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The importance of considering a social taxonomy

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17 Feb 2022

Despite barriers, advocating for a social taxonomy can drive a positive focus among financial services, says Oscar Warwick Thompson.

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Despite barriers, advocating for a social taxonomy can drive a positive focus among financial services, says Oscar Warwick Thompson.

Last year’s draft report on a social taxonomy by the European Commission’s advisory body, the Platform on Sustainable Finance, provided valuable momentum in the debate over how to address social issues in investment portfolios. UKSIF, which represents more than 270 members of the sustainable nance community, has seen rising awareness of the inter-connections between social and environmental and governance issues.

Social issues such as the treatment of employees, equality and modern-day slavery are being increasingly addressed in our members’ policies and engagement. We have continued to call on the government and our sector to comprehensively consider social risks and their impact, which are key drivers of long-term value.

Our hope is that the Platform’s final report (which we still await) can advance the consideration of a social taxonomy here at home. The government has taken some tentative steps; for example, the Department for Work and Pensions is expected to outline the next steps in exploring how occupational pension schemes are addressing material social risks in their investments, while the Pensions Minister has warned of action if trustees do not meet their legal obligations here.

While welcoming this focus, we would like to see this work progress much further and believe government should consult with the sector on the merits of introducing a social taxonomy. It could serve as a tool for investors to assess the social impact and performance of companies, helping direct capital to activities substantially contributing to, for example, improved living conditions for certain groups.

Providing criteria to measure social sustainability goals should help investors make informed investment decisions and minimise risks in the event they are not sufficiently evaluating the social implications of their investments. We envisage companies would strive to make sure their activities are having positive social sustainability impacts and boost their standards to achieve this.

It is a natural next step to adopt a holistic view of sustainability requiring ESG issues to be collectively seen together. The UK’s commitment to consult on a social taxonomy would be a positive signal, demonstrating the recognition that addressing social challenges is required to be a true global leader on sustainable nance and achieve a net-zero future.

We recognise the barriers the UK could face in implementing this, which the Platform’s report has identified, but this should not delay ambition. Many investors are increasingly supportive of a social taxonomy, including a large number of UKSIF’s members.

A key barrier is the diversity of metrics on social factors compared to climate change. These range from diversity, supply chain conditions, labour rights, the just transition, human rights, anti-corruption and fair pay, among a multitude of others. Investors will consider a different set with each of their investments, identifying

those most material on behalf of their clients, which can be complex. Accommodating this range of issues is challenging, and developing robust, science-based criteria in the same way as climate change will not be possible, with internationally agreed principles likely needing to form the foundation of a social taxonomy.

Related to this will be effectively quantifying social risks, for example, in investors’ portfolios, as social issues are inherently subjective and place-based, making prioritisation more difficult in the investment process. We remain far off having decision-useful data from companies, making it complex for investors to neatly reflect ‘S’ issues in their investment policies and stewardship.

One example is companies’ treatment of outsourced workers in their supply chains. Data issues can be exacerbated where countries do not have good corporate transparency or a free press, with ESG data providers unable to sometimes pick up reliable information.

We support initiatives promoting active stewardship on social issues, which should address the lack of data, such as the UN PRI’s collaborative initiative to help investors prioritise the most serious human rights risks within their engagement activity.

Consideration could be given to a Social Action 100+ initiative to identify a common set of social areas of focus and common metrics that are most material for each sector.

Despite barriers, we continue to advocate for a social taxonomy in the UK, believing it can drive a positive focus among financial services and businesses in addressing the social challenges we face that are critical to delivering a net-zero future.

Oscar Warwick Thompson is head of policy and communications at UK Sustainable Investment and Finance Association (UKSIF)

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