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Europe to suspend key part of ESG rulebook amid infighting

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The next step in Europe’s effort to create a global benchmark for ESG investing has been put on hold indefinitely as officials are reluctant to devote resources to a process already marred by deep political divisions, according to people familiar with the matter.

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(Bloomberg) – The next step in Europe’s effort to create a global benchmark for ESG investing has been put on hold indefinitely as officials are reluctant to devote resources to a process already marred by deep political divisions, according to people familiar with folder.

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The so-called social taxonomy, which was meant to be the next step in the years-long process to create a guide to directing capital to activities that meet environmental, social and governance standards, is unlikely to see the light of day in the next few years. . years, people said. It had been tentatively scheduled to debate before the current committee ends its mandate in 2024.

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 “has not taken an official position”, but “we understand that they will not prioritize social taxonomy” and that there will be no movement for several years, he said. -he declares.

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The move means that goals such as gender equality and supply chains that avoid exploitation will not be enshrined in EU ESG regulations until the second half of the decade, at the earliest. This follows the EU’s decision to add gas and nuclear power to its green taxonomy, which angered some member countries and left the European Parliament deeply divided. The infighting that has surrounded this process has left the bloc with little appetite for another round of talks that will likely be even tougher, the people said.

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

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Investors were initially promised a report from the European Commission outlining how it would go about creating a social taxonomy by the end of last year. This process was never completed and no guidelines have been offered by the EU executive since.

The EU Sustainable Finance Platform, a body that advises the Commission, published a set of proposals for the social taxonomy in February, four months late. The list includes guidelines on wages, gender equality and human supply chains. But those recommendations did nothing to speed up the process, according to people following the case.

The EU’s failure to move forward with the social leg of its taxonomy, which underpins the bloc’s ESG rules for everything from corporates to bond markets to asset management, comes in a increasingly tense political context. The war in Ukraine and the energy crisis it has exacerbated have shifted the political debate towards energy security, leading to a revitalization of the coal industry even as greenhouse gas emissions soar.

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Read more: Big finance and activists slam ‘disappointing’ EU gas vote

Meanwhile, interest groups have taken advantage of 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 into the sustainable investment regulations, pointing to the need to arm Ukraine as justification.

For ESG investors trying to navigate an evolving regulatory environment, the EU’s inability to move forward with a social taxonomy means their capital allocations will not be supported by a codified framework. This in a context where investors and regulators are increasingly attentive 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 existing EU taxonomy already requires companies to comply with minimum social safeguards such as fundamental labor rights.

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