The Social Taxonomy is Under Scrutiny Before the Proposal Process Started

The EU green taxonomy is one of the main pillars of the sustainable investing framework in the EU. The purpose of the taxonomy is to define which business activities and sectors can be considered as sustainable. That said, the current proposal to classify nuclear and gas as green energy sources—since they can be seen as transitional technologies to bridge the gap between the current and future energy demand and the lack of the availability of renewable energy sources for the time being—is putting the credibility of the EU action plan for financing sustainable growth under scrutiny.

The possible inclusion of nuclear and gas as green led to a wide discussion between market observers, investors, and politicians. Some EU member states already made clear that they won’t back the current proposal, while Austria signaled its readiness to sue the EU Commission if nuclear power becomes a part of the green taxonomy.

Beside the discussion around the classification of business activities from an environmental point of view, the EU Commission initiated the next phase, which shall lead to a social taxonomy. This process is driven by an expert group on the EU Commission-initiated Platform on Sustainable Finance.

On February 28, 2022, the expert group published a report that proposed a structure for a social taxonomy build on three objectives:

1. decent work
2. adequate living standards and wellbeing for end users
3. inclusive and sustainable communities and societies

Within this report, the expert group states that the investment in possibly harmful activities such as weapons should be declared as “socially harmful” based on internationally agreed conditions.

On the same day Bloomberg reports that Hans Christoph Atzpodien, who runs the lobby group BDSV – the Federation of German Security and Defense Industries – urges the EU to recognize the defense industry as a positive contribution to social sustainability under the ESG taxonomy. This was echoed by Markus Ferber, a German member of the European Parliament who was cited by Ignites Europe as saying, “With the Ukrainian crisis, we are witnessing right now how important a strong European industry is. It would be precisely the wrong move to undermine the strength of the European economy by a misguided over-eagerness for sustainability.” According to Ferber, the EU Commission would be well advised not to follow through with the proposals from the Platform on Sustainable Finance.

From my point of view adding weapons to the “do not harm” list would put the EU taxonomy under even more scrutiny than the current discussion around nuclear and gas. This is because the exclusion of weapons is one of widely accepted and practiced exclusion criteria within the investment industry and is even used by funds which do not claim that they are following an ESG approach at all.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.