Thomas Trier, Joachim Delventhal

17 October 2022

Minimum Safeguards – one step closer to clarity

Last week, the Platform on Sustainable Finance launched its final report on the EU Taxonomy Minimum Safeguards. This article helps you understand some of the most important guidance in the report.

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With the new report out, we hope this article might be a stepping-stone for familiarising yourself with the report. Having said that, we do recommend users of the report to understand the entire report and not just the executive summary or the summary of criteria for alignment, because the report includes some further guidance that is needed to fully grasp the summaries.

The report advises on the application of Minimum Safeguards (MS) in relation to the Taxonomy Regulation articles 3 and 18, but it is not an official Commission document. Consequently, the interpretation of the articles is not authoritative, but a guidance for now.

Emphasising two important aspects

During the presentation of the report, the EU Commission expressed that they intend to translate the report into official guidance materials and tools for practitioners, as opposed to creating further regulation. They emphasised two aspects of the report as being particularly important: first, the report was seen as very practice oriented. Second, they appreciated the clear reference to the UN Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises, since the Commission wants to continue using these as points of reference for current and upcoming legislation.

With that in mind, the report provides more clarity about the understanding of article 18 and its scope. It is clear from the report that companies should focus on four main topics: 1. Human rights (including labour and consumer rights); 2. Corruption/Bribery; 3. Taxation and 4. Fair competition. It also clarifies and thereby addresses a major point of uncertainty that the assessment of compliance with the MS is not based on the economic activity, like the other article 3 criteria, but on the entity level.

For each of the four areas there is a two-fold assessment of compliance:

Processes
Performance/outcome requirements.

If a company fails at one of these two, it will not be compliant with the MS. The process requirement reflects due diligence, but the scope of the due diligence depends on the topic.

The performance requirement is assessed against known reported and decided court cases against the company (controversies) or failure to engage OECD National Contact Point or respond to communication from the Business and Human Rights Resource Centre (BHRRC).

The performance requirement has been questioned by some stakeholders during the consultation period for the report, mainly because it appears rather random which is also recognised by the report. However, in the absence of other reliable or adequate sources, the performance requirement was kept. However, the report acknowledges that “in practice, it might be necessary to differentiate between court proceedings involving serious violations and minor cases.”

The report also concludes that focusing only on reported controversies would not be sufficient to determine if a company is compliant and even if a company has no reported controversies, it will fail if the required processes are not in place.

A company will also fail, in case it has had reported controversies, but has remedied the impact, if it does not have the processes in place.

Has a controversy been reported, but the company does have the processes in place, then the company is more likely to be compliant.

Consequently, the process requirement is the dominating requirement, while the performance requirement is more a red flag indicating that the company may not have adequate processes in place.

"Another key requirement and the first step for any assessment of whether a company is compliant with the Minimum Safeguards is whether a company reports on its human rights due diligence approach. If this is missing, a core element of the UNGP is absent."

THOMAS TRIER

CHIEF ADVISOR ON RESPONSIBLE BUSINESS CONDUCT, RAMBOLL MANAGEMENT CONSULTING.

Another key requirement and the first step for any assessment of whether a company is compliant with the MS is whether a company reports on its human rights due diligence approach. If this is missing, a core element of the UNGP is absent.

Criteria for Alignment with the Minimum Safeguards

The following section presents the differentiation of both the process based and the performance- based alignment criteria for each of the topics covered by the MS: 1. Human rights (including labour and consumer rights); 2. Corruption/Bribery; 3. Taxation and 4. Fair competition.

1. Human rights (including labour and consumer rights)

Process requirement

To be compliant with the MS a company must be aligned with the UNGP and the OECD Guidelines. This includes, across its activities, to publicly commit itself to respect all internationally recognised human rights standards, as defined in the International Bill of Human Rights, as well as the principles concerning fundamental rights at work in the eight ILO core conventions as set out in the Declaration on Fundamental Principles and Rights at Work.

The company must also apply all the six due diligence steps in OECD Guidelines and the similar steps in UNGP. This includes at a minimum:

embedding its commitment into policies, procedures, and management systems, including the allocation of adequate resources for day-to-day human rights functions,
human rights impact identification and assessment
ceasing, preventing, and/or mitigating adverse impacts,
tracking all relevant processes, measures, and their efficiency,
communicating/accounting for how adverse impacts are being addressed,
remediation

Meaningful and timely engagement with affected stakeholders is expected throughout due diligence process.

It is important to emphasise that a due diligence process is always on-going and must not be just a one-off exercise.

SMEs are expected to have established due diligence proportionate to their size and leverage, and to its human rights risks. Inspiration for the scope can be found in the EU Commission publication “My business and human rights - A guide to human rights for small and medium-sized enterprises”. In the EU context, SMEs are defined as businesses with 250 employees or less.

Performance requirement

To be compliant, there should not be any signal indicating that the company did not adequately implement human rights due diligence and/or did abuse human rights. Such signals are:

a) The company has finally been found in breach of labour law or human rights. b) The company does not engage with stakeholders in context of a case before an OECD National Contact Point (NCP), or the company has been found non-compliant with the OECD guidelines by the NCP, or the Business and Human Rights Resource Centre (BHRRC) has taken up an allegation against the company, and the company has not answered it within 3 months, only if these letters are less than 2 years old.

A company, including SMEs, is non-compliant for as long as it has not remedied its failure to comply with the performance requirement and has not implemented a human rights due diligence process including the six steps at a minimum.

2. Corruption/Bribery

Process requirement

The report, while referring to the OECD Guidelines, summarises the non-compliance as if the company has not developed and adopted adequate internal controls, ethics and compliance programmes, or measures for preventing and detecting corruption/bribery.

