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EU adviser group publishes its social taxonomy report

The EU social taxonomy aims to create a workable classification for companies and investors. Coupled with legislation prescribing fines for businesses with poor human rights oversight, it may begin to bring the S in ESG to the fore.

Ahead of the EU Platform on Sustainable Finance’s publication of its social taxonomy proposal, released today, Sustainable Views spoke to Antje Schneeweiss, the platform’s rapporteur for the technical subgroup on the social taxonomy. She is also secretary of AKI, the working group of church investors in the German Protestant Church.

The adviser group suggests a structure that evaluates activities, rather than whole companies. Consultation feedback had warned that this approach is too complex to implement, but the proposal has resisted these calls to remain in line with the green taxonomy approach.

The suggested structure for the social taxonomy consists of three objectives, each of which addresses a different group of stakeholders: decent work (including for value-chain workers); adequate living standards and wellbeing for end-users; and inclusive and sustainable communities and societies.

Workers, consumers and communities are the same three stakeholder groups on which the Corporate Sustainability Reporting Directive is centred.

The proposal also gives a structure for investment product disclosures, including equity and fixed income funds, for corporates issuing social bonds, and for borrowers and financiers of social loans.

We also asked Schneeweiss about the limitations of the social taxonomy, given what is happening in Europe and the decision taken by an investor such as energy group BP to divest its 20 per cent stake in Russian state-owned oil company Rosneft, following the country’s invasion of Ukraine.

Q: Can you take us through the main changes since the July proposal?

A: The horizontal and vertical dimension have been merged into one system with three objectives – content-wise, it is exactly the same but the structure is more coherent. I’ve seen somebody saying that we have been watering down something; we didn’t at all.

From the feedback that we got in the consultation, everybody was puzzled about these two dimensions and how companies were going to handle them. The problem wasn’t so much with the products and services part, the problem was with the processes part, with this horizontal part of how a company implements processes on human rights, on training.

So we had to show that even for this part, it is possible to identify certain sectors and activities, and that’s really quite hard. For training, for example, we said that if you look at the green transition, there’s obviously a special need for training, like in the automotive sector, which is switching to electric vehicles. It’s a huge social issue because you might lose a lot of jobs or need [workers] to reskill.

These types of sectors are highlighted in the report. For living wages [also under the decent work social objective] it would be the same: for sectors with especially low wages like agriculture and textile, the social taxonomy would look at the [wage] expenditure on certain activities. 

Q: In practical terms, how would a company prove to be taxonomy compliant?

Our task was not to go into this kind of details, but I would imagine, on the basis of our report, that in the example of the automotive company that is switching to electric vehicles and needs new skills, the expenditure they make to upskill workers who it would otherwise make redundant, that training would be defined as ‘social’ – it’d always be about the activity, not the whole company. And the activities can be either measured in turnover or in expenditures.

Q: What would ESG investors and lenders need to look at?

A: We were also asked to make suggestions for linking the green and social taxonomy. We worked out two models. In one model, the environmental taxonomy and social taxonomy are more apart. So you have an environmental taxonomy with minimal social safeguards that companies – in this case as a company, not its specific activities – have to meet. And then you have a social taxonomy with certain minimum environmental requirements for the whole company. The second model would merge the taxonomies more closely and their respective requirements become much more detailed depending on specific activities. As things are, I think the more separate approach would be a better first step. As part of our consultation we asked this question and 40 per cent voted for the first model, while 31 per cent voted for the second.

Q: How do you think the European Commission is going to receive your proposals?

A: We think there is great support by the Directorate-General for Employment [social affairs and inclusion]; DG Fisma [in charge of financial stability, financial services and capital markets union] is a bit more cautious. The situation is complicated, especially because of the environmental taxonomy’s complementary delegated act and the gas and nuclear question, so they’re still very busy with that. On the other hand, you see the social agenda of the EU and big pressure groups that need a taxonomy. Take, for example, the public banks [like Germany’s municipal banks] that finance social housing but also in healthcare, and similar social products and services. But also from companies that are implementing processes to ensure they comply with human rights obligations and meet their social policies, which would not be recognised under the green taxonomy.

Q: You also represent Church investor AKI. Will the social taxonomy make a difference to less dedicated investors?

A: For Church investors the social taxonomy is very important, of course. When you look at ESG ratings, the ratings differ for social issues even more than for environmental issues. You have less of a guideline there, so you need some authoritative structure, even if just for activities rather than companies defining what is social and what isn’t. It’s really difficult – that’s why rating agencies’ evaluations differ so much from one another – but it’s very important for all investors which are more and more pressed, actually, to invest socially – look at the growth of social bonds.

Climate investment became prominent once financial consequences materialised [through legislation]. The same might happen with social aspects with the Corporate Sustainability Due Diligence directive – it will start to cost companies if they do not comply. Investors will see that there is a financial and economic risk if companies do not [have the correct processes throughout their supply chains to respect] human rights. This might be the point where even mainstream investors become more interested in human rights and social issues. 

Q: In the context of business ethics and governance, will there be a need for the social taxonomy to address corporate relations with governments involved in acts of war and their state-owned companies?

A: This question is, of course, very important given the present situation [in Europe.] However, corporate relations with governments are not covered in the system of the taxonomy, whether environmental or social. The taxonomy is a classification system of economic activities. It does not relate to whole companies, so a link to how the company addresses embargoes and similar measures cannot be covered. The only way to bring in whole companies is via the minimum safeguards. The social taxonomy group is presently working out some advice for the European Commission on how to apply minimum safeguards, under article 18 of the existing [green] taxonomy regulation. However, this work has not yet been finalised.


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