In the context of a recently launched publication consultation, the European Union (EU) Platform on Sustainable Finance published two draft reports: one on the taxonomy extension options linked to environmental objectives and the other on developing a social taxonomy. The feedback period on these two reports ends on August 27, 2021, with the Platform on Sustainable Finance expected to submit the final reports, and its advice, to the European Commission (EC) in Autumn 2021. This advice will feed into the EC report on potential extension of taxonomy framework to be adopted by the end of 2021, as set out in the Taxonomy Regulation.
The draft report on taxonomy extension examines the premises, issues, and options for and against extending the EU Taxonomy "beyond green" to include significantly harmful activities and no significant impact activities within the overall EU sustainable finance framework. The report sets out 15 recommendations to build on the existing taxonomy. The Platform recommends that EU Taxonomy should be extended, with a priority given to an extension toward activities causing significant harm. Extended taxonomy must be part of a wider set of EU policy and legislative initiatives aimed at incentivizing finance for urgent transition away from significantly harmful activities, along with building climate-resilience and supporting a greening of the economy. The Platform recommends for EC to issue non-binding guidance to corporates, financial market participants, and other Taxonomy users, on the use of significantly harmful and intermediate performance levels for informing activity-specific investment plans and transition narratives. As another recommendation, the Platform notes that after a decision on an extended significantly harmful activities taxonomy is made, phasing in is rapid—aiming at first reporting by 2023. The Platform recommends that the necessary work to identify activities for which no technological possibility of improving their environmental performance to avoid significant harm exists, referencing all six objectives, is initiated as soon as possible. These recommendations are not final and the Platform will set out the final recommendations later in 2021. The key topics that have been identified for further investigation include outlining of reporting and disclosure options for an extended taxonomy, further consideration on whether a generic, or case by case, approach is required, and the possibility of a Platform guidance document to precede the recommended changes to the Taxonomy Regulation.
The draft report on social taxonomy states that the first task of the social taxonomy subgroup of the EU Platform for Sustainable Finance is to suggest a structure for a social taxonomy while keeping in mind what constitutes a substantial social contribution, how to not do significant harm, and what activities are harmful. The suggested structure of a social taxonomy would be both vertical and horizontal, with the vertical dimension focusing on products and services for basic human needs and basic infrastructure. From this perspective, economic activities that make these products and services more accessible, while doing no harm to efforts to achieve other social objectives, could be considered social. The horizontal dimension takes into account impact on different groups of stakeholders affected by economic activities and would be likely to include a combination of entity- and activity-level criteria, crucial for ensuring businesses’ respect and support for human rights as part of the social taxonomy. Built on the foundation of international norms and principles like the sustainable development goals (SDG) and the UN guiding principles for businesses and human rights, a social taxonomy would help investors to contribute to finance solutions around ensuring decent work, enabling inclusive and sustainable communities, and affordable healthcare and housing. A social taxonomy would be a tool to help investors identify opportunities to contribute to these objectives. The work done on the social taxonomy is liable to be incorporated into existing legislative texts such as the Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR). A social taxonomy is expected to increase the already increasingly heavy reporting burden the NFRD, SFDR, and environmental taxonomy impose on companies, especially as currently there are no standardized social indicators on which companies usually report.
Comment Due Date: August 27, 2021
Keywords: Europe, EU, Banking, Insurance, Securities, ESG, Sustainable Finance, Taxonomy Regulation, Social Taxonomy, Climate Change Risk, Social Risk, Environmental Taxonomy, Reporting, Disclosures, EC
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