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ARTICLE17 September 2021

Social taxonomy ? No, thank you!

The taxonomy is intended to indicate whether investments are sustainable or not. The focus so far has been on environmental factors, but now a similar setup is suggested for social impacts. Jonas Berggren, Chief Analyst International and EU Affairs, warns that the latter could become an administrative nightmare that leads to fewer sustainable investments.

Jonas Berggren, Chief Analyst International and EU AffairsPhoto: Ernst Henry Photography

Imagine if it was possible to set standardised, objective criteria for the various types of activities that benefit or harm society the most. Then imagine that private investment would flow towards, or away from, these activities based on the established criteria. In practice a type of scoreboard that would allow fund managers and other investors to easily identify those companies that are the most, or least, socially sustainable.

The idea of such a system goes under the name of social taxonomy. Recently, consultation closed on a report which advocated its introduction at EU level. The report had been commissioned by the European Commission and was written by the social taxonomy subgroup of the EU Platform for Sustainable Finance.

The proposal to undertake a similar exercise in the environmental field, the so-called ‘green taxonomy’, has received a great deal of attention. In Sweden, there has been much discussion over the potential impact of an unfavourable classification of, for example, hydropower or forestry. Such an outcome could have major negative consequences for - among other things - jobs and the economy. However, the question of a social taxonomy has yet to surface in the general debate; that said - given the working group’s far-reaching proposals - it’s probably time that it did.

The report proposes a system in two dimensions. The first is a ‘vertical’ dimension, which identifies what products or services should be categorised as generating significant social contributions or should be considered as socially harmful. The former could include water supply or education and the latter weapons manufacturing or gaming companies. The second is ‘horizontal’, focusing on the impact of company activities regardless of its line of business. In this, positive activities could include ensuring health and safety in the workplace or employment of vulnerable groups. Activities would be considered harmful if they are seen to go against the objectives of decent work, consumer interests or ’inclusive and sustainable communities’.

In addition, criteria are proposed for sustainable corporate governance, such as a balanced gender distribution on company boards, remuneration based on sustainability requirements achieved as well as for tax planning.

Does that sound complicated?

Yes, the approach shows all the signs of being able to develop into an administrative nightmare, with high costs for reporting and follow-up. Worse still, it is also fundamentally misconceived. It ignores that the evaluation of a company’s social contribution / social sustainability necessarily involves striking a balance between different social goals. The outcome of this inevitably varies depending on the local or national context and more or less subjective preferences. As the report also choses to exclude companies’ contributions to generating jobs, tax revenues and economic growth, in practice the social taxonomy risks diverting investments away from those areas where they can generate the most significant social contributions.

Moving forward with the report’s proposal would be highly controversial. The inclusion of criteria that influence wage policies and employment relationships directly affects national labour law, including collective bargaining between the social partners. Corporate governance criteria can also be seen as infringing on national legislation and its practice, as well as on property rights. In addition, proposed criteria aimed at enticing companies to pay more in taxes than required by national law are likely to stir some discussion.

It is important that the trend whereby companies take greater account of sustainability in general - including social sustainability - continues. To date, this has mainly been a market-driven development, and one which has proven to be effective in achieving results, as it allows companies to invest their resources where they can have the greatest impact. Tough general minimum requirements have also played a part. However, setting up a ”one-size-fit-all” taxonomy at EU level in the social arena - as proposed in the report - will undermine rather than contribute to this welcome development.

Therefore, let’s ensure that the idea of creating a social taxonomy remains where it belongs - on the drawing board!

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Contact our EU Office

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Contact our EU Office

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Publisher and editor-in-chief Anna Dalqvist