Discussions of sustainable finance currently focus primarily on climate protection goals. But of the three letters “E-S-G”, which are now commonly used as an acronym for environmental, social and governance aspects of sustainability, the “S” is becoming increasingly important too. What does this mean for banks?
EU to introduce a social taxonomy
The European Union is currently putting the finishing touches to its classification of environmentally sustainable economic activity, the so-called taxonomy. The European Commission made it clear back in 2018 that social factors were just as important as environmental issues and is therefore in all probability working on a social taxonomy. Like the “green” taxonomy, its aim will be to categorise economic activities, but now in terms of the extent to which they have a social impact and thus fall within the scope of the new classification system.
Horizontal and vertical dimensions of the social taxonomy
To structure the issue and help determine what economic activities can be considered “social”, the new taxonomy will focus on two approaches. First, the question of what business products contribute to better living conditions – for example when it comes to health or education in structurally weak regions or for disadvantaged sections of the population (vertical dimension). The second aspect chiefly concerns the human rights due diligence that companies should carry out (horizontal dimension).
Expectations of a social taxonomy
Be it “green” or “social” – businesses and banks need a system that is consistent. So the objective of the social taxonomy should also be to develop a common language and set incentives for companies to embrace social issues. At the same time, the social and green taxonomies should be fully coordinated with each other. Some overlaps with the horizontal dimension of the social taxonomy already exist – such as in the form of the UN Guiding Principles on Business and Human Rights.
The German Supply Chain Due Diligence Act
After lengthy discussion, the German government has now introduced the so-called Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz). The UN Guiding Principles mentioned above are an important point of reference for this law too. The objective of the law is for companies to assume more responsibility in the supply and value chain and thus contribute to greater overall economic sustainability. It is not yet possible to fully assess whether this will work or precisely what impact it will have on day-to-day business. Open questions also remain about the scope of application. Banks will naturally be affected by the legislation, but the law does not explicitly go into regulation for the banking industry.
Activities of the private banks and outlook
For a forward-looking financial sector, social and human rights aspects of sustainability are a key issue. Bit by bit, the private banks are integrating all relevant sustainability issues into their core business. Social impact banking, social equilibrium, the promotion of human rights and sustainable corporate governance are already important aspects in this regard. Managing risks is a central part of a bank’s business. This may, and increasingly will, include sustainability risk arising from social aspects that will need to be given greater consideration in future.
Click here for further information on the Association of German Banks’ position paper on sustainable finance.
