The proposed extension of the EU taxonomy to include a social taxonomy
Our key takeaway: It’s critical to help investors cut through the noise and evaluate what is genuinely a social investment and what they can finance that would contribute substantially to achieving social objectives. The proposed social taxonomy, to complement the environmental angle of the EU taxonomy, would help investors identify companies that are providing and enabling decent work (including value-chain workers), adequate living standards and wellbeing for end-users, and inclusive and sustainable communities and societies. The flip side of the coin is that environmentally sustainable economic activities would also need to include minimum social safeguards: actual human rights performance, rather than mere existence of policy and process.
The Platform on Sustainable Finance (“PSF”) has released its report on the extension of the EU taxonomy to include a social taxonomy:
- Suggesting an approach to inform investor decisions on the social side: The European Commission had asked the PSF to advise on whether the EU taxonomy should be extended to cover social issues and, if so, how. As a reminder, the EU taxonomy is a tool to help investors understand whether an economic activity is environmentally sustainable. The PSF’s report puts forward a general approach to the creation of a social taxonomy, in short, to define more clearly what would amount to a social investment and what activities contribute substantially to achieving social objectives, so that this in turn informs investor decisions. The report also touches upon what would be minimum safeguards for environmentally sustainable economic activities (this relates to Article 18 of the EU Taxonomy, which requires businesses carrying out environmentally sustainable economic activities to uphold certain international labour standards and human rights.) In short, it would be the actual performance on human rights (not the existence of a commitment) that counts.
- Substantial contributions, and do no significant harm: The authors suggest a social taxonomy structure which would delve into the development of social objectives, the definition of different types of substantial contributions; the “do no significant harm” (DNSH) criteria; and minimum safeguards. You’ll recall we discussed previously the proposed vertical and horizontal dimension of the social taxonomy. The authors move away from this and now suggest a single structure, with three main objectives: (1) decent work (including value-chain workers); (2) adequate living standards and wellbeing for end-users; and (3) inclusive and sustainable communities and societies. Each objective would include a number of different sub-objectives – the report provides some examples of what these could be. For example, decent work could include strengthening social dialogue, promoting freedom of association and promoting collective bargaining; it could include ensuring pay levels for workers are set in a predictable and transparent way and that living wages that guarantee decent lives are paid; and it could include carrying out risk-based due diligence to ensure respect of human rights and workers’ rights in the value chain.
- Sustainability governance and executive pay: The PSF further recommends two governance objectives to be added to the minimum safeguards for the environmental and social taxonomies. Specifically, corporate governance should include sustainability aspects – such as skills in the highest governance body and transparency on sustainability objectives and targets. Corporate governance aspects that relate to sustainability should also be strengthened – including anti-bribery and anti-corruption measures, responsible lobbying and political engagement, diversity of board members, and the option for employee representation on supervisory boards.