EU expert group makes recommendations for a social taxonomy

The recommendations are guided by the structure of the EU Taxonomy Regulation and the proposed Corporate Sustainability Reporting Directive.

The European Commission is considering whether to establish a social taxonomy following the EU Taxonomy Regulation, which came into force in 2020 and was recently further defined by delegated acts. The EU Taxonomy Regulation is intended to establish a classification system for environmentally sustainable economic activities, which is why it is also called the "sustainability taxonomy". A "social taxonomy" could be based on this existing taxonomy and could determine under which conditions an economic activity or a company in the EU may be classified as "social".

Such a classification could provide an additional incentive for investors to invest in projects that have been classified as "social", because it would ensure that financial products and economic activities which place particular emphasis on social compatibility are in principle worthy of financial support. This would also ultimately allow more capital to flow into social economic activities. The social taxonomy is not yet enshrined in law, but it is likely that the sustainability taxonomy will be amended to this effect; however, the final report (84 pages/1.8 MB) of the Platform for Sustainable Finance leaves open to what extent.

A social taxonomy would affect several directives, regulations and legislative initiatives:

• the sustainability taxonomy;
• the Corporate Sustainability Reporting Directive (CSRD), a proposed directive on corporate sustainability reporting to replace the Non-Financial Reporting Directive (NFRD) and introduce binding EU standards for sustainability reporting;
• the Sustainable Finance Disclosure Regulation (SFDR), a regulation on sustainability-related disclosures in the area of financial services, which has to be applied since March 2021; and
• the Sustainable Corporate Governance (SCG) initiative currently being developed by the EU Commission.

In its final report, the Platform for Sustainable Finance, a permanent expert group of the European Commission, proposes to keep the structure of a social taxonomy close to the structure of the sustainability taxonomy. Reflecting the sustainability taxonomy, the social taxonomy should define social objectives as well as types of significant contributions to these objectives and also clarify when none of these objectives is significantly harmed (Do-No-Significant-Harm-Principle/DNSH). Furthermore, compliance with minimum environmental saveguards is also envisaged. For a more precise definition of the requirements and, in particular, detailed technical assessment criteria to determine what is considered a "significant contribution" and what is considered "significant harm" with regard to the social objectives, the Sustainable Finance Platform recommends further definition by means of delegated acts - also reflecting the sustainability taxonomy.

But the final report points to different starting points for the social taxonomy compared to the sustainability taxonomy:

"While most economic activities have detrimental impacts on the environment, most economic activities such as the creation of decent jobs, paying taxes and production of socially beneficial goods and services can be considered inherently socially beneficial. A social taxonomy has to distinguish between such inherent benefits and additional social benefits that directly contribute to the realisation of human rights such as improving access to quality healthcare or ensuring decent jobs." It should also be noted that sustainability goals and criteria are science-based, while a social taxonomy should be based on international authoritative standards, such as the International Convention on Human Rights.

Therefore, the Platform for Sustainable Finance also recommends that the social taxonomy should not be shaped completely like the sustainability taxonomy.

According to the final report, the objectives in the social taxonomy should be based on the type of stakeholder that could be affected by the economic activities. These are a company's own workforce, including workers along the value chain, and end-users, as well as communities that are affected by economic activities directly or through the value chain. "The suggestion therefore is that 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," the report states.

The core objectives of a social taxonomy should accordingly be:

• decent work (including for value-chain workers);
• adequate living standards and wellbeing for end-users;
• inclusive and sustainable communities and societies.

In this way, the proposal of the Platform for Sustainable Finance borrows from the CSR Directive, which also targets these three groups of stakeholders.

In contrast to the sustainability taxonomy, the social taxonomy should also set sub-targets that elaborate on key aspects of these goals, such as healthcare, housing, wages, non-discrimination, consumer health and community livelihoods.

In addition, according to the Platform for Sustainable Finance, a social taxonomy could also address and define activities that are fundamentally socially harmful. Similar to the sustainability taxonomy, the question here is which activities should be considered socially harmful under all circumstances. In this regard, the final report suggests that certain types of weapons or even tobacco could be classified as harmful under any circumstance. Furthermore, the expert group suggests that environmental minimum saveguards should also become part of the social taxonomy - just as social minimum saveguards are part of the sustainability taxonomy.

The final report also recommends a number of actions that could be taken in a next step to develop a social taxonomy: minimum saveguards should be clarified; a study on the possible impacts of a social taxonomy should be conducted; and targets and sub-targets should be prioritised. In addition, for the first targets and individual economic sectors, it could be defined when a significant contribution is made to a target and when the achievement of a target is not significantly harmed.

The European Commission said it will carefully analyse the final report of the Sustainable Finance Platform. However, the Commission is not obliged to follow the recommendations made in the report.

The Sustainable Finance Platform is a group of experts who advise and assist the European Commission in the development of its sustainable finance policy, most notably in the further development of the taxonomy. It is composed of sustainability experts from the financial, non-financial and corporate sectors, non-governmental organisations and civil society, academia, think tanks and international institutions.