Lost in transition: the missing social dimension of sustainable finance taxonomies

Sustainability envisages that the environmental, social, and economic dimensions are all balanced in humanity’s development. However, sustainable finance taxonomies appear to be primarily preoccupied with environmental issues, falling short of fully addressing the social agenda, which should be an integral part of a truly just and equitable transition. This expert view examines how social taxonomies are designed and operated and examines the few countries and jurisdictions that have already developed such tools.

Sustainability envisages that environmental, social, and economic factors are all part of the equation and that there is a balance between the three. Yet, the social aspect has been largely neglected in the sustainable finance taxonomies (see textbox below), which mainly focus on climate change and - less often and in a less detailed manner - on biodiversity and other environmental issues.

To some extent, the social aspect is included in taxonomies, as they often strive for a just energy transition. The United Nations Committee for Development Policy broadly defines just transition as ‘ensuring that no one is left behind or pushed behind in the transition to low-carbon and environmentally sustainable economies and societies’. The International Labour Organization (ILO) further stresses that just transition must be gender-responsive and can be attained by creating decent work and reducing inequalities. In line with these definitions, most sustainable finance taxonomies envisage minimum social safeguards (for example, the EU Taxonomy refers to the UN Guiding Principles on Business and Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the International Bill of Human Rights).

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What are Sustainable Taxonomies?

Originating from the natural sciences, taxonomies could be broadly defined as systems for naming and organizing things into groups that share similar qualities. Today, they are widely employed to identify and classify financial assets, products, and services that can help combat environmental degradation or advance social progress. Sustainable finance taxonomies are one of the most rapidly developing areas of financial regulations. In recent years, many sustainable finance taxonomies have sprung up at both national and regional levels, and many more are still to come. However, they are lagging behind in their implementation.?

Social Taxonomies

However, while these safeguards aim to prevent the negative social impacts of environmental projects, they do not encourage positive societal change. To achieve broader social goals, the development of social taxonomies would be helpful. A social taxonomy can be defined as a classification system for sectors and activities that can help prevent negative social impacts and contribute to positive societal change.

EU: from frontrunner to laggard?

The European Union was among the first jurisdictions to develop and roll out a comprehensive green taxonomy, and its social taxonomy was projected to follow suit. In February 2022, the EU Platform on Sustainable Finance published its Final Report on Social Taxonomy, which was supposed to lay the foundations for the updated Taxonomy Regulation that would include the key social issues: decent work (including for value-chain workers), adequate living standards and wellbeing, inclusive and sustainable communities and societies. Several sub-objectives, ranging from equal employment opportunities for women and ensuring access to quality healthcare to improving access to education and lifelong learning and protection of personal data and privacy, were envisaged. Overall, the report provided a solid ground for the future Social Taxonomy.

Unfortunately, in August 2022, the EU Commission decided to halt the development of a Social Taxonomy, with no specific date for resuming the process. The Commission was, among other reasons, exhausted by the lengthy process needed for the Green Taxonomy and criticism from the financial sector that it should take ‘a more positive approach akin to the EU’s green taxonomy, rather than focus on telling investors what not to do.’

In June 2023, a coalition of 13 European platforms, associations, foundations, and social enterprises signed an Open Letter for a Social Taxonomy urging the commission not to lose momentum and to extend the current EU Taxonomy framework to include a social and human rights dimension as soon as possible. However, as of December 2024, the Social Taxonomy remains shelved, and it is unclear when it may be adopted.

While worrisome, this delay may turn out to be a blessing in disguise, as the proposed social taxonomy can now benefit from the lessons learned from the Green Taxonomy and avoid its drawbacks and pitfalls.

What are other countries achieving in the meantime?

Several dozen countries currently have sustainable finance taxonomies or have initiated their development. However, very few have a designated social taxonomy, or at least social pillars and goals as part of their broader sustainable finance taxonomies. These include Georgia, Mexico, China, Kazakhstan, and South Africa.

