sirpa Pietikäinen, a member of European parliament, thinks the social taxonomy should remain in the pipeline. (Photo courtesy of Sirpa Pietikäinen)
  • The European Commission, faced with an energy crunch that may become a full-blown economic crisis, has set aside work on the social taxonomy.
  • Some investors, NGOs and European politicians argue that social elements are a central pillar of the EU’s broader sustainability strategy…
  • while others say they are being addressed in other pieces of legislation, such as work on minimum social safeguards and supply chain due diligence.

News late last month that the European Commission (EC) had shelved its plans for a social taxonomy disappointed market participants but came as no huge surprise, in light of other developments, most notably the Ukraine war and its fallout. The move has left investors, NGOs and others divided over whether other regulatory initiatives focused on ensuring social equality amid the low-carbon transition will be sufficient.

The EC’s plan had been to complement the existing green taxonomy with a classification tool for economic activities that contribute to the EU’s social goals, such as improved living standards, decent wages, and tackling bribery and corruption.

The EC has not officially confirmed the move, which, again, some argue is to be expected.

“They would be foolish to publicly admit it’s been scrapped – left-wing MEPs [members of European parliament] and NGOs will scream and shout,” says one Brussels-based trade association head speaking on condition of anonymity. “I think they’ll keep saying they need more time, or they’ll commission another study. But they will not do anything on it under this commissioner, so until 2024.”

In response to questions about the status of the social taxonomy, a spokeswoman said the EC would 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”.

Some progress had already been made on the social taxonomy. The EU platform on sustainable finance, an expert group advising the EC on taxonomies and related policy projects, produced its final report on the framework in February, and the EC still owes the platform a formal response.

A different world

However, on 24 February Russia invaded Ukraine. With many EU countries still heavily reliant on Russian natural gas, the war and subsequent western sanctions on Russia have sparked an energy crisis that has sent gas prices to record levels (see chart below).

News over the weekend that Russia had extended the shutdown of the Nord Stream pipeline saw the euro plunge to its lowest point against the dollar in 20 years – the two currencies were standing roughly at parity as of 8 September. EU member states are seriously debating their next steps, after the EC has asked them to cut gas consumption.

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The EC says the continent has also seen its worst drought in 500 years over the summer, hitting already under-pressure supply chains as key transport routes literally dry up, and inflation is soaring.

“We are starting to live in a different world – all politicians now care about is inflation, energy and keeping the lights on,” says the trade association member. “We are already hearing in the Brussels corridors a few policymakers asking whether maybe stringent sustainable finance regulations work in the world of plenty, and whether we now need a more realistic take on things.”

But not everyone agrees that such legislation needs to be put on the back burner. Sirpa Pietikäinen, a Finnish politician and MEP for the centre-right European People’s Party, tells Capital Monitor. “It’s more difficult [to prioritise sustainability-focused regulation], but we can still work on other issues – we’re still doing budgets for example.”

“I think the [EC] doesn’t have the appetite or the guts to move forward with this,” she adds. “It’s not only timing and it’s not only workload. It’s a question of willingness.”

Pietikäinen says she will be submitting a formal question in the coming weeks to the EC about its plans for the social taxonomy.

Timing issues

Maria van der Heide, head of EU policy at ShareAction, a financial charity that promotes responsible investment, takes a similar view. After all, she tells Capital Monitor, the renewed sustainable finance strategy was still presented in 2021 during the Covid pandemic. She suspects the move may be more to do with the timing of the current EC, which has just over two years of its five-year term left to run.

“It’s not that I’ve given up on this [EC] entirely, but it’s clear we’re not going to get any significant new proposals – the energy is a bit lacking,” Van der Heide says. “The taxonomy would take years [to agree on], and they wouldn’t see the end of it – I think they don’t think it’s worth investing a lot of time in something they won’t be able to fully deliver on.”

Meanwhile, speculation is rife that policymakers are still reeling from the experience of trying to pass the green taxonomy. The legislation sparked much political infighting between countries and ended with a major concession being made to the fossil fuel sector with the inclusion of gas as a transition – and thus sustainable – fuel. Van der Heide says that was a “bit of a reality check” for many.

Indeed while the basic principles underpinning the green taxonomy were science-based, the concepts the social taxonomy hoped to tackle – such as human rights, living standards and tax transparency – are far more subjective. Attitudes towards these and related themes vary widely across the EU.

Other social regulations

Still, even without the social taxonomy, the EU is working to address social issues through other pieces of regulation, including the minimum social safeguards project and a proposal for supply chain due diligence.

The minimum safeguards will require companies to comply with the OECD guidelines for multinational enterprises and the UN guiding principles on business and human rights. The supply chain regulation is far-reaching and will require companies to audit every supplier they work with to ensure compliance with human rights standards.

If anything, these two frameworks are more directly effective than – even if not as broad as – a taxonomy because they create a legal liability for companies and can influence behaviour, argues Eric Christian Pedersen, head of responsible investment at Nordea Asset Management.  

“Sustainability themes only start getting market attention when they’re financially material, and regulations like supply chain due diligence will make them financially material,” he tells Capital Monitor. “If companies don’t fulfil their obligations under it, they will have difficulties accessing European markets.”

Worries over can-kicking

But some say that social objectives are an essential underpinning of the green taxonomy.

Despite the major challenges involved, social contributions need to form part of any discussion on what constitutes a sustainable investment, says Pablo Berrutti, senior investment specialist at Australian fund house Stewart Investors. “Not having social objectives covered is like removing a leg from a table – it won’t stand up without it.”

Besides, a social taxonomy with some concessions would be better than no social taxonomy at all, says Van der Heide. “We have to make sure we’re not creating a social crisis by trying to fix the climate crisis. I think it’s a risky strategy to focus on one for now and then potentially years later, when harm is already done, thinking about how we respond. We should integrate social factors right from the start.”

Her comments align with the concept of a just transition: the idea that all should benefit from the shift to a low-carbon world and no one should be left behind economically.

However, if the social taxonomy has been ditched – or at least postponed – in Europe, one wonders what hope there can be for such a concept in the US, with its stark political polarisation and current ESG backlash, or Asia, arguably the most politically and economically diverse region of all.

Capital Monitor is hosting the second part of its Webinar series, Making Sense of Net Zero, alongside New Statesman and Tech Monitor on September 21. Find out more information on NSMG.live.

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