EU ESG – developing the social taxonomy

On 28 February 2022, the Platform on Sustainable Finance (PSF) published its Final Report by Subgroup 4: Social Taxonomy (the Report).

In the Report, the PSF proposes a structure for a social taxonomy within the present EU legislative framework on sustainable finance and sustainable governance, which comprises:

• the existing and proposed legislation on the EU taxonomy
• the proposed corporate sustainability reporting directive (CSRD)
• the Sustainable Finance Disclosures Regulation (SFDR) and
• the sustainable corporate-governance (SCG) initiative.

Although all these influence the Report, the work’s focus was primarily on the present structure of the environmental taxonomy - public feedback to the PSF’s draft Social Taxonomy Report published in July 2021 (see below) highlighted that market participants expected a common structure for social and environment.

Work of PSF’s Subgroup 4

Subgroup 4 of the PSF was asked to

• consider the relationship between the social and environmental taxonomies and
• reflect on other sustainability objectives like governance and the regulatory environment.

It considered two main differences between a social taxonomy and an environmental taxonomy, namely:

• while most economic activities have detrimental environmental impacts on the environment, most can be considered inherently beneficial on the social side of things (in that they, for example, create decent jobs, pay taxes and produce socially beneficial goods and services).

  A social taxonomy, then, must distinguish between the inherent benefits and any additional social benefits that directly contribute to the realisation of human rights, such as improving access to quality healthcare or ensuring decent jobs.

• While environmental objectives and criteria can be based on science, a social taxonomy must be based on international authoritative standards of topical relevance, such as the International Bill of Human Rights.

What does the Report propose?

The Report proposes a social taxonomy within the current EU legislative space on sustainable finance and sustainable governance, and notes differences between a social and an environmental taxonomy.

The structure which the Report proposes for the social taxonomy borrows various aspects of the environmental taxonomy, including:

• the development of social objectives
• types of substantial contributions
• "do no significant harm" (DNSH) criteria and
• minimum safeguards.

However, unlike the environmental taxonomy, the social taxonomy would contain sub-objectives specifying different aspects of three social objectives, each addressing a different group of stakeholders.

The social objectives are:

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

Sub-objectives will, the Report considers, ensure that various aspects integral to these objectives can be addressed, including

• health and safety
• healthcare
• housing
• wages
• non-discrimination
• consumer health and
• communities’ livelihoods

The report also puts forward requirements for future social criteria and indicators within its proposed framework, together with ideas about the next steps for developing a social taxonomy.

Background to the Report

As mentioned above, the Report follows from a draft report, ‘Social Taxonomy’ which was published on 12 July 2021 and which remained open for consultation until 6 September 2021.

Our summary of the draft Report and other PSF publications of last July and August can be found here.

What happens next?

The European Commission’s updated page on PSF can be found here – it notes that the Report “will be carefully analysed in due course”.