Introduction
One of the four conditions an economic activity must meet to qualify as environmentally sustainable under Article 18 of the EU Taxonomy Regulation (Regulation) is adherence to the “Minimum Safeguards”.
The Regulation describes the Minimum Safeguards as “procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs)”.
In other words, no matter how environmentally “green” an activity is, it will not qualify as environmentally sustainable under the Regulation if the relevant undertaking has not implemented appropriate measures, aligned to the UNGPs and OECD Guidelines, to mitigate human rights risks.
In October 2022, the EU Platform on Sustainable Finance (PSF), an expert group established to advise the European Commission, published its final report to clarify how companies should interpret and implement these Minimum Safeguards (Final Report).
OECD Guidelines and UNGPs
Before turning to the Final Report, it is important to understand the OECD Guidelines and UNGPs in context. Both are soft law instruments (in other words, they are not legally binding) that set out due diligence expectations of businesses in relation to human rights and, in the case of the OECD Guidelines, responsible business conduct more broadly (which extends to the environment and anti-corruption).
While voluntary, the UNGPs are widely recognised as the most authoritative framework in terms of business’ human rights responsibilities. The UNGPs were unanimously endorsed by the UN Human Rights Council in 2011, and the principles of human rights due diligence (HRDD) set out in the UNGPs have since been incorporated into legislation in a number of countries, as well as other industry initiatives and international frameworks, including the OECD Guidelines.
The OECD Guidelines, addressed to multinational enterprises, provide non-binding principles and standards for responsible business conduct. Amongst other things, and consistent with the UNGPs, the OECD Guidelines recommend that companies implement due diligence procedures to identify, mitigate, prevent and account for any actual or potential adverse human rights impacts arising from or connected with their own operations and business relationships.
While these HRDD principles are widely endorsed, the expectations of the OECD Guidelines and UNGPs are broadly framed and expressed at a high level. Assessing an undertaking’s ‘compliance’ with these frameworks is therefore not straightforward. This inevitably gives rise to uncertainty in terms of what standard of conduct is required to meet the Minimum Safeguards criterion in Article 18 of the Regulation.
The Final Report references studies that show a heavy reliance by the financial market on indicators such as an undertaking’s ESG ratings, membership of the UN Global Compact, NGO reports, or controversy screening. It notes that relying on such external data sources misunderstands the core HRDD requirements of the UNGPs (and OECD Guidelines) that underpin the Minimum Safeguards.
Further PSF guidance
In light of this conclusion, the PSF provides further guidance on compliance with the Minimum Safeguards, referencing the OECD Guidelines and UNGPs, as well as emerging legislation such as the EU Corporate Sustainability Due Diligence Directive (CSDDD), which draw from the UNGPs.
The PSF advises that HRDD is at the heart of the Minimum Safeguards. This entails:
- Adopting and embedding a commitment to HRDD into policies and procedures (UNGP 16 & OECD RBC DD Guide1 step 1).
- Identification and assessment of adverse impacts, including through stakeholder engagement (UNGP 17, 18 & OECD RBC DD Guide step 2).
- Taking actions to cease, prevent, mitigate, and remediate adverse impacts (UNGP 17, 19 & OECD RBC DD Guide step 3).
- Tracking the implementation of these actions and its results (UNGP 17, 20 & OECD RBC DD Guide step 4).
- Communicating publicly on the approach to HRDD, and actions taken to avoid and address adverse impacts (UNGP 17, 21 & OECD RBC DD Guide step 5).
- Providing or cooperating in remediation, including establishing or participating in grievance mechanisms where individuals and groups can raise concerns about adverse impacts (UNGP 22, 29, 31 & OECD RBC DD Guide step 6).
Key indicative criteria
The PSF guidance proposes two criteria that indicate adherence to the Minimum Safeguards. If either apply, an undertaking is unlikely to be compliant:
- The company has not established adequate HRDD processes, as outlined in the UNGPs and OECD Guidelines.
- There are clear indications that the company does not adequately implement HRDD resulting in human rights abuses.
Criterion 1 is both procedural and outcome-based. It requires scrutiny of whether the company follows the six steps above, and the effectiveness of the company’s HRDD in avoiding and addressing human rights impacts. The Report notes that compliance by undertakings with emerging due diligence and reporting legislation is likely to support this assessment. Specifically:
- Disclosures by an undertaking under the European Sustainability Reporting Standards, as required by the forthcoming Corporate Sustainability Reporting Directive (CSRD), will support an understanding of whether such undertaking’s HRDD procedures are “adequate”.
- The same is true of undertakings that adhere to the HRDD requirements of the CSDDD once this is in force, depending on the degree of divergence between the CSDDD and the UNGPs once this legislation has progressed through the EU legislative process.
For undertakings not required to comply with legislation such as the CSRD or CSDDD, the Report suggests Criterion 1 may be assessed by reference to the undertaking’s performance in voluntary frameworks such as the World Benchmark Alliance.
Criterion 2 focuses on specific human rights issues that may indicate inadequate HRDD, such as where:
- the undertaking or its top management is found to be in breach of HRDD laws (e.g. the CSDDD), labour laws, consumer protection laws, data protection laws, humanitarian law, and criminal law; or
- the undertaking does not participate in dialogue with an OECD National Contact Point in relation to alleged breaches of the OECD Guidelines, or does not respond to concerns taken up by the Business and Human Rights Resource Centre.
Next steps
The EU Commission will consider the Report and its recommendations, and the PSF notes that its guidance should be re-assessed once key legislation such as the CSDDD and CSRD are finalised. Investors and businesses alike should therefore continue to monitor developments as guidance around the interpretation of the Regulation continues to crystallise. In the meantime, a key takeaway is that reliance on proxy data and external indicators alone may be insufficient to understand how an undertaking conducts HRDD and manages human rights issues, and direct engagement will quite often be necessary.
Many thanks to Alice Devenuto, trainee solicitor, for her assistance with this article.