"EU: Platform on Sustainable Finance publishes final report on social taxonomy", 1 March 2022

On 28 February 2022, the Platform on Sustainable Finance ("PSF") published its final report on extension of the existing EU taxonomy to include a social taxonomy. This follows a consultation on a draft report in the summer of 2021 (see here). 

The European Commission had asked the PSF to advise it on whether the EU taxonomy should be extended to cover social issues and, if so, how. However, the PSF's final report does not include all the technical detail - its purpose is to suggest to the Commission a general approach to the creation of a social taxonomy and evaluate the pros and cons of different types of approach. 

The Commission now needs to decide if and how to take forward the PSF's suggestions. Although, it is not bound by the PSF's report, as the PSF is made up of well-regarded experts in their field, their final report carries substantial weight (see "Next steps" below). 

Purpose of a social taxonomy

The purpose of a social taxonomy is to define more clearly what amounts to a social investment and what activities contribute substantially to achieving social objectives so that private capital can be directed towards socially valuable activities - in the same way that the existing green taxonomy provides a framework for assessing whether a particular activity is environmentally sustainable. It is a tool to help investors and end consumers make more informed choices.

The development of a social taxonomy is also an important step in furthering respect for human rights and better working conditions, as well as ensuring that the net zero transition is a "just transition" (e.g. where workers and communities particularly affected by the move away from a fossil-fuel reliant economy are not unfairly disadvantaged or "left behind"). 

Suggested structure for a social taxonomy

In response to feedback on its draft report, in particular to concerns about increased administrative burden on businesses, the PSF has tried to align the structure of the suggested social taxonomy more closely with the existing environmental taxonomy. 

So the suggested structure of the social taxonomy now involves: 

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

The PSF has abandoned its previous suggestion of having a horizontal and vertical dimension and is now suggesting 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...

Governance and sustainability-linked pay

The Commission had also asked the PSF to advise on what other sustainability objectives, such as governance, could be covered in an environmental taxonomy and social taxonomy. Of course, the minimum safeguards in the Taxonomy Regulation already refer to the OECD Guidelines for Multinational Enterprises...

On sustainability competencies, it was expected that the Commission's proposal on sustainable corporate governance would cover this. However, that proposal has since morphed into a human rights and environmental due diligence proposal with only a small smattering of governance aspects (see here), which does not go as far as the PSF was expecting it to go on governance.

On linking executive pay to sustainability factors, the PSF recommends that this should be part of the EU taxonomy. It sees this as a "very effective way to steer a company towards achieving the sustainability targets it has set for itself" and a "reflection of what is happening in the real economy". It believes that concerns about interference with a company's autonomy can be addressed by ensuring this requirement is directional rather than prescriptive and is based on a company's own sustainability strategy and KPIs. 

Next steps 

The PSF report states that the Taxonomy Regulation could be amended to include a social taxonomy, with new articles mirroring Articles 10-15 of the existing Regulation and the technical screening criteria for a social taxonomy set out in delegated acts. For those of us only just getting to grips with the fiendish complexity of the environmental taxonomy, the thought of having to grapple with a parallel social taxonomy sounds rather ominous. 

As mentioned above, the PSF's suggestions are not binding on the Commission (although they do carry significant weight) so the Commission will have to decide if and how to develop a social taxonomy. The Commission was required by the Taxonomy Regulation to publish its own report on next steps on the social taxonomy by 31 December 2021. Clearly, that was not possible as the PSF has only just submitted its final report to the Commission. At the time of writing, it is not yet clear when the Commission is likely to publish its own report.

Separately, the PSF was also expected to publish its final report to the Commission on a significant harm and no significant impact (NSI) taxonomies by the end of Q1 2022 but that work has been delayed so it is not yet clear when that report will be published (see here).