Under the Taxonomy Regulation the compliance with minimum safeguards is one of the four defining pillars of environmentally sustainable economic activities  (Article 3(c), Recital 35). 

                       
                 
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According to the said provisions economic activities only qualify as environmentally sustainable where they are carried out in alignment with:

  • the OECD Guidelines for Multinational Enterprises and
  • UN Guiding Principles on Business and Human Rights, including the declaration on Fundamental Principles and Rights at Work of the International Labour Organisation (ILO), the eight fundamental conventions of the ILO and the International Bill of Human Rights.

Recital 35 explains that that fundamental conventions of the ILO define human and labour rights that undertakings should respect.

Several of those international standards are enshrined the Charter of Fundamental Rights of the European Union, in particular the prohibition of slavery and forced labour and the principle of non-discrimination. Those minimum safeguards are without prejudice to the application of more stringent requirements related to the environment, health, safety and social sustainability set out in Union law, where applicable.

When complying with those minimum safeguards, undertakings should, moreover, adhere to and take into account:: 

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Taxonomy Regulation

Recital 35

Recalling the joint commitment of the European Parliament, the Council and the Commission to pursuing the principles enshrined in the European Pillar of Social Rights in support of sustainable and inclusive growth, and recognising the relevance of international minimum human and labour rights and standards, compliance with minimum safeguards should be a condition for economic activities to qualify as environmentally sustainable. For that reason, economic activities should only qualify as environmentally sustainable where they are carried out in alignment with the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, including the declaration on Fundamental Principles and Rights at Work of the International Labour Organisation (ILO), the eight fundamental conventions of the ILO and the International Bill of Human Rights. The fundamental conventions of the ILO define human and labour rights that undertakings should respect. Several of those international standards are enshrined the Charter of Fundamental Rights of the European Union, in particular the prohibition of slavery and forced labour and the principle of non-discrimination. Those minimum safeguards are without prejudice to the application of more stringent requirements related to the environment, health, safety and social sustainability set out in Union law, where applicable. When complying with those minimum safeguards, undertakings should adhere to the principle of ‘do no significant harm’ referred to in Regulation (EU) 2019/2088, and take into account the regulatory technical standards adopted pursuant to that Regulation that further specify that principle.

Article 18
Minimum safeguards

1.The minimum safeguards referred to in point (c) of Article 3 shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

2.When implementing the procedures referred to in paragraph 1 of this Article, undertakings shall adhere to the principle of ‘do no significant harm’ referred to in point (17) of Article 2 of Regulation (EU) 2019/2088.

 

European Commission published Notice of 13 June 2023 on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation (2023/C 211/01), which refers to the question of minimum safeguards under the EU Taxonomy Regulation - see below.
 

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Commission Notice of 13 June 2023 on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation, (2023/C 211/01)

Minimum safeguards under the EU Taxonomy Regulation

1.   What role do the minimum safeguards play in the EU Taxonomy Regulation?

The Taxonomy Regulation provides that an economic activity can only qualify as environmentally sustainable if, in addition to meeting the other requirements of Article 3 (3), it is carried out in compliance with the minimum safeguards laid down in Article 18’. This is in line with the principles enshrined in the European Pillar of Social Rights in support of a sustainable and inclusive growth, as well as with the relevant international minimum human and labour rights standards.

The minimum safeguards are therefore an integral part of the Taxonomy and are one of the four criteria laid down in Article 3 which must be met for economic activities to be considered environmentally sustainable. The inclusion of minimum safeguards in the Taxonomy framework aims to ensure that entities carrying out economic activities considered as Taxonomy-aligned meet certain minimum social and governance standards.

In other words, the purpose of the minimum safeguards under the Taxonomy Regulation is to prevent activities and investments from being regarded as ‘sustainable’ if they involve breaches of key social principles and human and labour rights or do not align with minimum standards for responsible business conduct.

2.   How are the minimum safeguards defined under the Article 18 of the EU Taxonomy?

Article 18 of the Taxonomy Regulation lays down specific requirements for minimum safeguards referring both to international standards of responsible business conduct under Article 18(1) and to the principle of ‘do no significant harm’ of the SFDR (4) under Article 18(2).

Under Article 18(1), minimum safeguards are to be understood as due diligence and remedy procedures implemented by a company that is carrying out an economic activity in order to ensure alignment with the Organisation for Economic Cooperation and Development Guidelines for Multinational Enterprises (OECD MNEs) and the UN Guiding Principles on Business and Human Rights (UNGP). The latter includes the principles and rights set out in eight of the ten fundamental conventions identified in the International Labour Organization (ILO) Declaration of the on Fundamental Principles and Rights at Work (5) and the International Bill of Human Rights (6).

