The European Union’s sustainable finance strategy intends to expand beyond green finance to include the social sphere. Therefore, the technical experts behind The EU Platform on Sustainable Finance - the body behind recommendations on this implementation - also published a first report on the EU Social Taxonomy. The draft is open for consultation throughout the summer for better understanding of the concept and its possible implementation.
Green investments are intended to finance the European Union’s environmental objectives, such as carbon neutrality. Social investments are those that would help achieve the Sustainable Development Goals (SDGs) adopted by the United Nations in 2015, whilst also respecting Article 3 of the Treaty on the European Union which refers to an "internal social market". At least, that is the theory.

In practice, how can we ensure that European companies and investors respect human rights everywhere? And above all, what are all the social rights that they must implement? To answer this question – which is all the more sensitive considering EU Member States are the competent authorities on the matter – The EU Platform on Sustainable Finance recently published its first draft on the EU Social Taxonomy. The draft report is open for consultation until August 27th.

In what way can a social taxonomy be used? For the authors of the report, it should "help investors identify solutions that ensure decent work, an inclusive social life based on sustainable models, and access to affordable health and housing." These investment opportunities are already established through social guidelines and promoted by different frameworks, such as the SDGs or the United Nations Guiding Principles on Business and Human Rights. The COVID-19 pandemic accelerated the social taxonomy project because it showed that a just transition, respect for human rights, and access to affordable housing was far from the rule for everyone in Europe.

Methodological debate

Drawing on the EU Taxonomy for sustainable activities, the authors of the report attempt to answer three central questions: What constitutes substantial social contribution? How can we limit significant social harm? What activities are socially destructive? Various issues are raised throughout the 60-page document. For example, how can we differentiate between the social benefit of job creation and the added value of a job that meets taxonomy criteria by facilitating access to healthcare or accessible housing? The report lays out the methodological debates that they hope to resolve through the consultation process. One of the key elements to consider is the choice between two taxonomy models (pages 52 to 57).

The first model consists of replicating the mechanics of the green taxonomy by listing activities with high social benefits that offer minimum environmental guarantees. The second model involves a single taxonomy that would include duplicate lists of eligible activity criteria, guaranteed absence of significant harm to others, and would include environmental and social elements. These are difficult choices, and they will play a significant role in making the EU Social Taxonomy an effective investment tool, or not.

For the EU Social Taxonomy to exist, several difficult steps must be taken, including: defining what it means to "make a substantial contribution and do no significant harm to the social status of workers, consumers, and communities". It will also be necessary to develop social benefit indicators that are adapted to companies and explore the AAAQ concept (availability, accessibility, acceptability, and quality) for food, education, water, and basic social infrastructure, such as schools and hospitals. Lastly, the EU Social Taxonomy must also integrate governance issues in its tax criteria, the fight against corruption, and lobbying frameworks.

The forthcoming European Parliament debate on the duty of vigilance will give a sense of the European divide on these highly sensitive subjects during a major economic crisis.
Anne-Catherine Husson-Traore,  @AC_HT, Directrice générale de Novethic

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