Europe to Put Key Plank of ESG Rulebook on Hold Amid Infighting

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(Bloomberg) — The next milestone in Europe’s efforts to create a global benchmark for ESG investing has been shelved indefinitely as officials balk at devoting resources to a process that’s already marred by deep political division, according to people familiar with the matter. 

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The so-called social taxonomy, which was to be the next plank in the years-long process to create a guidebook for driving capital into activities that meet environmental, social and governance standards, is unlikely to see the light of day in the next few years, the people said. It had tentatively been slated for debate before the current commission ends its term in 2024. 

The social taxonomy “seems to have stayed in the background,” said Vincent Ingham, director of regulatory policy at the European Fund and Asset Management Association. The Commission “hasn’t taken an official position,” but “it’s our understanding that they won’t prioritize the social taxonomy” and that there’ll be no movement for several years, he said.

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The decision means that goals such as gender equality and supply chains that avoid exploitation won’t be enshrined in EU ESG regulations until the latter half of the decade, at the earliest. It follows the EU’s decision to add gas and nuclear energy to its green taxonomy, which angered some member countries and left the EU parliament deeply divided. The infighting that surrounded that process has left the bloc with little appetite for another round of talks that will likely be even more fraught, the people said. 

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“The social taxonomy could become very contentious politically,” said Hugo Gallagher, senior policy adviser at the European Sustainable Investment Forum (Eurosif), whose members represent about $20 trillion in assets under management. It “would have to cover virtually all economic sectors, the volume and complexity of technical work this would imply is daunting.”

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Investors were originally promised an EU Commission report outlining how it would go about creating a social taxonomy by the end of last year. That process was never completed and no guidelines have been put forward by the EU’s executive branch since.

The EU’s Platform on Sustainable Finance, a body that advises the Commission, published a set of proposals for the social taxonomy back in February, four months behind schedule. The list includes guidelines on pay, gender equality and humane supply chains. But those recommendations did nothing to expedite the process, according to people following the matter.

The EU’s failure to move ahead with the social plank of its taxonomy, which underpins the bloc’s ESG rules for everything from companies to bond markets to asset management, comes amid an increasingly tense political backdrop. The war in Ukraine and the energy crisis it has exacerbated have steered the political debate toward energy security, resulting in a revitalized coal industry even as greenhouse gas emissions soar. 

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Meanwhile, interest groups have used delays in the process around the social taxonomy to try to persuade EU officials to include more asset classes. Most notable are efforts by the defense industry to be incorporated in the rulebook for sustainable investing, pointing to the need to arm Ukraine as a justification. 

For ESG investors trying to navigate the evolving regulatory environment, the EU’s failure to move ahead with a social taxonomy means their capital allocations won’t be backed by a codified framework. That’s against a backdrop in which both investors and regulators are increasingly alert to the risk of greenwashing. 

According to an EU official, the bloc will try to pursue other policy initiatives to help guide investors. The official also noted that the EU’s existing taxonomy already requires companies to comply with a minimum of social safeguards such as basic labor rights.