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October 12, 2022

Platform on Sustainable Finance lays out final recommendations on minimum safeguards

Advisory body to European Commission suggests a dual approach for companies to comply with minimum safeguards in the EU taxonomy and be considered sustainable entities.

The Platform on Sustainable Finance is proposing an approach that is both process-based and performance-based to enforce compliance with minimum safeguards set out in Article 18 of the EU taxonomy regulation. The combined approach aims to impose the implementation of adequate internal company practices while also introducing external checks on performance outcomes. 

“Failure to comply with one of the two approaches would result in non-compliance with the minimum safeguards,” said platform member Signe Andreasen Lysgaard, announcing the final recommendations during a webinar on Tuesday. 

The final recommendations are the outcome of a prior draft report and consultation period but are not binding. The European Commission will take the final decision on which advice to include in EU legislation.

Martin Spolc, head of the sustainable finance unit at the commission’s directorate general of financial services, said during the webinar: “We appreciate the pragmatic approach by the platform and we want to reassure stakeholders that this will not lead to new legislation by the commission, but to improve the usability of the taxonomy.”

To demonstrate compliance with minimum safeguards, entities need to implement due-diligence processes following the United Nations Guiding Principles on Business and Human Rights. Entities also need to prove they carry no liability on social safeguards established in court cases; are not subject to a non-compliance statement by a national contact point of the OECD; and have responded to potential allegations flagged by the Business and Human Rights Resource Centre.

The platform recommends that for EU companies, the external verification of compliance should rest with the auditor. “There needs to be an assessment of auditors’ capacity to engage with matters such as human rights,” Lysgaard said, highlighting the future role of auditors in this space. 

Where do minimum safeguards fit?

In the summer, doubts emerged over whether an EU social taxonomy would still see the light of day. However, platform chair Nathan Fabian noted during the webinar that “the requirements on minimum safeguards are not dependent on the introduction of a social taxonomy”.

Currently, for an economic activity to be considered aligned with the EU taxonomy, which focuses on environmental factors, it must adhere to three conditions, namely to: contribute substantially to one or more environmental objectives specified in the taxonomy; do no significant harm to any of the other environmental objectives; and comply with minimum social and governance safeguards. 

In its latest report, the Platform on Sustainable Finance based its view on the overall impact of an entity rather than just the impact of a specific economic activity – as is currently the case in the taxonomy – and looked at how minimum safeguards can be applied to several economic participants.

The topics that fall under minimum social safeguards are human rights (affecting workers, consumers and communities); bribery and corruption; taxation; and fair competition. The platform took into account how these topics are dealt with in other regulations and listed areas to consider for policy coherence between these regulations and the requirements on minimum safeguards.

The key EU regulations linked to the platform’s recommendations are the existing Sustainable Finance Disclosure Regulation, the Corporate Sustainability Reporting Directive, and the proposed Corporate Sustainability Due Diligence Directive. The report noted that under SFDR, the mandatory social principal adverse impacts are not entirely aligned with minimum safeguards.

The platform warns that disclosure requirements in the CSRD, covering both positive and negative impacts, are impractical from a minimum safeguards compliance perspective. It also pointed out that the usability for minimum safeguards requires CSDDD alignment with UNGPs guidelines. 

However, since CSRD and CSDDD regulation are not yet fully finalised yet, the platform acknowledges its advice should be revised in the future.

Guidelines for specific issuers

The platform also considered implications for specific market participants on assessing their compliance with minimum safeguards under the taxonomy. For example, when banks issue green bonds on behalf of others, it recommends that the minimum safeguards should not be applicable to the banks but to the entity receiving the financing. Household mortgages would not need to comply with minimum safeguards.

Capacity constraints for small and medium-sized enterprises were recognised elsewhere in the report, but the platform still anticipates increased reporting from smaller firms as it encourages voluntary reporting.

The report said that in terms of public lending, and at a sovereign level, the picture is less clear since application of UNGPs is not straightforward. The platform therefore suggests the temporary use of a combination of internationally recognised indices to report on human rights risks – but flags this as an area for subsequent work.

During the webinar, Lysgaard acknowledged that human rights due diligence is a policy area that can evolve as context and business activity changes, and as new or different issues are identified over time.

Photo credit: Getty Images

 



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