Social taxonomy, which classifies economic activities significantly contributing to social goals in the European Union, will be a new challenge for companies, given that it is not based on technical criteria, but rather on international principles and standards. Investors are already adapting their policies and incorporating metrics aimed at valuing these aspects in their investments, and for this very reason companies cannot afford to lag behind.
Regulation 2020/852 of the European Parliament and of the Council of 18 June 2020 laid down the criteria used to determine the degree to which an investment in a given economic activity is environmentally sustainable. This is known as environmental taxonomy, and its objective is to channel investments toward activities that are sustainable from an environmental standpoint.
It is now the turn of social taxonomy, only just getting started but already building up speed. Specifically, in February 2022 the Platform on Sustainable Finance, advisor to the European Commission, presented the second version of the report on social taxonomy, laying the foundation for future European regulations in this area. This is the technical work the European Commission will use as a basis for its development of this new taxonomy.
Given this situation, investors are, unsurprisingly, already adapting their investment policies, classifying industries, establishing metrics and assessing impacts, all of which is affecting companies, be it positively or negatively.
If environmental taxonomy gave rise to many questions, and even to controversy when classifying certain activities as “green”, social taxonomy, which is not based on technical aspects but rather on international principles and standards, will entail an even greater challenge. If action is taken in haste, this could become one more burden on the competitiveness of companies, which are the true driving forces behind the economy and development (including sustainable development)).
As presented by the Platform on Sustainable Finance, social taxonomy is structured around three stakeholder groups (workforce, final users/consumers and affected communities) and three general objectives linked to each group (decent work; adequate living standards and wellbeing; and sustainability and inclusion, respectively). These general objectives include specific obligations (e.g., with respect to the workforce, the elimination of the pay gap).
In connection with the last objective, sustainability and inclusion, the competitiveness of companies could be hampered if action is taken without assessing the potential consequences of taking giant steps to develop social taxonomy without accompanying those steps with policies that permit the performance of obligations and of carefully thought out objectives.
Furthermore, although the benefits of approving social taxonomy are many and of great value (establishment of common standards or metrics, credibility, secure channeling of investments), it is important to consider the potential consequences for certain economic activities, should they be classified as harmful activities (i.e., activities that are harmful or damaging to social objectives) without assessing other implications, such as the impact of such classification on the companies that pursue the activities, on the jobs they create, and on the regions that depend on such activities for survival, or how this potential impact is to be addressed and compensated. These implications are no less social aspects.
It would be important for upcoming work on the matter to have a more positive focus, valuing the social contribution of companies as they pursue their activity. Social objectives are inherent in the practices of companies, through the jobs they create and their investment in employees, all of which entails significant benefits for society as a whole.