But what should the Real Estate Sector do about it?
From March 15 through 18 the global real estate industry gathered in Cannes for MIPIM 2022. This year’s theme was ‘Driving Urban Change’, and, just like last year’s edition ‘New World: New Era, Time to Reconnect’, social sustainability remained a pressing topic. This is a great opportunity to revisit the European Union’s (EU) ESG taxonomy regulation, the final report on social taxonomy, and what this exactly means for the real estate sector.
Why are we talking about sustainable taxonomies in the first place?
The European Union’s ESG taxonomy regulation (2020/852) came into force on 12 July 2020 and is enforceable from January this year. Its goals are to channel investments towards environmentally and socially beneficial activities, avoid green and social washing, make it possible to meet the Paris Agreement climate targets, and be in line with the UN’s 2030 Agenda for Sustainable Development. It aims to do so by establishing a framework to facilitate sustainable investment through a 'green list' of environmentally sustainable economic activities, built around six objectives that each have several sub-objectives. The next step has been a similar social taxonomy, of which the most recent version was published in February 2022. In what follows we will discuss what’s on the table and what this means for the sector.
Article 18 and current minimum social safeguards
Before we unpack the social taxonomy, a quick detour into how social sustainability is already included in the environmental taxonomy through ‘Article 18’ is warranted. Not in the least because companies are already expected to be compliant. Article 18 is the human rights minimal safeguard clause:
This pretty much means that companies should already have in place management policies and processes to identify, prevent, mitigate and account for potential and actual negative human rights impacts that their business causes, contributes to or is directly linked to through business relationships. In line with the United Nations Guiding Principles (UNGP) on Business and Human Rights.
The issue with this article is that the current application is worrying, providing more incentive to develop a proper social taxonomy. For instance, an ESG rating provider relied on a simple (arbitrary) check of media reports to evaluate the human rights performance of a company, which is a clearly problematic indicator. Moreover, there are huge data gaps at this stage. The real estate sector should thus be prepared for higher reporting standards. Though, the Platform on Sustainable Finance does note they aim to avoid double reporting structures and unnecessary additional administrative costs.
A Social Sustainability Taxonomy
The new social taxonomy will aim to resolve these issues by establishing more detailed indicators within the present EU legislative environment on sustainable finance and sustainable governance. In the remainder of this blog, we will list several key points of the social taxonomy and their implications for the real estate sector.
Three key objectives: workers, end-users, and communities & societies
The Platform on Sustainable determines three key objectives for a social taxonomy:
- decent work, including value-chain workers
- adequate living standards and wellbeing for end-users
- inclusive and sustainable communities and societies
Five contribution types
These objectives will contain both activity level (products & services) and entity level (process) criteria. Within each of these objectives, there are different types of contributions These are summarized in the table below.
- Avoiding and addressing negative impacts: Targeting both high-risk sectors with documented human-rights and labour-rights abuses of relevance to the objective; or sectors that are less likely to contribute to the objectives of the European social pillar. For example, ensuring a decent life for workers.
- Enhancing the inherent positive impacts of social goods and services, and basic economic infrastructure: Targeting social goods and services sectors that provide: goods and services for basic human needs; and basic economic infrastructure of direct relevance to the right to an adequate standard of living. For example, providing housing.
- Enabling activities: Where economic activities have the potential to enable substantial risk reductions in other sectors, these activities should also be classified.
- Do no significant harm (DNSH) criteria: These ensure that when an activity makes a substantial contribution to one social objective, it does not harm the other social objectives. This means for example that there cannot be a trade-off between affordability and quality in housing development.
- Minimum safeguards: This is what is already recognized in Article 18 and requires further development.
Contributions and AAAQ
The suggested starting point for developing criteria for the ‘enhancement of positive impacts’ is the concept of availability, accessibility, acceptability and quality (AAAQ). For example, housing companies operating under NACE code 41.20 (building & managing apartments) could be expected to meet a criterium like “the apartment is built / managed with x percent lower rent compared to the average rent in a certain region and ensuring that these apartments are let only to certain target groups like those with low income”. Or, that buildings must also meet certain quality standards. Acceptability is more difficult to define, but could for example be understood as promoting cultural acceptability.
The housing example is used on purpose, as housing affordability was a key pillar at MIPIM this year. On Wednesday Oma Rosenfeld, global advisor on housing, moderated a session on ‘housing first: the affordable challenge’. This session explored whether the real estate industry can rely on government policies to overcome this challenge, and what other non-regulatory strategies the real estate sector can use to tackle the housing shortage. The current taxonomy emphasizes that affordable housing will have to comply with AAAQ, making this a multi-dimensional issue.
