UniCredit - Social Taxonomy

While market players  are  busy  understanding  and  aligning their  activities  with  the  current  and  evolving  EU  Taxonomy Regulation  which  determines  what  is  “environmentally” sustainable, the European Commission (EC) has changed gears with respect to social aspects and published a draft report for a potential “Social Taxonomy” in July 2021.

The draft has been prepared by a dedicated subgroup of the Platform on Sustainable Finance – a group of experts advising the   Commission   on   the   development   of   the   Taxonomy framework. It presents a view of what Social Taxonomy could  look  like and how it might interact with environmental objectives. The final report is expected to be provided  to  the  EC in the course of 2022 after  which the EC  shall  decide  whether  to  put forward a legislative proposal based on the Platform recommendation.

There are various reasons why a  Social Taxonomy  is  needed.  One  is  the  so  called “just transition”,  i.e.  the transition to a low-carbon economy while treating the people and communities impacted fairly, making sure no one is left behind. Another reason  is  the substantial  investment  requirements  for  social  investments in  areas  such  as  affordable  housing  or healthcare,  among  others,  and  the consequent  investor  demand for  such  investment  opportunities. Having  a standardised classification system defining what “socially” sustainable is would  speed  up  the  flow  of  capital  and the realisation  of  such investments.

There are various critical differences  between  environmental  and  social  taxonomy  due  to  their  inherent nature,  which complicates the process of defining the parameters and establishing a basis for implementation. However, in principle, they are both trying to guide and help companies and investors to avoid “blue” washing and/or greenwashing. While it is yet to be seen if and in which form the social taxonomy is going to be implemented, the proposal and the efforts already put in for its development show a critical shift in policy makers’ expectations vis-à-vis the corporate world.

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