Towards social sustainability: a social taxonomy

A growing demand for financial products that address environmental, social and governance (ESG) criteria underpins the political project to drive sustainability across the financial sector and direct investments towards sustainable economic activities. But the lack of clear definitions makes it difficult to evaluate investments and social resources and, therefore, their orientation towards socially responsible activities and enterprises. A social taxonomy would aim to address these problems and harmonize the way social aspects are measured.

These considerations led the European Economic and Social Committee (EESC) of the European Union to draw up an own-initiative opinion in August. In his opinion, it is necessary to adopt a holistic approach to the EU taxonomy, with environmentally and socially sustainable aspects.

The challenges are enormous: the green transformation, the economic and social impact of the pandemic, the war in Ukraine and the resulting geopolitical tensions. The minimum investment deficit in social infrastructure has been estimated at around €1.5 trillion for the period 2018 to 2030. A social taxonomy could provide guidelines for investments with a positive social impact.

Three main objectives

However, social sustainability is not even in its infancy. The European Commission was asked to publish a report by the end of 2021, to assess the options available to extend the scope of the EU taxonomy to ‘other sustainability goals, such as social objectives’. However, the report risks dying due to the commission’s negligence.

In this context, the Platform for Sustainable Finance (Platform) has already presented a concept. The Platform proposes a similar structure for social taxonomy as for environmental taxonomy.

Three main objectives would address a company’s key stakeholders, complemented by sub-goals:

• decent work in relation to employees in the enterprise and along the value chain, with sub-goals such as strengthening social dialogue and promoting collective bargaining;
• decent standards of living in relation to consumers, with secondary objectives such as product safety, health care and quality housing, and
• inclusive and sustainable communities in relation to affected groups, with secondary objectives such as equity, inclusive growth and sustainable livelihoods.

Sustainable management objectives, such as transparent and non-aggressive tax planning, should also be incorporated into the social taxonomy. As with environmental taxonomy, the principle of ‘do no significant harm’ must apply, in addition to minimum protection, so that none of the three main objectives is significantly affected by a corporate activity.

“Social washing”

Focusing on the activity, rather than the company as a whole, can offer a loophole for ‘social washing’ if corporate structures and working conditions do not correspond to the positive image the company promotes. A ‘substantial contribution’ to social sustainability should be considered to exist if the positive effects associated with the activity are enhanced, for example, in housing, health, transport or telecommunications, all prerequisites for an adequate standard of living. A ‘substantial contribution’ would be recognised if criteria such as availability, accessibility, acceptability and quality (AAAQ) are met and none of the three main objectives are violated.

There would also be a ‘substantial contribution’ if negative impacts on the three stakeholder groups mentioned above are avoided. This would include, for example, the promotion of collective bargaining or the strengthening of social dialogue. Finally, activities that fundamentally and in all circumstances conflict with sustainability objectives and whose harmfulness cannot be reduced, such as those related to weapons prohibited by international agreements, should be excluded.

The fact that a social taxonomy also involves risks from the point of view of employees is already evident. Assessments of their potential impact range from negligible, as investment decisions would be based primarily on motives such as increasing returns or minimizing risks, to concrete fears that non-compliance with the taxonomy would lead to worse financing conditions.

There are also fears of complex reporting requirements and costly audit procedures. However, these could be countered by taking advantage of overlap with other reporting requirements, such as under the future Corporate Sustainability Reporting Directive (CSRD) and the planned Corporate Due Diligence Directive on sustainability. Taxonomy-related advice and services could be provided by a public law agency, especially for small and medium-sized enterprises, cooperatives and not-for-profit business models.

Gold Standard

The EU taxonomy should identify policies and companies that contribute significantly to social sustainability and provide a gold standard that reflects a higher level of ambition than foreseen in EU legislation. This is important to address concerns about market foreclosure.

In addition, the definition of what should be included in the taxonomy will be controversial. This is because there is great confusion in ESG criteria and measured deviations are particularly pronounced in the categories of human rights and product safety. This opens the door to social and ecological washing, so that the negative impacts of economic activities are hidden and overlooked. A key justification and objective for a social taxonomy is to combat social laundering, so the definition process must be subject to democratic debate and decision-making.

A social taxonomy could be a step on the road to strengthening the EU’s social dimension. If properly designed, it has the potential to make transparent the social effects of financial investments, direct resources to socially responsible activities and enterprises, contribute to a just green transition and promote good jobs. The unilateral approach to sustainable finance on the environment also risks neglecting the social sustainability aspects of investments.

Coherent concept

In the EESC’s view, a successful social taxonomy would support the growing demand for socially oriented investments by providing a coherent concept for measuring social sustainability. To prevent social laundering, complaint mechanisms should be provided for trade unions and works councils. Respect for human and workers’ rights should be a prerequisite. Compliance with collective agreements and co-determination procedures, at company and group level, must be a cornerstone.

The CSRD, which also takes into account social issues and corporate governance, would be an important counterpart to social taxonomy by ensuring the availability of essential data. On the contrary, the taxonomy would offer an assessment and classification of these data on the criterion of social sustainability.

Finally, transparency is crucial for capital market efficiency. A social taxonomy would promote fair competition and make companies and organizations that contribute to social sustainability more visible.

Source: Gaceta Mercantil