In 2022, the National Bank of Georgia presented the country’s Sustainable Finance (SF) Taxonomy, which ‘adopts a broad perspective when defining the sustainable finance and thus, in addition to green finance, it also includes social finance’. The social dimension covers five significant domains: infrastructure, health, financial services, food, and education, which are further divided into categories and sub-categories. The classification of the Georgian Taxonomy appears to be comprehensive and covers such diverse social issues. It also defines the target populations, which cover a wide range of different groups, from people with disabilities to veterans and people living in high mountain regions.

In March 2023, Mexico’s Ministry of Finance unveiled the country’s Sustainable Taxonomy, which is perhaps the first taxonomy to have a specific focus on gender. Gender equality is among the three major objectives of the Taxonomy, and activities contributing to gender equality are transversal, spanning across twenty economic sectors. The Gender Equality Index (GEI) will serve as a key indicator for assessing an organisation’s level of participation and commitment across three core pillars outlined in the Taxonomy: decent work, well-being, and social inclusion. Based on those pillars , specific metrics will be developed to evaluate actions and commitments within organisations, addressing areas such as equal pay, gender-sensitive health initiatives, women's social participation, and more.

In 2020, the China International Center for Economic and Technical Exchange (CICETE) and UNDP published the Technical Report on SDG Finance Taxonomy for China. The report covers both environmental and social categories. Eligible social activities include basic infrastructure, affordable housing, health, education, technology & culture, food security, and financial services. The taxonomy is organised into three cascading levels. For example, Level 1: education, Level 2: Preschool education, Level 3: Construction, expansion and reconstruction of resources needed for preschool children's care and education, new educational and teaching equipment, staffing, etc. ?

Each activity has to contribute to helping one or several target populations, including for example ?people living below the poverty line, senior citizens or pregnant women, among many other groups defined. Impact Indicators are also envisaged, helping companies to report on the achieved progress.

Other countries which are actively developing social taxonomies or whose existing taxonomies have a social angle include Kazakhstan and South Africa. In June 2022, the proposed draft Taxonomy of Social Projects for ESG Finance Markets, developed by the Astana International Financial Centre (AIFC) Green Finance Centre in Kazakhstan, was discussed during the Green Growth Forum. South Africa’s Green Taxonomy recognises the need for an ‘equitable transition which is cognizant of a wider social impact’ and the need to ‘balance ecosystem protection with social development’. It may be expected that the South Africa Sustainable Finance Initiative’s Taxonomy Working Group may elaborate on a more detailed list of eligible social activities in the future.

A transition for whom? Way forward to a truly just and equitable climate future

There is an urgent need for a just and gender-sensitive transition at a global scale, and in particular in the Global South. The ongoing climate crisis must be overcome, and the common green future must be achieved without jeopardising developing countries’ right to social progress and economic advancement. This will require vast amounts of capital, and drying streams of official development assistance are not enough.

The development of social taxonomies is crucial to give the private financial sector guidance on how to finance just transitions across economies. Transparent and interoperable classification systems are essential for directing capital flows to sectors, projects, and activities that improve living and working conditions, provide for gender equality, and promote positive social change.

Social taxonomies must be as inclusive as possible, covering all sectors contributing to social progress, from education and healthcare to (sustainable) infrastructure, (affordable) housing, and cultural heritage management. The most essential sectors and activities are already listed in the International Capital Market Association (ICMA) Social Bond Principles (SBP) 2023: and include among many others affordable basic infrastructure such as clean drinking water and energy, access to essential services (like health or education), affordable housing and employment generation.

National taxonomies can build upon this list, expanding or tailoring depending on their needs and goals, as well as on the needs of the composition and needs of the target populations. They must take a positive approach, recommending banks and investors where society expects them to channel their funding instead of building fencing and establishing prohibitive rules.

Market-based mechanisms should be used to make such investments relatively more attractive (both by providing incentives and by making unjust investments more expensive). Ignoring the social pillar of sustainability is no longer an option, and social taxonomies can help us bring back the balance in the sustainability equation.

Pavel Boev is a researcher of sustainable supply chains and finance at Profundo. For further information, please contact [email protected].