Final Report on Minimum Safeguards

The European Commission expert group; Platform on Sustainable Finance, has published a final report on the minimum safeguards laid out in Article 3 and 18 of the Taxonomy Regulation. It replaces the draft report published in July 2022.

In general, the final report advises on the application of the minimum safeguards. It covers the following main areas:

• The embedding of minimum safeguards in the existing EU regulation (the SFDR, CSDDD, CSRD as well as initiatives on corruption, fair competition and taxation),
• The identification of topics that relate to the norms and standards touched upon in Article 18 of the Taxonomy Regulation, and
• Advice on the compliance with the minimum safeguards

Minimum safeguards are one of the criteria used to determine if an economic activity qualifies as environmentally sustainable. These criteria are listed in Article 3 in the Taxonomy Regulation. Minimum safeguards are further described in Article 18 in the Taxonomy Regulation, according to which minimum safeguards are procedures implemented by companies carrying out economic activities to ensure alignment with standards for human and labour rights. The standards are defined in the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD Guidelines for MNE), the UN Guiding Principles on Business and Human Rights (UNGPs), the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work as well as the International Bill of Human Rights.

The expert group has identified four core topics which shall be used to determine compliance with minimum safeguards:

• Human rights (including labour and consumer rights)
• Corruption (Bribery, bribe solicitation and extortion)
• Taxation
• Fair competition

The advice given by the expert group on the above four topics are based on the standards outlined in Article 18 in the Taxonomy Regulation as well as existing and upcoming EU regulation. Among others, the report draws parallels to the CSDDD and CSRD. They are, to some extent, used as a means of guidance for determining compliance with the minimum safeguards. When CSDDD and CSRD are finalized and some experience has been made, the expert group expects a further revision. The report also gives advice for, among others, banks, sub-sovereigns and smaller companies such as SMEs falling outside the direct scope of CSDDD and CSRD.

Below, the minimum safeguards alignment criteria within the four core topics are elaborated upon:

• Human rights: The human rights due diligence process is central to minimum safeguards and to ensuring that undertakings have relevant procedures implemented as required in Article 18 of the Taxonomy Regulation. The report determines two overall criteria indicating non-compliance with minimum safeguards: 1) If the company has not established sufficient human rights due diligence processes as referred to in the UNGPs and OECD Guidelines for MNE, 2) there are clear indications that the company does not have sufficient human rights due diligence process implemented, resulting in human rights abuses. A company is considered non-compliant with minimum safeguards and the Taxonomy if one of the criteria is applicable. Specifically for SMEs, they should be considered non-compliant if either the company does not have a due diligence process proportionate to its leverage, size and risks, or if the company has breached human, labour or consumer rights.
• Corruption: The report sets out two criteria for being aligned with minimum safeguards in relation to corruption. A company is not compliant with the safeguards if one of the criteria applies: 1) The company has not developed or adopted sufficient compliance and ethics programs, internal controls or any prevention measures, 2) the undertaking or senior management, also senior management of any subsidiaries, has been convicted for corruption or bribery and it is final. In relation to SMEs, they are considered non-compliant if they have been finally convicted of corruption.
• Taxation: The same process as for human rights and corruption can be followed when identifying sufficient procedures for establishing compliance with minimum safeguards. The report proposes the following criteria for a company’s alignment with minimum safeguards: 1) The company does not find tax governance and compliance to be important elements of oversight and no sufficient tax risk management processes and strategies as described in OECD MNE Guidelines on tax are established, 2) the company is guilty of tax evasion. Again, an undertaking does not comply with the minimum safeguards if one of the criteria applies. Specifically for SMEs, non-compliance require that the company has been finally convicted for tax evasion.
• Fair competition: The report has formulated the following two recommended criteria for a company’s alignment with minimum safeguards. Therefore, an undertaking is not compliant with the safeguards if just one of the criteria applies: 1) The company does not train senior management on competition issues and neither does it promote the awareness with employees around the importance of being compliant with competition regulations, 2) the undertaking or senior management, also senior management of any subsidiaries, has breached competition laws. Again, for SMEs, they will be non-compliant with the minimum safeguards in case they have breached competition law and been finally convicted in court.

The final report does not bind the Commission, however, it will be subject for analysis and serves as an information basis. The full report can be accessed here.

Tags:  ComplianceCSDDDCSRDSustainability