BDO - EU taxonomy: not only green but also social transition

Legal context

The social taxonomy is an extension of the environmental taxonomy (EU regulation 2020/852), which consists of the classification - according to common definitions - of a list of economic activities that can be considered environmentally sustainable.

The European Commission has set up a working subgroup to prepare the technical work and to advise the Commission itself in the progressive and continuous taxonomic definition of the social objectives and on how to be compliant with the minimum social guarantees. The mandate that the working group has received is to:

• extend the taxonomy to social objectives, following an approach consistent with the environmental taxonomy, according to art. 16 of Regulation 2020/852;
  
• advise the European Commission on how to use Article 18 (of Regulation 852) which defines the minimum safeguards for companies to comply with "the OECD guidelines for multinational companies and the United Nations guiding principles on business and human rights". A particularly relevant mandate, which follows the principle of not causing significant damage under art. 2, point 17, of the EU regulation 2019/2088.

On July 12^th, 2021, the Sustainable Finance Platform published a draft report on the Social Taxonomy of consultative nature. The documents considered as references:

• the Universal Declaration of Human Rights.
  
• the ILO (International Labor Organization ) Declaration on fundamental principles and rights at work.
  
• United Nations Guiding Principles on Business and Human Rights.
  
• the OECD guidelines for multinational companies.

The public consultation was open from July 12th to September 6th and the final contributions have been presented in autumn 2021. We are currently waiting for the report indicating the provisions necessary to extend the scope of application of the regulation on environmental taxonomy also to social objectives.

What does “Social” mean for the Commission

All social taxonomy related considerations and requirements may be incorporated into existing legislative texts such as the EU Directive 2014/95 and the EU Regulation 2019/2088. That said, the primary areas of interest are: sustainable corporate governance, responsible supply chains, and policies for sustainable products.

The Social Taxonomy project has two dimensions:

• the vertical one promotes adequate standards of quality of life. It includes aspects related to improving access to basic products and services (water, food, housing, health, education) and basic economic infrastructures (transport, internet, electricity, credit).
  
• the horizontal dimension is linked to the extent to which economic activities can be considered socially sustainable. In this case, the focus is horizontally placed on people (workers, consumers, and communities) to ensure decent work, promote consumer interests, and enable inclusive and sustainable communities.

Through this subdivision, the current lack of common definitions and standardised classifications would be filled, leading money towards socially sustainable activities. Yet, this raises a question related to measurement. According to the report, at the moment, the positive impact on workers, consumers, and the community can be measured in terms of decent living wages, health and safety, safer products, and job creation. In addition, it is mentioned how the redirection of capital flows towards services and products that promote access to disadvantaged people would help reduce the share of people living below the poverty line.

Next steps

The draft report raises several questions regarding the correlation between the environmental and social taxonomy that need to be addressed. Among these, if environmentally sustainable activities aim to reduce or reverse negative environmental impacts, it is not certain that all economic activities will have environmental benefits. On the contrary, most economic activities have inherent social benefits (for example, job creation and contribution to taxation). For this reason, the social taxonomy will have to distinguish between intrinsic and additional social impacts, unlike the environmental taxonomy which pays attention mainly to avoid harmful effects. Finally, environmental taxonomy is based on scientific consensus, natural sciences, and international treaties (such as the Paris Agreement), while social taxonomy will have to develop measurable criteria.

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