The OECD Guidelines for Multinational Enterprises bring together all thematic areas of responsible business conduct and responsible supply chain management. It also recommends that enterprises apply good corporate governance practices, including due diligence (7) as set out in the OECD Principles of Corporate Governance.

The UN Guiding Principles on Business and Human Rights (i)specify a standard of conduct for businesses to prevent human-rights violations; and (ii) address any potential risks resulting from the economic activities that businesses conduct. The responsibility of business entities to respect human rights refers to internationally recognised rights understood, as a minimum, as those expressed in eight of the ten fundamental ILO conventions and in the International Bill of Human Rights

Article 18(2) introduces a direct link with the principle of ‘do no significant harm’ (DNSH) referred to in Article 2(17) of the SFDR. This ensures that minimum social standards are defined at European level, and that there is consistency in European legislation.

The details of the SFDR’s principle of ‘do no significant harm’ are specified in Delegated Regulation (EU) 2022/1288 adopted by the European Commission in April 2022. According to this regulation, in addition to disclosing whether the sustainable investment is aligned with the OECD MNEs and UN GP, implementing the SFDR principle of do no significant harm requires the consideration of a list of principal adverse indicators. The European Commission considers that, in the context of the Article 18(2) of the Taxonomy Regulation, the link between the minimum safeguards and the principle of DNSH of the SFDR is to be understood, as a minimum, through the SFDR principal adverse impact indicators for social and employee matters, respect for human rights, anti-corruption and anti-bribery matters listed in the table 1 of Annex I of the SDFDR Delegated Regulation (8).

Adverse sustainability indicator of Table 1

Metric

Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises

Share of investments in investee companies that have been involved in violations of the UNGC principles or OECD Guidelines for Multinational Enterprises

Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises

Share of investments in investee companies without policies to monitor compliance with the UNGC principles or OECD Guidelines for Multinational Enterprises or grievance/ complaints handling mechanisms to address violations of the UNGC principles or OECD Guidelines for Multinational Enterprises

Unadjusted gender pay gap

Average unadjusted gender pay gap of investee companies

Board gender diversity

Average ratio of female to male board members in investee companies, expressed as a percentage of all board members

Exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons)

Share of investments in investee companies involved in the manufacture or selling of controversial weapons


3.   What are the key expectations for undertakings under Article 18 of the Taxonomy Regulation?

Undertakings disclosing their alignment with the Taxonomy will need to assess their compliance with the Taxonomy’s minimum safeguards requirements under both Article 18(1) and Article 18(2).

Under Article 18(1), undertakings whose economic activities are to be considered as Taxonomy-aligned must have implemented due diligence and remedy procedures to ensure the alignment with the standards for responsible business conduct mentioned in the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (see question 2). Both these texts extensively outline how the principles and conduct of due diligence can be implemented.

The central requirement under Article 18(1) is that an undertaking must implement appropriate procedures, including procedures to continuously identify, prevent, mitigate or remediate the relevant actual and potential adverse impacts connected with their own operations, value chains and business relationships in order to ensure their activities are carried out in line with these standards.

Sometimes, despite implementing all appropriate procedures, an undertaking cannot address certain risks or eliminate certain negative impacts. This does not necessarily mean that the undertaking does not comply with the minimum safeguards, provided that the undertaking has clearly disclosed these potential impacts and explained what it did to identify, prevent, mitigate or remediate them and why it could not eliminate certain impacts. In fact, it is recognised that there can be instances where, despite reasonable due diligence measures, undertakings may still not be able to prevent, cease or mitigate adverse impacts when it comes to the adverse impacts in the undertaking’s value chain.

As part of those due diligence and remedy procedures, companies are required under Article 18(2) to consider the SFDR principal adverse impact indicators related to social and employee matters, respect for human rights, anti-corruption and anti-bribery matters referred to under question 2 (9).

The only issue covered by Article 18(2) as of today which is not explicitly covered by Article 18(1) is the principal adverse impact relating to the exposure to controversial weapons as defined under the SFDR Delegated Regulation (10) (anti-personnel mines, cluster munitions, chemical weapons and biological weapons). Therefore, by virtue of Article 18(2), undertakings are to ensure that their due diligence and remedy procedures allow for the identification, prevention, mitigation or remediation of any actual or potential exposure to the manufacture or selling of controversial weapons.

