The EU Social Taxonomy Proposal
1. Introduction
Following the introduction of the EU's environmental taxonomy, the Platform on Sustainable Finance (the Platform), as advisor to the European Commission, was asked to advise on a potential social taxonomy framework.
Similar to the environmental taxonomy, the proposed social taxonomy aims to provide a classification system to determine whether an economic activity is considered socially sustainable. In February 2022, the Platform published its Final Report on Social Taxonomy (the Report) setting out its proposals for a social taxonomy.
2. Proposed Structure
The Platform proposed that the social taxonomy follow the basic structure as the environmental taxonomy through:
- identification of social objectives
- establishment of criteria to determine whether an economic activity is socially sustainable, considering the same elements as the environmental taxonomy, being
- substantial contribution to one or more of the social objectives
- a “do no significant harm" (DNSH) test
- minimum safeguards
A number of reasons for this suggested approach are identified within the Report including:
- having similar structures should reduce the burden companies would experience by having to deal with two completely different systems
- the importance of investors being able to compare the degree to which an investment is considered to be in line with the environmental taxonomy, in line with the social taxonomy or in line with both taxonomies
While the Platform proposed that the structure of the social taxonomy would follow that of the environmental taxonomy, it is acknowledged that there are some key differences in terms of the subject matter of the taxonomies which will mean that distinct approaches will need to be taken. For example, it will not be possible to base a social taxonomy in science to the same extent as the environmental taxonomy. The proposed social taxonomy will instead need to rely on agreed authoritative norms and principles. In addition, as economic activities tend to have inherent social benefits through the creation of jobs, contribution to taxes, and provision of socially beneficial products and services, the social taxonomy will need to differentiate between the inherent and additional social benefit of economic activity.
3. The Social Objectives
Building upon the social taxonomy’s foundations in established international norms and principles, the Report suggests relying on a number of documents including the Universal Declaration of Human Rights, the European Convention on Human Rights and the UN Sustainable Development Goals (SDGs), to identify three objectives for a social taxonomy. Three proposed objectives have been suggested by the Platform with the proposal being that these are supplemented by a non-exhaustive list of sub-objectives, details in Table 1 below.
|
No |
Objective |
Key points |
Sub-objectives |
|
1 |
Decent work (including value chain workers) |
Not confined to organisations’ immediate employees, nor is it confined to within the EU. Instead, it would apply to all value chain workers. |
|
|
2 |
Adequate living standards and well-being for end users |
Focuses on people as end users of certain products and services that either pose heightened health or safety risks or that have the potential to help people to meet basic human needs. |
|
|
3 |
Inclusive and sustainable communities and societies |
Emphasises respect and support for human rights through paying attention to the impact of economic activity on communities and the wider society. This will be achieved by addressing and avoiding negative impacts on communities and societies and by making basic economic infrastructure available to certain target groups. |
|
The Report states that it was agreed that the most convincing way to articulate the objectives of a social taxonomy was by setting out the type of stakeholders that different economic activities can affect. The Report identifies the stakeholders affected by business activities as:
- an entity’s own workforce (including value-chain workers)
- end-users or consumers
- affected communities (directly or through the value chain)
This aligns with the approach taken by the European Financial Reporting Advisory Group (EFRAG) in preparing the social standards in the draft European Sustainability Reporting Standards. The Platform propose that, for the sake of simplicity, a future social taxonomy should be centred around these three groups of stakeholders to whose lives and livelihoods economic activities can make a positive contribution.
Conclusion
It remains to be seen if and when the proposed social taxonomy will come to fruition given that the European Commission appears to have shelved this proposal due to a lack of agreement on how to move forward. Our recent article on the taxonomy's minimum safeguard requirements highlights that while the existing taxonomy framework focused on six environmental objectives, an economic activity cannot be considered environmentally sustainable if the company carrying out the activity fails to comply with social and governance norms.
While there is no sign of progress being made on the establishment of a social taxonomy since the publication of the Report, this should not be taken as an indication of a lack of focus on social considerations. In addition to Taxonomy Regulation's minimum safeguard provisions which the Platform published a separate Report on, there are other European initiatives relating to sustainable governance, such as the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosures Regulation and the proposed Corporate Sustainability Due Diligence Directive, which all require in scope companies to focus on social issues in tandem with environmental and governance considerations.
For more information in relation to this topic, please contact Jill Shaw, ESG & Sustainability Lead or visit our ESG & Sustainability hub. With thanks to Mark O'Rourke for his assistance in the preparation of this article.