ESG: the Platform on Sustainable Finance Report on minimum safeguards

On 11 October 2022, the EU’s Platform on Sustainable Finance (PSF) published a “Final Report on Minimum Safeguards” (the Report).

Background to the Report

Article 3 of the Taxonomy Regulation requires environmentally sustainable economic activities to comply with certain minimum safeguards (MS) referred to in Article 18 of the same Regulation.

Article 18(1) specifies that the MS must be procedures which an undertaking carrying out an economic activity implements to ensure alignment with

• the OECD guidelines for Multinational Enterprises
• the United Nations Guiding Principles on Business and Human Rights
• 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.

The PSF was asked by the European Commission (the Commission) to advise on the functioning of the MS, with its advice to include both

• an overview of what procedures undertakings currently apply to ensure alignment with the provisions in Article 18 and
• relevant national frameworks which Member States have in place in respect to matters covered by the MS clause.

The PSF consulted on its draft report in July 2022 and the Report takes into account the responses received to that.

The advice provided by the PSF to the Commission is, however, non-binding.

What are the Report’s key recommendations?

The Report identifies four core topics for which compliance with minimum safeguards should be defined, namely:

• human rights, including workers’ rights
• bribery/corruption
• taxation
• fair competition

The Report also recommends that the following criteria should be used as a sign of an undertaking’s non-compliance with the MS:

• inadequate or non-existent corporate due diligence processes on human rights, including labour rights, bribery, taxation, and fair competition
• final liability of companies in respect for breaches of any of the above topics
• the lack of collaboration with a National Contact Point, and an assessment of non-compliance with OECD guidelines by an OECD NCP
• non-response to allegations by the Business and Human Rights Resource Centre.

At the end of the Report, the PSF sets out a table summarising its recommendations on criteria for MS alignment for different types of undertaking.

What does the Report cover?

The Report assesses connections between the MS and the key EU legislation in this area, namely

• the Commission Delegated Regulation made under Article 8 of the taxonomy Regulation
• the Sustainable Finance Disclosure Regulation (SFDR)
• the SFDR RTS
• the ESAs’ Final Report of October 2021 on the draft SFDR RTS
• the Corporate Sustainability Reporting Directive (CSRD) and
• the proposed Corporate Sustainability Due Diligence Directive (CSDDD).

It also considers further EU initiatives on taxation, corruption and fair competition.

The PSF proposes that its advice should be revised once the CSRD and CSDDD are finalised and some experience on practical implementation and court rulings has been accumulated.

Given the SFDR’s special role in the context of MS, the Report incorporates the five mandatory social principal adverse impacts (PAI) of the SFDR in its advice.

Given that Article 18 specifically requires the MS to be aligned with

• the OECD guidelines for Multinational Enterprises (MNE),
• the United Nations 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 and
• the International Bill of Human Rights,

the Report identifies four core topics for which compliance with minimum safeguards should be defined, namely:

• human rights, including workers’ rights
• bribery/corruption
• taxation
• fair competition

In addition, the Report provides advice to the Commission on

• project finance
• SME financing
• green bonds
• how to assess sub-sovereign compliance with MS.

What next?

As is made clear on the relevant Commission webpage, “[t]he final report will be carefully analysed by the Commission, but it does not bind the Commission on any decision on the matter”.

We will be tracking this topic and will report on any future developments that the Commission proposes.