Beyond the provisions of Article 18(2) described above, the Taxonomy Regulation does not contain further considerations relating to weapons or defence-related equipment and technologies in the assessment of minimum safeguards. As stated in the Draft Commission notice on interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act (11), the Commission acknowledges the need to ensure access to finance and investment including from the private sector for all strategic sectors, including the defence industry. The defence industry is recognised as a crucial contributor to the resilience and security of the Union, and therefore to peace and social sustainability (12).

The list of SFDR indicators related to social and employee matters, respect for human rights, anti-corruption and anti-bribery might change with potential future revisions of the SFDR delegated act. That is why any issue that may be addressed in the future by the adverse indicators of the SFDR will also need to be considered by undertakings according to Article 18(2).

Reporting in line with the Corporate Sustainability Reporting Directive (13) (CSRD) will help companies to assess their compliance with Article 18 requirements and will help investors to get the necessary information from investee companies (14). Article 18 of the EU Taxonomy Regulation does not require additional disclosures, there is therefore no duplication with the CSRD reporting requirements.

For further informal advice on best practices, users are invited to consult the Final Report on Minimum Safeguards of the Platform on Sustainable Finance published in October 2022.



Practical use cases regarding Taxonomy minimum safeguards

Potential practical use cases regarding minimum safeguards have been described in the document prepared for the European Commission in June 2023: "The EU Taxonomy User Guide" (p. 29 - 30) - see extract below.

 

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Use Case 6: Assessing compliance with minimum safeguards

How can my company ensure compliance of its eligible activities with the minimum safeguards?

 

Context

 

In line with the principles enshrined in the European Pillar of Social Rights supporting a sustainable and inclusive growth, and recognising the relevance of international minimum human and labour rights and standards, the EU Taxonomy Regulation stipulates that economic activities should only qualify as environmentally sustainable where they are carried out in alignment with Article 18 (1) and (2):

*The minimum safeguards referred to in point (c) of Article 3 shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the

DECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights.

When implementing the procedures referred to in paragraph 1 of this Article, undertakings shall adhere to the criteria of "do no significant harm" referred to in point (17) of Article 2 of Regulation (EU) 2019/2088.

As regards to the UN Guiding Principles on Business and Human rights, these include: (1) the Declaration on Fundamental Principles and Rights at Work of the International Labour Organisation (ILO); (2) the eight fundamental conventions of the ILO; and, (3) the International Bill of Human Rights from the Office of the United Nations High Commissioner for Human Rights (OHCHR).

As an example, the eight fundamental conventions identified in the ILO's declaration are:

  • the right not to be subjected to forced labour;
  • the freedom of association;
  • workers' right to organise; the right to collective bargaining;
    equal remuneration for men and women workers for work of equal value; non-discrimination in opportunity and treatment with respect to employment and occupation; and
  • the right not to be subjected to child labour.

 

Disclaimer: Companies subject to Taxonomy disclosure under Article 8 of the Taxonomy Regulation will also be subject to sustainability reporting standards referenced in the

CSRD. Those standards will be prepared by the European Financial Reporting Advisory Group (EFRAG) and adopted by the Commission as Delegated Acts.

 

Proposed approach to address your challenge

 

To demonstrate your compliance with the minimum safeguards, ensure that your company approach to has defined the relevant policies, procedures, systems and indicators that are necessary to adhere to the UN Guiding Principles on Business and Human rights and the OECD Guidelines for Multinational Enterprises as referred to in Article 18(1) of the Taxonomy Regulation.

 

For example, such information could include:

  1. your labour and governance policies, and whether these include compliance with all eight conventions;
  2. a definition of your labour management systems;
  3. key performance indicators on elements such as health and safety track records, gender mobility or gender pay gap; and,
  4. audits of sites and/or suppliers or subcontractors on those dimensions.

 

Next steps and references

 

References to recommended resources:

  • OECD Guidelines for Multinational Enterprises
  • UN Guiding Principles on Business and Human Rights
  • [Potential upcoming FAQ from the Commission]
  • Report of the Platform on Sustainable Finance on minimum safeguards

 

Source: The EU Taxonomy User Guide, Document prepared for the European Commission, June 2023, p. 29 - 30

 

 

 
chronicle   Regulatory chronicle

 

 

October 2022

 

Platform on Sustainable Finance's, Final Report on Minimum Safeguards

 

 

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