However, the OECD Guidelines, as mentioned in the report, also requires that these controls, compliance programmes etc. must be “developed on the basis of a risk assessment addressing the individual circumstances of an enterprise, in particular the bribery risks facing the enterprise (such as its geographical and industrial sector of operation)”. Consequently, the OECD’s six steps risk based due diligence approach also applies to corruption/bribery.

Performance requirement

A final conviction on corruption or bribery of the senior management, including the senior management of its subsidiaries, would indicate non-compliance with this requirement.

It is also a requirement that the company communicates on its corruption/bribery processes and performance. A company would, for instance, be non-compliant with the MS if it fails to report on its anti-corruption strategies and processes in its sustainability reporting.

Regarding SMEs, the report suggests that “SME information on anti-corruption measurements adequate to the size and risk profile of the company must be disclosed to consider the company MS compliant. An SME is not compliant if it has been finally convicted of corruption.”

If a company fails on the performance requirements, the company will be non-compliant for as long as it has not implemented processes to prevent such breaches in the future.

3. Taxation and fair competition

Taxation and fair competition are not covered by the OECD six steps due diligence approach as this requirement, according to the OECD Guidelines, is not applicable to these two responsible business conduct topics. Nevertheless, the OECD Guidelines include process requirements reflecting due diligence which the report uses for assessing non-compliance with the MS in relation to taxation and fair competition.

Process requirement for taxation

The company does not treat tax governance and compliance as important elements of oversight, and there exists no adequate tax risk management strategies and processes as outlined in OECD MNE Guidelines covering tax. Tax compliance includes tax avoidance through aggressive tax planning.

These outlined strategies and processes include a commitment towards co-operation with authorities, transparency and tax compliance that is reflected in risk management systems, structures, and policies. Corporate boards should adopt tax risk management strategies to ensure that the financial, regulatory, and reputational risks associated with taxation are fully identified and evaluated. Furthermore, a company with associated entities (companies belonging to same group) should apply the arm’s length principle to avoid inappropriate shifting of profits or losses and minimise risks of double taxation.

Process requirement for fair competition

The company does not promote employee awareness of the importance of compliance with all applicable competition laws and regulations and does not train senior management in relation to competition issues.

Performance requirement for taxation or fair competition

The company has been found guilty of tax evasion and the company or its senior management, including the senior management of its subsidiaries, has been found in breach of competition laws.

According to the report, the status of non-compliance should be upheld until the company has proved that its processes have been improved in a way that a repetition of breaches of the performance requirements is unlikely.

The report appears not to recommend any process requirements for SMEs, but just the performance requirements. Although there are good reasons for this recommendation, it should be reminded that the OECD Guidelines do not distinguish between SMEs and other companies. The implementation of the requirements to SMEs should however be proportionate to their size.

"The report appears not to recommend any process requirements for SMEs, but just the performance requirements. Although there are good reasons for this recommendation, it should be reminded that the OECD Guidelines do not distinguish between SMEs and other companies."

JOACHIM DELVENTHAL

HUMAN RIGHTS EXPERT, RAMBOLL MANAGEMENT CONSULTING.

Project finance/Special purpose vehicles (SPVs) and banks/investors

In this section we address the report’s comments on the particularities for project finance/ SPVs and banks/investors.

As the MS as well as the UNGP and OECD Guidelines apply to these actors, the report suggests that the process and performance requirements under the four topics are likewise applicable to project finance/ SPVs and banks/investors, if these actors are the undertakings carrying out the activity covered by the taxonomy.

If the bank is not the undertaking carrying out the activity, the entity receiving the loan or other form of financing is “the undertaking carrying out the activity” and should meet the respective criteria for companies. However, financial institutions, investors, etc. are still expected to comply with the UNGP or the OECD Guidelines, but not because of the Taxonomy and the MS.

Regarding project finance/SPVs, the report observes that “the undertaking which has to be compliant with MS would be the undertaking which is implementing the project” and that the SPVs, regardless the fact that it could be regarded as a SME should comply with the MS requirements for non-SMEs, because the projects are often huge and require large sums of finance.

If a company owns more than 50% of a SPV, then that company must comply with the MS. If there is no majority shareholder, the SPV is considered the undertaking which is carrying out the activity and should comply with MS.

Linking to future instruments

The report links the process and performance requirements to the new CSRD and the European Sustainability Reporting Standards (ESRS) to illustrate how companies that fall within the scope of these instruments will have to report on and be audited against the topics (it is still unclear how taxation is covered by the CSRD). However, the CSRD also provides an opportunity for the companies to communicate on the topics and be compliant with the MS. Companies that must comply with the MS, but are not covered by the CSRD, can of course still be inspired by it and decide to be audited against it.

The proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) covers the human rights (including labour and consumer rights) topic of the MS. The report observes that “if the CSDDD proposal becomes law and a significant overlap and alignment with Article 18 standards is maintained, compliance with the law would in the future serve as a proxy for Article 18 alignment on human rights, including labour rights by companies”.

About the authors

Thomas Trier Hansen is a Chief Advisor on responsible business conduct in Ramboll Management Consulting and has worked in more than 50 countries on various aspects of human rights over the last two decades.

Joachim Delventhal is an Associate Manager in Ramboll Management Consulting and PhD Fellow, specialising in strategy and responsible business. He has a background from working with human rights in various sectors, including international companies, IGOs, and NGOs.

Want to know more?

Thomas Trier Hansen
Chief Advisor
+45 51 61 23 59
Joachim Delventhal
Associate Manager

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