Our key takeaway: We gain further clarity on how the EU could define the social part of sustainable investments, to complement the environmental part (the EU taxonomy).
On 12 July 2021, the social taxonomy subgroup of the EU Platform for Sustainable Finance published its Draft Report by Subgroup 4: Social Taxonomy. Consultation on this paper closes on 27 August 2021 and the final report will be submitted to the European Commission in autumn 2021:
- Bringing the social into the environment. The EU Taxonomy Regulation of July 2020 provides a classification system for sustainable activities. The taxonomy, initially covering environmental activities and objectives, was created to provide clarity and certainty for investors and decision-makers, to help ensure that financing contributes to the EU Green Deal. Given the taxonomy’s limited inclusion of social sustainability aspects, the European Commission gave the Platform for Sustainable Finance the mandate to work on extending the taxonomy to social objectives to promote investment in social sustainability that seeks to achieve the Sustainable Development Goals (SDGs) and ensures respect for the UN Guiding Principles on Business and Human Rights (UNGPs). This social taxonomy will have implications for other relevant EU legislation, such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).
- Four differences between a social and an environmental taxonomy. The social taxonomy subgroup identified four main differences as follows: (1) Economic activities such as job creation are inherently socially beneficial. A social taxonomy has to distinguish between these inherent benefits and added social benefits such as improving access to quality healthcare or ensuring decent jobs. (2) Environmental objectives and criteria can be based on science, but a social taxonomy could be founded on international authoritative standards of topical relevance such as the International Bill of Human Rights. (3) The environmental taxonomy links criteria to economic activities. However, some social aspects, such as collective bargaining or tax transparency, cannot be linked to economic activities – they must be linked to the economic entity. (4) For some social topics it might be more difficult to develop meaningful quantitative criteria.
- A social taxonomy considers both promotion of human rights, as well as a baseline respect for human rights. The suggested structure of a social taxonomy would be both vertical and horizontal. The vertical dimension focuses on products and services for basic human needs (e.g. water, food, housing, healthcare, education) and basic infrastructure (transport, telecommunications, clean energy, financial inclusion, waste management). Economic activities that make these products and services more accessible, while doing no harm to efforts to achieve other social objectives, could be considered social. The horizontal dimension takes into account impacts on different groups of stakeholders affected by economic activities – workers, including value chain workers, consumers and communities (e.g., ensuring decent work, enabling inclusive and sustainable communities). Horizontal objectives would be likely to include a combination of entity- and activity-level criteria.
For more, see Social taxonomy subgroup of the EU Platform for Sustainable Finance, Draft Report by Subgroup 4: Social Taxonomy (July 2021)