Developing a Social Taxonomy to Promote Sustainable Finance in the Republic of Korea

Sustainable finance refers to financial services, products, and processes that contribute to sustainable development and bring environmental, social, and economic impact. This can be further classified into “green finance,” which puts emphasis on environmental impact, and “social finance,” which is more on social impact (e.g., quality education).

The promotion of sustainable finance requires establishing taxonomies to determine if an economic activity contributes to sustainable growth and development.   For example, the green taxonomy provides clear criteria for green finance. It enables consistent evaluation of environmentally sustainable industries and economic activities, and sound investments and lending decisions. It also alleviates concerns over greenwashing or false claims about environment-friendly products, services, or investments. The European Union (EU) Taxonomy (2020) serves as a global benchmark for green taxonomy. Subsequently, the Republic of Korea’s Ministry of Environment introduced the K-Taxonomy at the end of 2021.

Meanwhile, a social taxonomy provides the criteria for social finance or investment.  It examines how economic activities support social goals, such as poverty eradication, health and wellbeing, quality education, gender equality, clean water, and hygiene. It plays an important role in revitalizing green finance because green economic activities need to secure minimum social safeguards, such as preventing child labor, forced labor, or destruction of cultural heritage. The development of a social taxonomy gained more attention when the EU published a social taxonomy draft in 2021 and acknowledged the risks of not taking social factors into account in investments. The EU’s proposed social goals include consumer access to basic necessities and economic infrastructure, job creation, consumer interests, and the pursuit of a sustainable community.

In the Republic of Korea, greater efforts are needed to establish a social taxonomy as there are not enough discussions and interests about its application. A consensus on social goals and criteria is necessary.  While a green taxonomy focuses on specific activities and quantitative factors, a social taxonomy gives more emphasis on agents of economic activities, such as negotiation between employees and employer, and qualitative factors, such as transparent taxation. Therefore, active participation of interested parties and the process of fine-tuning various interests along the way must be ensured

It would be advisable to include minimum environmental safeguards as one of the criteria for judging social activities to promote sustainable finance. Mutually requiring minimum safeguards between green taxonomy and social taxonomy would facilitate a virtuous cycle between environmental and social impact, further contributing to sustainable development of the economy.

The Korean government must build a widespread social consensus on environmental and social goals. For example, among the K-Taxonomy goals, “reducing greenhouse gas” has been discussed socially in support of the government’s carbon-neutral 2050 policy. However, it is hard to say if the necessity of other environmental goals has formed “sufficient social consensus” in the country

The government must also enhance its information disclosure mechanism. Disclosing information to the market, such as business activities that conform to environmental and social goals will help stakeholders make the right investments.  

Moreover, the government must strengthen the capacity of the supervisory authority and reorganize it if needed. It should determine if existing regulations come in conflict with the social taxonomy.

EU Platform for Sustainable Finance. Draft Report by Subgroup 4: Social Taxonomy.

Korea Institute of Finance website.