- Ebba Ramel
- Nordea Sustainable Finance Advisory
What is the Social Taxonomy, and what is its aim?
Environmental and social issues have been cornerstones of the European Union’s Sustainable Finance Strategy since its inception. With the release of the final version of the EU’s Environmental Taxonomy last year, companies and investors have become increasingly accustomed to the idea of a classification system and the provision of guidelines and definitions for sustainability matters.
The Social Taxonomy is a next step in defining a label for activities that contribute to and advance social welfare. Reflecting on the criticism received in the consultation period last year, the European Platform on Sustainable Finance (“the Platform”) on Monday released its report that aims to inform the EU’s policy decisions regarding a Social Taxonomy.
What are the core components?
As opposed to the Environmental Taxonomy, which rests on validated research results and international frameworks such as the Paris Agreement, the Social Taxonomy builds on international consensus documents which can be classified into three groups: i) International Conventions, ii) the European Pillar of Social Rights and iii) the UN Sustainable Development Goals.
The fundamental documents include: (i) the OECD Guidelines for Multinational Enterprises; (ii) the United Nations Guiding Principles on Business and Human Rights (UNGPs); (iii) the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labor Organization on Fundamental Principles and Rights at Work; (iv) the International Bill of Human Rights; (v) the European Pillar of Social Rights; and (vi) the European Social Charter. The Platform highlights that the agreed upon social topics defined in the Taxonomy are therefore not to be defined as subjective, as they rely on long-standing agreements, compromises and sets of law.
In order to create a common structure with existing or coming legislation, such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD), the proposed structure of the Social Taxonomy is organised based on three stakeholder groups: employees, consumers and communities. The proposed objectives and sub-objectives for the three stakeholder groups are outlined below. Classification of activities will follow the NACE code classification as in the Environmental Taxonomy.
|Objectives are sorted along the three stakeholder groups||Sub-objectives (not complete)|
|1. Decent work||Social dialogue, living wages, health and safety, lifelong learning|
|2. Adequate living standards and wellbeing for end-users||Healthcare, social housing, long-term care, education|
|3. Inclusive and sustainable communities and societies||Access to basic economic infrastructure, inclusion of people with disabilities|
Source: EU Platform on Sustainable Finance
In order to further align the structure with the Environmental Taxonomy, the Platform has abandoned the previously suggested classification of substantial contribution on a horizontal (activities) and vertical (product) level and replaced it with a classification along three significant contribution criteria:
- Avoiding and addressing negative impact
Targeting high-risk sectors with documented human rights and labour rights abuses and sectors which are less likely to contribute to objectives of the European social pillar.
- Enhancing inherent positive impact of i) social goods and services and ii) basic economic infrastructure
Sectors providing products and services for basic human needs – e.g. water, housing, healthcare, digital infrastructure.
Sectors where standards for basic human needs and basic economic infrastructure are not met or accessible.
- Enabling activities
Where economic activities have the potential to enable substantial risk reductions in other sectors.
Governance topics such as tax transparency, anti-corruption and whistleblowing should be seen as a hygiene factor and as such constitute the minimum safeguards, which are often governed by existing laws under national or EU jurisdiction.
How does it fit in with other frameworks?
The Social Taxonomy proposal has been aligned with existing and upcoming standards to the highest degree possible. Most important was the alignment with CSRD/SFDR and the recently published EU proposal for a Directive on Corporate Sustainability Due Diligence. Specifically, the platform highlighted that it was key that the three stakeholder groups parallel those outlined in the CSRD and reporting requirements, and thus topics will be overlapping to a large extent. It is, however, important to bear in mind that the two reporting directives, CSRD and SFDR, aim to define sustainability contributions on the entity level, whereas the Environmental and Social Taxonomies define substantial contribution on the activity level.
We suggest corporates start by beginning to understand their potential contributions to the objectives and sub-objectives, and how these may be communicated via current or proposed voluntary sustainability reporting.
What are the next steps, and how will this impact companies?
The next steps for the development of a Social Taxonomy to be legally adopted will be the clarification of minimum social safeguards, rationales for a prioritisation of objectives and sub-objectives and the definition of substantial contribution and “do no significant harm” (DNSH) criteria, as outlined in the Environmental Taxonomy. Uncertainty remains whether the Social Taxonomy will contain Technical Screening Criteria in the same manner as the Environmental Taxonomy.
For companies, we expect the Social Taxonomy to contain considerably fewer hurdles than the Environmental Taxonomy. First of all, especially in the Nordic countries, minimum social safeguards such as tax transparency are deeply anchored in legal texts, and workers’ rights are especially protected relative to the global context. Furthermore, much of the data required will consist of traditional economic indicators readily available to corporations, such as wage levels and the cost of goods and accidents. Industries with less transparent supply chains and large multinational enterprises not bound by the same high legislative standards may face more challenges.
Despite the anticipated fewer hurdles for corporates and the need for further clarification on some areas of the proposal, corporates could benefit from early engagement with the concepts outlined. We suggest they start, for example, by beginning to understand their potential contributions to objectives and sub-objectives, and how these may be communicated via current or proposed voluntary sustainability reporting.
- Lea Gamsjäger
- Nordea Sustainable Finance Advisory
Nordea Sustainable Finance Advisory
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