[Square] Taxonomy Is Expanding

Kim Young-woo, Research Fellow at the Institute for Shared Growth

On July 28, 2021, the EU released a meaningful draft report. This report, called the ‘Social Taxonomy,’ contains principles to determine what constitutes ‘socially sustainable’ economic activities. Taxonomy, which translates to an industrial classification system, originally comes from biology. It is a compound word from the Greek ‘taxis’ meaning ‘to classify’ and ‘nomos’ meaning ‘science,’ referring to a classification system organized according to the purpose of a field of study.

Until now, the EU Taxonomy has contained non-financial information (ESG) related to environmentally sustainable investments, serving as a useful objective reference for investments. However, the ‘Green Taxonomy,’ which will be implemented from July next year, has been limited solely to the environment, focusing on climate change response. Among the three ESG fields, there was no taxonomy except for the environmental sector.

The Social Taxonomy for sustainable finance signifies an expansion of the EU Taxonomy’s scope. The Social Taxonomy serves as a standard to determine what constitutes a substantial social contribution. It presents four social objectives structured in a multidimensional way. The vertical dimension proposes the improvement of standards for a dignified life, while the horizontal social objectives pursue three goals: creating decent work, enhancing consumer benefits, and fostering sustainable communities.

First, the vertical dimension examines whether products and services have improved the ‘adequate living standard.’ In contrast, the horizontal dimension focuses on the ‘protection of stakeholders’ human rights’ during economic activities. In other words, it addresses broad shared growth issues. For example, creating good jobs, enhancing consumer benefits, and pursuing sustainable community growth align with the concept of shared growth.

Among the contents of the Social Taxonomy, the EU supply chain corporate due diligence is particularly noteworthy. According to the report, large companies must include △obligations to verify, report, and improve activities related to the environment and human rights in the supply chain △disclosure of issues and countermeasures when risks occur △imposition of fines or compensation for damages in case of violations. Among major countries, the UK (2015), France (2017), and the Netherlands (2020) have legislated this, and Germany also enacted the Supply Chain Due Diligence Act (LkSG) last June. This law applies from 2023 to companies with more than 3,000 employees and will expand to companies with over 1,000 employees in 2024.

With the emergence of the Social Taxonomy, ESG evaluation is entering a completely new phase. The public consultation on the Social Taxonomy was completed in early September. The Sustainable Finance Platform, composed of market participants, experts, and public institutions, positively evaluated the draft. They welcomed that with the Social Taxonomy, companies that only superficially address social issues through social washing (blue washing) will be filtered out. The Social Taxonomy mostly contains issues related to shared growth. It will serve as an opportunity to re-recognize the importance of shared growth.

This content was produced with the assistance of AI translation services.