Judith Vorbach from the European Economic and Social Committee, with Susanne Wixforth, Advisor, walk us through social taxonomy
EU social taxonomy is not even in its infancy, so the EESC is stimulating the debate, where they are proposing criteria for a sound social taxonomy to create opportunities while also meeting its challenges.
It is necessary to adopt a comprehensive approach to the EU taxonomy, with both environmentally and socially sustainable aspects, as the European Economic and Social Committee (EESC) concludes in its own-initiative opinion published in August 2022. In the Taxonomy Regulation, the European Commission was asked to publish a report by the end of 2021 to assess the options available for extending the scope of the EU taxonomy to “other sustainability goals such as social goals”. In its opinion, the EESC wants to stimulate the debate and calls on the Commission to publish this report, which is still pending.
Transparent financial investments and the green transition
A properly designed social taxonomy would help to make the social effects of financial investments transparent, provide direct instruments to support social sustainability and promote a fair green transition and good jobs. There is an increasing demand for financial products which address environmental, social and governance (ESG) criteria. However, the confusion surrounding ESG criteria makes it difficult to actually steer financial investment in that direction and even opens the door to “social- and greenwashing”, concealing the negative impacts of economic activities. Finally, the one-sided focus in sustainable finance on environmental risks overlooks the social sustainability aspects of investments.
There are also challenges to overcome. Assessments of the impact of introducing a social taxonomy range from it being negligible, as investment decisions would continue to be primarily based on motives such as financial returns, to fears that non-compliance with the taxonomy would lead to worse financing conditions for businesses. Moreover, as with the environmental taxonomy, the question of what should be included in the social taxonomy will also be contentious. There are also fears of complex information requirements and costly audit procedures. Another concern is that focusing on the activity, rather than the company, would create a loophole for “social washing” if corporate structures and working conditions do not correspond to the positive image the company promotes.
Social taxonomy – the concept
The Platform on Sustainable Finance presented a valuable concept for a future social taxonomy in February 2022. Three main objectives would address the key stakeholders of a company: decent work for employees in the company and along the value chain, with sub-goals such as strengthening social dialogue; decent living standards for consumers, with sub-targets such as product safety; and inclusive and sustainable communities for affected groups, with sub-goals such as inclusive growth. This way, a social taxonomy would rely on standards and globally agreed frameworks.
As with the environmental taxonomy, the “do no significant harm” (DNSH) principle should apply so that none of the three main objectives is significantly impaired by any economic activity. Services provided by sectors such as housing and healthcare are prerequisites for an adequate standard of living. A “substantial contribution” to social sustainability should be deemed to exist if these services meet criteria such as availability, accessibility, acceptability and quality (AAAQ). Another way for an activity to comply with the taxonomy would be if it avoided having a negative impact on stakeholders, for example, by strengthening workers’ rights.
How to put taxonomy opportunities into practice
As the success of the taxonomy is linked to its credibility, the activities included must meet a widely accepted definition of sustainability. Therefore, social sustainability criteria should be subject to democratic debate and decision-making, which should fully involve social partners and civil society organisations. That way, a common idea of social sustainability can be developed, to which individual actors could and should refer. To avoid “social washing”, complaint mechanisms should also be provided for trade unions and works councils.
The taxonomy should provide a gold standard which reflects a higher level of ambition than provided for in EU legislation. Respect for human and workers’ rights should be a prerequisite. Adherence to collective agreements and co-determination mechanisms in accordance with the respective provisions is crucial. The European Pillar of Social Rights and the relevant Sustainable Development Goals (SDGs), such as SDG 8 on decent work, should serve as the main guides. However, public investment will continue to play a crucial role in the field of public services, and stable social security systems remain fundamental.
To avoid extensive reporting procedures, the Corporate Sustainability Reporting Directive (CSRD), which also takes social issues and corporate governance into account, and the proposed Corporate Sustainability Due Diligence Directive should also create a basis for the social taxonomy. Finally, transparency is crucial for an efficient and fully functioning capital market. A social taxonomy would promote fair competition and make companies and organisations which contribute to social sustainability more visible.