With the introduction of the Taxonomy into European legislation in June 2020, we now have a clear set of rules regarding activities that contribute to reducing the impact of our activities on climate change. This enables investors to consider the risks and opportunities presented by climate change in a practical and specific manner, focusing on the performance of economic activities to achieve the targets agreed upon in the Paris Agreement and the EU’s environmental goals for 2030 and 2050. It also serves as a guide for companies to understand which types of activities are attractive to sustainable investors.
Alongside environmental investments, the transition to equitable sustainability – a socially sustainable transition – also requires investments in activities with a positive social impact. On capital markets, there is a growing trend toward social bonds, impact investment funds, and investment options that promote fundamental values, such as respect for human rights or the Sustainable Development Goals. However, this trend is not matched by a full understanding of the types of investments that substantially contribute to achieving social objectives.
The EU Platform on Sustainable Finance has explored the possibility of extending the EU Taxonomy to cover social objectives and has made several recommendations in this regard. The new Social Taxonomy (February 2022) aims to open new directions on capital markets for those investors who prioritize social impact and the social dimension of the economic transition. This will allow investors and companies to identify and present sustainable investments and activities in areas such as access to healthcare, social housing, social services, human rights, and labour rights.
The report highlights the need for a framework to guide social activities within the context of taxonomy. A social taxonomy consistent with the environmental taxonomy and based on market best practices can be developed without creating excessive bureaucracy for the business environment.
In the absence of a social taxonomy, investors and companies lack a clear framework for defining what constitutes the "social" domain. Under these conditions, investors and companies cannot promote their investments and activities in areas like access to healthcare, social housing, human rights, or labour rights as sustainable. The COVID-19 pandemic demonstrated how this could lead to absurd situations. For example, while investments in photovoltaic parks were considered sustainable, investments in vaccine development could not be labelled as such. Such discrepancies have been challenged by investors, companies, and civil society.