Towards social sustainability: a social taxonomy

A ‘social taxonomy’ should be developed as a counterpart to the green investment taxonomy, with comprehensive employee involvement.

An increasing demand for financial products which address environmental, social and governance (ESG) criteria underpins the political project to push sustainability through the financial sector and to direct investments towards sustainable economic activities. But lack of clear definitions makes it difficult to evaluate social investments and resources and thus steer them toward socially-responsible activities and enterprises. A social taxonomy would aim to address these issues and harmonise how social aspects are measured.

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

The challenges are enormous: the green transformation, the economic and social impact of the pandemic, the Ukraine war and resulting geopolitical tensions. The minimum investment shortfall 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

Yet 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 for extending the scope of the EU taxonomy to ‘other sustainability goals such as social goals’. The report however risks death by commission neglect.

In this context, the Platform for Sustainable Finance (Platform) has already presented a concept.The Platform proposes a similar structure for the social taxonomy as for the environmental taxonomy. Three main objectives would address the key stakeholders of a company, complemented by sub-objectives:

• decent work in relation to employees in the company and along the value chain, with sub-goals such as strengthening social dialogue and promoting collective bargaining;
• decent living standards in relation to consumers, with sub-targets such as product safety, quality healthcare and housing, and
• inclusive and sustainable communities in relation to affected groups, with sub-goals 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 the environmental taxonomy, the ‘do no significant harm’ principle should apply, in addition to minimum protection, so that none of the three main objectives is significantly impaired by a corporate activity.

‘Social washing’

Focus 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 deemed to exist if the positive effects associated with the activity are enhanced—in housing, health, transport or telecommunications, for instance, 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 fulfilled and none of the three main objectives violated.

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

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

There are also fears of complex information requirements and costly audit procedures. These could however be countered by taking advantage of the overlap with other reporting requirements, such as under the future Corporate Sustainability Reporting Directive (CSRD) and the planned Corporate Due Diligence Directive on sustainability. Advice and provision of services related to the taxonomy could be provided by a public law agency, especially for small and medium-sized enterprises, co-operatives and non-profit business models.

Gold standard

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

Also, the definition of what should be included in the taxonomy will be contentious. This is because there is a great deal of confusion in the ESG criteria and measured deviations are particularly pronounced in the human-rights and product-safety categories. This opens the door to social- and greenwashing, so that negative impacts of economic activities are concealed and glossed over. A key rationale and objective for a social taxonomy is to combat social washing, so the definition process must be subject to democratic debate and decision-making.

A social taxonomy could be a step on the way to strengthening the social dimension of the EU. If properly designed, it has the potential to make the social effects of financial investments transparent, to direct resources to socially-responsible activities and companies, to contribute to a fair green transition and to promote good jobs. The one-sided focus in sustainable finance on the environment also risks neglecting social-sustainability aspects of investments.

Coherent concept

From the EESC’s point of view, a successful social taxonomy would support the increasing demand for socially-oriented investments by offering a coherent concept for measuring social sustainability. To avoid social washing, 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 codetermination procedures—at company and group levels—should be a cornerstone.

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

Finally, transparency is crucial to the efficiency of the capital market. A social taxonomy would promote fair competition and make companies and organisations which contribute to social sustainability more visible.