Increased alignment a key priority when finalising recommendations, according to PSF members.
The final draft of the Platform for Sustainable Finance’s (PSF) social taxonomy proposal has been adjusted to integrate more fully with existing European sustainable finance legislation to minimise regulatory burdens.
The social taxonomy will prevent ‘blue washing’ by providers of financial services by serving as a classification system outlining which economic activities are socially sustainable.
Respondents to the first draft of the social taxonomy cited concerns that the introduction of a separate taxonomy would add to the reporting burden on companies, financial services providers and investors.
The final draft has therefore been amended to reflect social-related reporting requirements detailed in the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Due Diligence initiative, and the existing taxonomy of environmentally sustainable economic activities.
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 January 2022.
“Social issues are becoming increasingly important to investors as they look to understand the impact of their investments and ensure a just transition to net zero,” said Victor van Hoorn, Executive Director of the European Sustainable Investment Forum (Eurosif), speaking during a webinar launching the paper.
The PSF recommended that internationally agreed authoritative norms and principles, such as the United Nations Guiding Principles on Business and Human Rights, should “form the foundations” of the social taxonomy.
“These norms are not subjective, but have been worked out in long-standing discussions with stakeholder groups over the years,” said Antje Schneeweiss, PSF member and General Secretary of the Evangelical Church in Germany’s (EKD) Church Investors Group working group. “PSF believes this is a strong basis to build a social taxonomy on.”
The PSF is also working on a brown taxonomy and the remaining technical screening criteria for the environmental taxonomy. The latter can be expected “in the coming weeks”, according to Nathian Fabian, PSF’s Chair.
Three core social objectives
The latest draft of the social taxonomy moves away from the vertical and horizontal dimensions introduced in the first framework.
It instead introduces three objectives, following the environmental taxonomy’s structure, which builds on six pillars. The social taxonomy’s proposed objectives are: decent work (including for value chain workers), adequate living standards and wellbeing for end-users, and inclusive and sustainable communities and societies.
“The three objectives represent the three stakeholder groups – workers, consumers and communities,” said Schneeweiss. “Each also has sub-objectives, including living wage, health and safety and lifelong learning – themes which can be linked to environmental factors.”
The European Financial Reporting Authority Group’s (EFRAG) draft approach to the European sustainability reporting standards (ESRSs) under CSRD is also based on the three stakeholder groups.
“By aligning the structure of the social taxonomy to the structure considered by EFRAG, we have made a first step towards avoiding double reporting structures and unnecessary additional administrative costs,” the report said.
Investors have previously argued that companies are failing to disclose the social-related information they need to inform their investment decisions.
“The issue has been knowing what to disclose,” said Fabian, who is also Chief Responsible Investment Officer for the UN-convened Principles for Responsible Investment (PRI).
Should the European Commission formally adopt the social taxonomy, companies will have a clearer idea of the information investors will be after, he noted.
“The data will become clearer and more accessible,” Fabian said.
The much-delayed due diligence directive will also require increased social-related disclosures from companies, with a number of objectives between the two pieces of draft legislation overlapping, the paper noted.
“Once the [due diligence initiative] is finalised it must be worked out which role a social taxonomy will play exactly in these areas,” it said, noting however that the due diligence initiative is specifically focused on company reporting, whereas the taxonomy is targeting socially sustainable economic activities.
The Commission will now conduct a review of the social taxonomy in due course.
“Against the backdrop of growing inequalities in our societies, further aggravated by health and climate crises, the introduction of the social taxonomy must not be delayed,” said Maria van der Heide, Head of EU Policy at NGO ShareAction. “We therefore urge the Commission to respond to the social taxonomy report swiftly and develop a social taxonomy without delay.”