Breaking down the objectives
In this section we will break down each of the three key objectives. As explained above, each objective will be comprised of various contribution types (negative impact, positive impact, DNSH…). The report lists an extensive – though not exhaustive - set of potential operationalisations of each objective. As the entire list is highly relevant for the real estate sector, we recommend a full reading. For the purpose of this blog we will highlight some criteria that are especially interesting, focusing predominantly on the third objective: ‘inclusive and sustainable communities and societies’.
- Decent work (including value-chain workers)
This objective focuses on people in their working lives or as workers. Indicators for this objective would build on the International Labour Organization’s (ILO) decent-work agenda and the UN’s SDG 8 (decent work & economic growth). These would lead to sub-objectives geared at employment creation, social protection, rights at work, social dialogue, skills & life-long learning, quality jobs, and more.
For example: an economic entity will qualify as enabling decent work where it:
- Promotes decent work, for instance by strengthing social dialogue, promoting freedom of association, and promoting collective bargaining for setting wages and working conditions.
- Promotes equality and non-discrimination at work
- Ensures respect for the human rights and workers’ rights of affected workers in the value-chain, for instancy by providing excellent health and safety arrangements and outcomes
- Adequate living standards and wellbeing for end-users
This objective focuses on people in their role as end-users of certain products and services. On the one hand products and services can pose health of safety risks, on the other they have the potential to help people to meet basic human needs.
For example: an economic entity will qualify as promoting adequate living standards and well-being for end-users where it:
- Enhances the safety and the quality of its products and services
- Provides for the protection of consumers’ personal data and privacy as well as cybersecurity by design and by default
- Improves access to healthy and highly nutritious food of good quality, especially for children
- Improves access to good-quality drinking water
- Improves access to good-quality housing
- Improves access to education and lifelong learning
- Inclusive and sustainable communities and societies
This objective will emphasize respecting and supporting human rights by paying attention to the impacts of activities on communities and the wider society. It will achieve this by both addressing and avoiding negative impacts; as well as making basic economic infrastructure available to certain target groups. The sub-objectives under this objective will emphasize issues such as: land rights; indigenous people’s rights; human-rights defenders; and improving/maintaining the accessibility and availability of basic economic infrastructure and services like clean electricity and water for certain vulnerable groups or groups in need.
For example: an economic entity will qualify as enabling inclusive and sustainable communities and societies where it:
- Promotes equality and inclusive growth including by
- Creating and preserving decent jobs, particularly as part of a just, green and digital transition, for example by retaining and reskilling workers
- To the extent that is appropriate, preserving employment levels and hiring local workers and supporting local suppliers in targeted areas
- promoting equality by: addressing recognised gender gaps in communities and society; or having a transformative impact on gender equality and time savings for women (e.g. design features of mobility projects, access to finance for female entrepreneurs).
- Supports sustainable livelihoods and land rights including by
- Promoting community-driven development where decision-making processes are decentralised to the community level.
- Avoiding and addressing negative impacts on communities affected by business operations (including but not limited to their: land and livelihoods; health, safety and security; culturally and spiritually sacred sites; and access to basic services, such as water, sanitation, housing and education).
- Carrying out meaningful consultations with affected communities, including on development priorities where relevant. This should aim to ensure continuous engagement and good-faith negotiation with indigenous peoples to obtain their free, prior and informed consent before undertaking any activities that may affect them.
- Ensures respect for the human rights of affected communities by carrying out risk-based due diligence, including as it relates to the above-mentioned sub-objective areas
- Taking action and engaging in collective advocacy, dialogue with states, and multi-stakeholder coalitions on issues relating to human-rights defenders and restrictions on civic freedoms and the rule of law;
- ensuring that indigenous and customary land rights are upheld when acquiring or using land, including by redesigning business plans or activities to avoid impacts on indigenous or customary land.
The dimension of communities & societies is bound to be very important for the real estate sector. The importance of communities was for instance addressed at MIPIM under the key pillar ‘Cities for Citizens’, Guillemette Colombe from Make.org stated: “It has become harder for local stakeholders to make decisions without involving the end users, the inhabitants. With the arrival of social media, citizens challenge local decisions more and more and want to make their voices heard”. This is hardly shocking with citizen consultation, participation, or even co-production, becoming increasingly codified in laws across the EU, see for instance the Dutch Environment and Planning Act (Omgevingswet).
Social Value is not charity!
A nice note to end on might be that the emerging Social Taxonomy reminds us once and for all that Social Value is not charity. An earlier version of the report stated: “Not all business entities, let alone economic activities, have a direct impact on communities. In this regard, it will be important to ensure that criteria for substantial contribution do not promote philanthropy or a return to early versions of corporate sustainability reporting, where companies engage in ‘do good’ activities that have little connection to their operational footprint or the negative impacts associated with their business model.”
To be sure, these objectives are mere suggestions for now and there are still many uncertainties. What is certain is that the EU is taking Social Value in Real Estate seriously, and Real Estate professionals should follow suit.
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