A social EU taxonomy?

On 1 January 2022, the EU taxonomy started to apply to the environmental objectives relating to climate change. From now on, i.a. financial market participants will report on how well the investments they make/how the financial products they offer contribute to achieving these goals. Next year, the other four environmental goals in the taxonomy will also begin to apply.

We have previously written about the EU Sustainable Finance Initiative of which the taxonomy is a part. The taxonomy is one of the cornerstones of the regulatory framework that will contribute to making the EU the world's first climate-neutral continent by 2050. Another cornerstone is disclosure regulation. The disclosure regulation contains rules on how e.g. financial market participants (insurance companies, occupational pension companies, etc.) must report on how they work with sustainability and report what they achieve in this respect when they manage their customers' money.

When the disclosure regulation was first adopted, it was relatively neutral in terms of social and environmental sustainability (sustainability consists of three parts - environmental and social issues and governance, which is required to be able to operate and follow up the previous two). The disclosure regulation defines sustainable investment as follows:

An investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance. (our emphasis)

The disclosure regulation thus presupposes that sustainable investments can be both environmentally sustainable and/or socially sustainable, but in order to be sustainable, an investment must not cause any significant harm to either environmental or social sustainability goals.

When the taxonomy regulation was presented, however, the taxonomy was restricted to apply only to the environment. The same applies to the question of causing "significant harm" - according to the taxonomy art. 3 and 4, it is sufficient to be an environmentally sustainable activity that the activity does not cause any significant harm to any other environmental objective. Otherwise, it is only required that you do not violate basic minimum levels. The taxonomy also clarifies that authorities must apply this definition when deciding what is an environmentally sustainable activity. An environmentally sustainable activity can thus significantly harm a social sustainability goal and, according to the taxonomy, still be environmentally sustainable. Lawyers who reviewed the taxonomy should have pointed this out in relation to the disclosure regulation's definition och a sustainable investment and sustainability experts who reviewed the taxonomy should have pointed out the problem of considering an activity to be sustainable that significantly harms either an environmental or social sustainability objective regardless of whether the activity relates to environmental or social sustainability.

The problem seems to be that the EU has not wanted to clarify any social sustainability goals (with the effect that we will not strive for any either) and that no one has seen the need to do so either. The people who have been at the table have not considered the issue at all as important as the environmental sustainability goals where great effort has been put into designing criteria to avoid greenwashing and ensure as far as possible that the investments have an effect and lead to the set goals.

We have previously written about how the European Commission stated the importance of having clear criteria for sustainability goals in order for them to have an impact and that the European Commission then seemed to back away from introducing goals for social sustainability. The issue is now being examined by the EU's Sustainable Investment Platform. A draft report was presented in the summer of 2021 on a social taxonomy, where it was also stated that it is doubtful whether such a taxonomy will be developed or whether the existing EU taxonomy (which despite its general name is only aimed at the environment) will also expand with social goals.

There is not much debate on these issues, despite the fact that it is a question of how more than EUR 1 trillion will be invested sustainably in the coming years - both with tax money and private funds through, for example, pension provisions. Society is developing in the direction in which financial resources are invested. Do we want a society that only tries to solve environmental problems without seeing how these problems may also be rooted in the lack of social sustainability? Where women and foreign-born are under-represented among owners and among those who make decisions about what to do with the earth's resources? Where women's innovation is only allocated about 1% of the venture capital?

What is defined as a sustainable investment will be decisive for where financial resources are invested in the future. Ignoring social sustainability and making it more difficult for those pursuing innovation aimed at social sustainability to obtain funding through the policy tools developed should be the subject of more debate. We will see the result of these choices in how society develops in the future. So far, I have not seen any debate in Sweden among those who are initiated in sustainability regarding the management of social sustainability within the framework of the EU's initiative for sustainable investments. It's surprising. The question of whether there will be a social taxonomy will probably be decided this year, so it is now that the debate needs to be conducted.

Those who are experts on sustainability should contribute with their knowledge on the importance of not just focusing on one leg to succeed in sustainability. Lawyers should contribute their knowledge about the importance of creating the same clarity about social goals in order to ensure that there is a necessary basis for demonstrating compliance with the rules (the definition of sustainable investments in the disclosure regulation requires that it can be shown that an environmentally sustainable investment does not cause significant harm to any social sustainability goal but how should that be done if it is not known specifically what the relevant social sustainability goals are?). As with greenwashing, there is a great need to get rid of similar phenomena when it comes to social sustainability. In the past year, we have seen several examples of so-called femwashing - where companies turn to female customers and present themselves as being run and owned by women when in fact this is not the case. Where women are front figures but only have a few percent ownership while the company promotes women to believe in themselves and take care of themselves. This is an issue considering that female founders only get about 1 % of the venture capital and about 90 times as much goes to male-only founded companies.

There are many who talk about sustainability and that so much is happening in that area now. However, those who familiarize themselves with the regulations can see that there are big gaps. There may be a reason for these gaps and that we are not talking about them. Those gaps will only be closed if we all want change and are prepared to take a stand for change. When we write about social sustainability, it often gets very quiet (a picture of a vase with flowers usually gets many times more likes). Maybe there are many who are quite happy with the order of things as they are. However, the only way to change is to debate, raise awareness and show that something is important. Right now, the message is clear to the EU: Nobody is really interested in social sustainability. It is perfectly ok for the EU to just set criteria for environmental sustainability and expand the regulations for this - believing that it is only this part of sustainability that we will be interested in investing in. If we become interested in investing in social sustainability, it will be quite ok to not have any guiding criteria because it increases the opportunities to, for example, engage in "femwashing" so that we do not have to change for real. Perhaps a social taxonomy will be adopted with very rudimentary goals to at least make the system work - where our goals are kept at a low level so that they do not contribute to change. Although we may assume that the environmental problems would have been best solved by an increased focus on higher diversity among those who make decisions about how the earth's resources should be used so that all relevant risks are taken into account, we are not prepared to change who gets these opportunities in society.

This article is accompanied by a picture of SDG10. This goal caused many discussions and it was not possible to agree on what targets to be set since there were different opinions on both where we are today and what a goal should be. Instead it became a rather low ambitioned goal which will not contribute to over-all change. Our greates challenges are probably that we cannot unite on the need to create greater equality and that we are many who do not push for it either.