The role of social factors in the EU’s regulatory framework

difficulty. First of all, the social sphere is inevitably correlated with the concept of CSR, which has to take into account a multitude of stakeholders that come into play. Secondly, the social, cultural, religious, economic, and legal contexts greatly influence what is included in the S- factor. One thinks of the strong relocation of companies' production chains to countries where social demands are inadequately met, to the point of sometimes not even respecting the cardinal principles that are now taken for granted in the most advanced economies.

Given the difficulty of finding a precise definition of what is contained in the social factor, and also given the climate emergency that has demanded more focus from policy makers, the European Union has embraced a milder approach, concentrating mainly on environmental issues, and touching marginally on social issues. As analyzed in the previous paragraphs, three main regulations have been introduced in the area of sustainable finance, namely the NFRD, the SFRD and the Taxonomy.

The first requires the publication of a non-financial statement containing social and environmental issues, respect for human rights, anti-corruption, and bribery information. The European Commission has later issued, pursuant to Article 2 of the NFRD, non-binding guidelines related to social issues, and in doing so, some authors argued that the Commission could have made these guidelines binding for the companies and could have submitted a report with legislative proposal rather than strengthening in 2019 guidelines related to the climate issues⁹³. These guidelines, drafted based on the recommendations of the Task Force on Climate-related Financial Disclosures, failed to provide processes on how to take unintended social consequences into account and focused only on climate-related issues rather than also strengthening the social sphere. Nevertheless, the main issue companies face in disclosing non-financial information is a lack of standardization and common understanding of what is actually socially material. As shown in a consultation conducted by the European Commission, 82% of the respondents believed that an application of a common standard for non-financial information would resolve the problems of reliability, comparability, and companies not reporting all relevant information⁹⁴.

93 VANDER STICHELE M.,“Strengthening green finance by better integrating the social dimensions in the European Union Sustainable Finance Laws”, 2020, Making the Financial System Sustainable, Cambridge University Press, pp. 299–326. The author proposes that the European Commission should have given binding nature to the guidelines according to Article 3 of the NFRD, which states that the European Commission shall publish a report on the implementation of the NFRD and in particular referring to the level of guidance and methods provided.

94 EUROPEAN COMMISSION, “Summary Report of the Public Consultation on the Review of the Non-Financial Reporting Directive 20 February 2020 - 11 June 2020”, 2020, Available at:

The SFRD’s main aim is to combat market fragmentation in the area of disclosure of sustainability factors related to financial products. As previously analyzed, according to the definition given by the SFRD of “sustainable investment”, an investment is socially sustainable in the event that contributes to a social objective. While disclosure requirements for environmental investment have been better specified following the introduction of the Taxonomy, which has thus anchored the definition of what is environmentally sustainable to the disclosure requirements under the SFRD, there is still a lot of confusion among investors on what constitute an investment that contributes to a social objective. In the absence of a Social Taxonomy, we can assume that everything that is not environmental or related to governance is socially sustainable. As argued above when analyzing the SFDR discipline, the lack of a clear definition and guidelines has led to great confusion among asset managers who have therefore adopted different approaches to interpreting the term socially sustainable. This result goes against the ultimate goal of the regulation, which was to create a clear and harmonized system of disclosure in order to avoid market fragmentation.

The approach used by the European Union within the Taxonomy has been to focus on providing financial market players with a definition of activities that are environmentally sustainable, while at the same time, giving it a marginal role, requiring companies to meet minimum safeguards in order to be considered as aligned with the Taxonomy. These minimum safeguards were the subject of much debate in the marketplace as it was difficult to understand how a company should be compliant with these standards. First of all, it is worth noting the difference between this requirement and the first two, namely, to contribute substantially to at least one of the six environmental objectives and to do not significantly harm any of the other objectives. In fact, while the first two requirements refer to the activity aiming to be classified as environmentally sustainable, the third requirement requires the undertaking as a whole to be compliant with the minimum safeguards. Recently the European Commission mandated the European Platform on Sustainable Finance to issue recommendations on how the undertakings shall be compliant with these safeguards. The Platform published in July 2022 a draft report on minimum safeguards⁹⁵, in which it identified 4 main core areas to which undertakings must be compliant:

https://www.consob.it/documents/46180/46181/Ares%282020%293997889_summary_report.pdf/bf9a64eb- 3b24-4ade-bc5e-c7a1e238ca89

95 EUROPEAN PLATFORM ON SUSTAINABLE FINANCE, “Draft report on minimum safeguards”, 2022. Available at:

(i) Human rights, including workers ‘rights;

(ii) Bribery/Corruption;

(iii) Taxation; and (iv) Fair Competition.

The Platform issued 4 main recommendations, the first one focuses on the processes that the undertaking shall implement in order to be deemed as compliant with the minimum safeguards under Article 18 of the Taxonomy and, therefore, be deemed as Taxonomy-aligned. In fact, the undertaking shall implement an adequate due diligence process on human rights, including labour rights, bribery, taxation, and fair competition. In the event that such process is not adequate nor existent, this is a sign of non-compliance with minimum safeguards. Moreover, the undertaking shall not be convicted in court in respect of any of those topics and shall cooperate with a National Contact Point, which assess the undertaking’s compliance with the OECD guidelines. Such compliance is in turn essential to be compliant with Article 18 of the Taxonomy. Finally, indifference to the allegations made by the Business and Human Rights Resource Centre should be considered a sign of non-compliance.

It is therefore clear that whenever one enters the field of social sustainability there is widespread confusion among investors and market players, as in the absence of a clear definition and guidelines creating a harmonised system everyone adopts a different system.

This goes against the principle of fair competition and puts investors at risk of social washing as they are deprived of the information they need to make an informed choice. For these reasons, in the following chapter we will analyze why it is necessary to introduce a Social Taxonomy and look at the recent proposal made by the European Platform on Sustainable Finance of how this could be structured.

https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/draft- report-minimum-safeguards-july2022_en.pdf