28/02/2022

On February 28, the European Commission’s Platform on Sustainable Finance (PSF) Subgroup 4 has released the final Report on Social Taxonomy, proposing a structure for an EU social taxonomy in line with the current legislative environment on sustainable finance and governance. 

Environmental and social aspects have been part of the EU’s sustainable finance strategy since the very beginning. It is widely recognised that there is a need for social investments to
both: (i) achieve the sustainable development goals (SDGs) of the UN’s 2030 agenda; and (ii)
create the social internal market set out in the Treaty on European Union (Article 3). It is also widely recognised that businesses must show respect for human rights as envisaged in the UN guiding principles on business and human rights (UNGPs). 

For the time being, Social and Governance are only a feature of the more complex EU environmental taxonomy framework, which sets minimum social safeguards via Art. 18. As social grievances can easily translate into reputational risks for companies associated with social or human rights violations, it is crucial for investors to consider this dimension before financing a business. A social taxonomy, hence, is necessary to identify credible approaches to mitigate these risks and provide guidance to capital market participants, helping them to recognize sustainable investments and allocate resources efficiently. 

According to the report, the future Social Taxonomy might have some elements in common with the current environmental one and:

• Develop social objectives;
• Adopt a substantial contribution principle;
• Rely on the Do not significantly harm (DNSH) criteria;
• Include minimum safeguards. 

 Furthermore, the Social Taxonomy would build on three proposed objectives: 

1)     Decent Work (with links to value chain workers): This objective should not be limited to the European Union, as working conditions in third countries sometimes do not meet specific standards and have a great influence on the European market. 

2)     Adequate living standards and well-being for end-users: This objective focuses on people in their role as end-users of certain products and services bridging the gaps towards a stronger right to health, food, housing, and education. 

3)     Inclusive and sustainable communities and societies: This objective will work through (i) addressing and avoiding negative impacts; and (ii) making basic economic infrastructure available to certain target groups. 

Each objective will in turn include sub-objectives, that will include (but will not be limited to) health and safety, healthcare, housing, wages, non-discrimination, consumer health, and communities’ livelihoods. 

While most of the work currently on the agenda of the European Commission around the EU Taxonomy is still focused on the remaining four Environmental Objectives, due to be released in the upcoming weeks, the Final Report of the Subgroup 4 on the Social Taxonomy has now been handed to the European Commission.