Social Safeguards “Critical” to EU Taxonomy

Advisor to Commission insists minimum safeguards can support Europe’s just transition. 

With fears growing over the future of Europe’s planned social taxonomy, hopes for a ‘just transition’ to a low-carbon economy will rest on other measures, including proposed minimum safeguards, the consultation on which has recently been extended.  

The environmental taxonomy must implement minimum safeguards to ensure the EU isn’t “closing its eyes to the social impacts of greening its economies”, according to Signe Andreasen Lysgaard, Strategic Advisor on Business and Human Rights at the Danish Institute for Human Rights. 

The European Commission tasked the Platform on Sustainable Finance (PSF) with drafting minimum safeguards under Article 18 of the Taxonomy Regulation to prevent green investments from being labelled as ‘sustainable’ if they contribute negatively to selected social and governance themes.  

The consultation period for the PSF’s draft was recently extended from 22 August to 6 September. 

“The role of the minimum safeguards in the taxonomy is critical – the EU cannot make its net zero transition on the back of human rights abuses,” Lysgaard, a member of the PSF sub-group that worked on the draft, told ESG Investor. 

“We see significant human rights challenges playing out across clean energy projects: negative impacts on local communities, land rights disputes, people being located without compensation, and poor conditions for workers.” 

The PSF’s draft draws on the OECD guidelines for Multinational Enterprises, the UN Guiding Principles on Business and Human Rights, and the International Bill for Human Rights, identifying four core topics through which compliance with the minimum safeguards will be defined. These are human rights, bribery/corruption, taxation, and fair compensation.  

To assess alignment with these four core pillars, the draft framework has adopted a two-pronged approach, introducing both a procedure-based and an outcome-based test. The former considers whether firms have implemented adequate due diligence procedures across the four topics. The latter focuses on any breaches against the four themes, such as court convictions related to poor human rights due diligence.  

As well as encouraging stakeholders to respond to the consultation, Lysgaard said they should outline how they want the Commission to respond to ensure “this report comes to life and is visibly implemented by taxonomy users”. 

Following the closing of the consultation, the PSF will consider feedback and submit a final report to the Commission by the end of September.  

The PSF is the successor to the Technical Expert Group (TEG) and was responsible for drafting the environmental taxonomy, which became effective at the beginning of this year. The taxonomy outlines environmental economic activities that the EU considers to be sustainable.  

Investors, sustainability experts and academic institutions have regularly called on policymakers to ensure social factors are taken into consideration to enable a just transition to a greener economy.

Fitting in  

The PSF has designed its draft minimum safeguards to integrate with existing pieces of sustainable finance legislation. 

In particular, “the Sustainable Finance Disclosure Regulation (SFDR) plays a special role in the context of [the minimum safeguards] because it is explicitly mentioned in Article 18.2 of the Taxonomy Regulation,” the report said. The draft therefore incorporates the five mandatory social principal adverse impacts (PAI) under SFDR.  

However, the PSF has had to make its recommendations recognising that several relevant initiatives remain works-in-progress. 

“The minimum safeguards have been written at a point in time where we’re still putting pieces of the regulatory puzzle together – such as the social standards under the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence directive (CSDDD) proposal,” said Lysgaard.  

“These future measures will also have an effect on the market and will reinforce the minimum safeguards component of the taxonomy.”  

CSRD, which is set to replace the Non-Financial Reporting Directive (NFRD) from 1 January, 2024, will require companies to disclose against themes such as environmental and social rights. It will first apply to large firms already reporting under NFRD, with large companies not reporting under the existing directive expected to published their reports the following year. Listed SMEs have until 2026.  

The consultation for European sustainability reporting standards (ESRSs) also recently closed. These requirements – which cover 13 ESG themes, including social factors – will apply to companies falling under the scope of CSRD. 

The proposed CSDDD, which has been adopted by the Commission, will apply along the full value chains of EU and non-EU companies in the single market with more than 500 employees and revenues of at least €150 million. Qualifying firms must integrate environmental and human rights due diligence into their internal policies and report on performance progress.  

It has been presented to the European Parliament and the Council for approval. Once adopted, EU member states will have two years to incorporate the directive into their national laws.  

The PSF has considered potential developments across both the CSRD and CSDDD within its draft report, which said: “Once the CSDDD and CSRD are finalised, and some experience on practical implementation and court rulings is accumulated, this advice should be revised on the basis of the final version of the legislation and its implementation.” 

A clear direction 

In February, the PSF also published its final draft for a social taxonomy, which Lysgaard noted is a “critical piece” of European efforts to ensure social factors are prioritised alongside environmental factors. 

The social taxonomy will serve as a complementary classification system to the environmental taxonomy, outlining which economic activities are socially sustainable. It covers three objectives: decent work along the entire value chain, inclusive and sustainable communities, and adequate living standards and wellbeing for consumers and end-users. 

“The social taxonomy would be an entirely different instrument than social safeguards, as it would point out a clear direction and incentives for investors that want to invest in social sustainability. That critical piece is currently not part of the puzzle yet,” said Lysgaard. 

There has been growing concern that any further action on the social taxonomy by the Commission will be delayed until at least 2024. 

The Commission is expected to publish its own report on the merits of possible provisions to extend the Taxonomy Regulation to cover social objectives in due course, and intends to carefully analyse the PSF social taxonomy draft.  

Lysgaard said: “I hope the Commission doesn’t wait too long to act on our advice and take steps to realise a social taxonomy. Of course, there are a lot of moving parts for the Commission to contend with and finalise, but we need to strengthen the social part of the EU’s sustainable finance approach for it to become fully sustainable and not just green.” 

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