UN, OECD and ILO rules should ‘take the place of science’ in social taxonomy, say EU advisors

Documents lay out approach to social taxonomy as well as plans for environmentally harmful framework

EU advisors believe that a taxonomy for socially-sustainable activities should be underpinned by existing global guidelines, and should cover both direct and indirect social impacts, according to documents seen by RI. 

Two reports outline current thinking by the EU’s Platform on Sustainable Finance on how to extend the EU’s green taxonomy to social and environmentally harmful activities. 

While the green taxonomy is required to use science in its assessment of business activities, the experts acknowledge that no such science is available for social activities. As a consequence, it says, the UN Guiding Principles on Business and Human Rights, the European Convention on Human Rights, and numerous other guidelines from the International Labour Organisation, EU, UN and OECD should “take the place of science”. 

“To include the investors’ point of view, the ICMA Social Bond Principles and the IFC Performance Standards have also been considered,” it states. 

Like climate, a social taxonomy should cover both direct and indirect impacts, the document says – equivalent to Scope 1, 2 and 3. 

“The analysis of essential texts on human rights and social goals, a thinking through of the consequences and current practices suggest that a social taxonomy should consider both the horizontal dimension of processes to implement human rights and a vertical dimension of social products and services,” say the experts.  

A company’s direct social impacts should be centred on its internal processes and governance. This could include “transparent and non-aggressive tax planning”, board independence, audit committee, board diversity, remuneration (including links between executive pay and environmental and social performance), risk disclosure and responsible lobbying, the document suggests. 

There should be exclusions for some sectors, such as weapons, gambling and tobacco, even if they have good internal practices and governance. 

Areas for inclusion could be water, food, housing, healthcare, education and training, transport, internet and financial inclusion, it continues; and relevant stakeholder groups should be defined as workers, consumers and communities. 

A social taxonomy could also require companies to show how they have contributed to the achievement of the UN’s Sustainable Development Goals in particular countries, the document suggests. 

The original legal agreement on the EU’s taxonomy requires the Commission to explore its extension at the end of 2021. Last November, it established working groups within its Platform to advise it on an expansion into social issues and harmful activities. 

The latter group has also developed a shorter, less detailed document, which suggests the creation of an “intermediate performance” category in the EU Taxonomy, to capture additional activities.

It’s possible that this category will provide the European Commission with a way of dealing with growing political pressure to include gas and nuclear in the taxonomy. 

Faced with last minute backlash from some Member States during recent negotiations on the climate-component of the framework, the Commission toyed with the idea of including some fossil-based activities in its technical screening criteria. A number of leaked documents on the run up to the publication of its proposals last month showed controversial amendments to the rules, understood to have been attempts to appease pro-nuclear France and fossil-heavy member states such as Poland. 

However, high-profile pushback from MEPs, civil society and members of its own Platform resulted in the Commission backtracking on the plans, and instead committing to revisit the inclusion of fossil-based technology in the taxonomy later this year. 

Some stakeholders argue that nuclear and gas activities provide lower carbon energy sources to countries in which renewable energy is not immediately viable, making them a credible ‘transition’ technology. However, the taxonomy already has a ‘transition’ pillar – reserved for ‘best-in-class’ economic activities in sectors where truly low-carbon processes are not yet available, such as cement and steel. 

The Platform’s documents suggest that the Commission could avoid dual definitions of climate transition by creating a new classification called ‘intermediate performance’, for activities that do not significantly contribute to an environmental objective but also would not fall into a planned category for significantly harmful activities.  

This would accompany long-standing plans to introduce a taxonomy for ‘significantly harmful’ activities and would be a way to name different levels of transition and environmental performance, according to the report. 

The extended taxonomy should be designed to incentivise finance away from significantly harmful activities, it said, noting that while coal is already excluded from framework’s legal agreement, other activities that are always significantly harmful to the EU’s six environmental objectives should also be formally identified. 

The Platform is expected to put its proposals out for consultation later this month, and incorporate feedback into the final text by September. Full reports on the development of the social taxonomy and minimum social safeguards will be presented in October and November, respectively.