Cautious Welcome for EU Social Taxonomy

Industry warns on exclusion risks and insufficient minimum standards, as Europe looks to put social factors on par with environmental ones. 

Sustainable social activities listed in the draft EU Social Taxonomy need to be comprehensive, measurable and inclusive of companies in transition, according to consultation responses. The public consultation closes today, following an extension of the original 27 August deadline.

The draft was published on 12 July by the Platform for Sustainable Finance that replaced the Technical Expert Group (TEG) responsible for drafting the original Taxonomy Regulation. A subgroup from the Platform was tasked with proposing a Social Taxonomy, explaining how the existing Taxonomy could be extended to cover sustainable social factors.

Responses are supportive of the Social Taxonomy, emphasising the importance of measuring social factors alongside environmental ones. Respondents include Norges Bank Investment Management (NBIM), NGO ShareAction, Cardano Group, the Business and Human Rights Resource Centre, EIRIS Foundation, Investor Alliance for Human Rights, Workforce Disclosure Initiative (WDI) and World Benchmarking Alliance (WBA).

However, questions remain around the potential exclusion of ‘socially harmful activities’ and the depth of the social minimum safeguards included in the original Taxonomy Regulation.

Following a review of the feedback, the Platform will submit a final report to the European Commission in October.

The existing Taxonomy Regulation aims to prevent greenwashing by serving as a classification system outlining which investments are environmentally sustainable.

Going beyond the minimum

The consultation sought feedback on two proposed models for a Social Taxonomy.

‘Model’ One proposes the formation of a separate complementary Social Taxonomy, connected to the existing environmental one through minimum safeguards. Minimum social safeguards would underline the six environmental pillars of the Taxonomy Regulation and minimum environmental safeguards would be introduced for the social pillars of a Social Taxonomy.

NGO ShareAction argued the introduction of minimum safeguards in Model One “is not sufficient to drive the social change that is needed and to achieve the UN Sustainable Development Goals (SDGs)”.

“The downside would be thin social and environmental criteria in the respective other part of the taxonomy,” it added.

The NGO is more supportive of Model Two, which proposes one Sustainable Taxonomy with a list of social and environmental objectives and additional comprehensive Do No Significant Harm (DNSH) criteria.

ShareAction also contributed to a joint statement responding to the draft Social Taxonomy, alongside the Business and Human Rights Resource Centre, EIRIS Foundation, Investor Alliance for Human Rights, WDI and WBA.

The group called for an equal waiting of E and S activities in the taxonomy, given that other EU regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) and the proposed Corporate Sustainability Reporting Directive (CSRD), take this approach.

“‘Environmentally sound’ activities will not be sustainable if based upon poor working conditions, or harming customers or communities. Social progress depends upon a healthy planet,” the group explained.

Socially harmful activities

The current draft proposes exclusion criteria in order to ensure that ‘socially harmful activities’ are not included in the Social Taxonomy, even if those activities meet the requirements of its ‘horizontal objectives’.

The Platform’s subgroup has proposed a vertical and horizontal framework for the taxonomy. The vertical dimension concerns what socially sustainable business is being done, whereas the horizontal focuses on how socially sustainable business is being done.

For example, the vertical dimension considers the promotion of adequate living standards, so would include social housing. The horizontal axis focuses on the promotion of positive impacts on affected stakeholder groups and communities, such as a company ensuring decent work or promoting consumer interests.

However, by excluding socially harmful activities from the taxonomy, the EU runs the risk of excluding companies in transition, according to NBIM, which manages over €1 billion in assets.

This exclusionary stance has been similarly adopted by the Taxonomy Regulation, generating conflict with nuclear and gas majors that are in transition and investing in sustainable activities.

“We recognise that certain activities might have a higher risk of causing negative impacts on stakeholders and therefore require enhanced due diligence by companies engaged in such activities. However, we question the feasibility of developing lists of ‘socially harmful activities’, given the lack of universal norms and standards providing a basis for such criteria,” said the investment management division of the Norwegian Central Bank.

In such cases where these criteria can be established, company assessments typically only happen on “a conduct basis”, NBIM added.

Within its own framework, NBIM noted that its ethical exclusion criteria, as set by the Norwegian parliament, have been “reserved for the future risk of contributions to the most severe norm violations at the company level”.

The Social Taxonomy needs to have an added focus on place-based social issues, said pensions risk and investment management provider Cardano Group.

“While human rights are universal, their salience may be specific to the geography or jurisdiction of the economic activity,” said Karin Pasha, Head of Sustainability at Cardano Netherlands.

For example, meeting living wage requirements in a country with “weak or non-existent labour rights” is less substantial than in a country with well-established labour rights, she added.

Costs of further delay

On current timelines, it’s unlikely asset managers will need to start to factor the Social Taxonomy into how they manage and describe their funds until 2025.

The Commission needs to implement the Social Taxonomy sooner rather than later in order to meet the 2030 deadline for achieving the SDGs and to accelerate the transition to a more sustainable world, ShareAction warned.

“Starting the development of the Taxonomy in 2022 will most probably mean that it will not be applied before 2025. Delaying it further would leave less than five years until 2030. The development of the Social Taxonomy in parallel to the discussions on CSRD and the Sustainable Corporate Governance initiative allows for a strong alignment between the different initiatives,” ShareAction said.

The delayed EU Sustainable Corporate Governance initiative, originally due at the end of June, aims to create a legal framework for corporate human rights and environmental due diligence. It will require requiring companies to demonstrate that they have conducted proper due diligence on the risks for people and the environment as a direct result of their business practices.

Once finalised, the Social Taxonomy will be incorporated into existing legislative texts such as CSRD and SFDR.

The Platform of Sustainable Finance is also currently consulting on both the extension of the environmental taxonomy to include transitional activities and the technical screening criteria for its remaining four environmental objectives.

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