Clifford Chance

The report will assist those seeking to comply with the EU Taxonomy Regulation to assess whether an undertaking has procedures to align with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises.

Minimum Safeguards

To qualify as an environmentally sustainable investment under the EU Taxonomy Regulation ("TR"), investment in economic activities must meet 4 mandatory criteria, including compliance with "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" ("Minimum Safeguards").

In October, the Platform on Sustainable Finance ("PSF") published its Final Report on Minimum Safeguards. The PSF, comprised of experts representing industry, NGOs and several EU institutions, advises the European Commission on the functioning of the TR and on sustainable finance more broadly.

International standards for responsible business conduct

The UN Guiding Principles on Business and Human Rights (the "UNGP") and the OECD Guidelines for Multinational Enterprises (the "Guidelines") are instruments articulating non-legally binding expectations on businesses to meet internationally recognised laws and standards on responsible business conduct. The UNGPs articulate a due diligence framework to enable companies to know and show that they respect internationally recognised human rights. This framework is incorporated into the Guidelines which sets expectations on a range of issues including environment, human rights and anti-corruption.

The UNGP and the Guidelines have increased in visibility in recent years. In addition to the TR, they are now referred to or incorporated in EU legislative instruments such as the EU Sustainable Finance Disclosure Regulation ("SFDR"), the EU Non-Financial Reporting Directive and its successor, the proposed EU Corporate Sustainability Reporting Directive ("CSRD") and the associated European Sustainability Reporting Standards ("ESRS"). Also, the proposed EU Corporate Sustainability Due Diligence Directive ("CSDDD"), which aims to complement the TR, requires certain undertakings to carry out due diligence on potential and actual adverse human rights and environmental impacts. It builds on the UNGP and the Guidelines, promoting their implementation.

The requirement for Minimum Safeguards in the TR represents a significant step forward in the EU's ongoing incorporation of responsible business conduct standards into its regulatory framework.

However, for many undertakings based or operating in, or raising funds in the EU, and those categorising their products on the spectrum of green, the requirement to assess whether undertakings have Minimum Safeguards in place poses a new and significant challenge.

Indicators of non-compliance with Minimum Safeguards

The UNGP and the Guidelines are broadly-worded. Neither they nor the TR prescribe a specific methodology for assessing whether procedures are aligned with the UNGP and the Guidelines, leaving undertakings to determine for themselves whether or not alignment has been achieved.

The PSF notes that the financial market has struggled to understand how Minimum Safeguards should be implemented and fails to understand what compliance/non-compliance with Minimum Safeguards means. Proxies for implementation have developed, such as membership of the UN Global Compact, NGO reports, and controversy screening. Also, ESG ratings are relied on heavily.

The PSF proposes two criteria which indicate non-compliance with Minimum Safeguards:

1. The undertaking has not established adequate human rights due diligence ("HRDD") processes as per the UNGP and the Guidelines.
2. There are "clear indications" that the undertaking does not adequately implement HRDD resulting in "human rights abuses".

If either of these criteria apply, the PSF suggests that the undertaking should be considered as non-compliant with Minimum Safeguards.

The PSF report explains that disclosure under the ESRS (required by the CSRD) is likely to provide an understanding as to whether an undertaking has implemented adequate HRDD under criteria (1) above (see p.36 of the report). Further, the PSF envisages that undertakings' compliance with the CSDDD will go far to demonstrate alignment with the Minimum Safeguards, if it comes into force. For undertakings not bound by the CSRD or the CSDDD, the PSF notes that analysis of undertakings' performance against published assessment frameworks such as the World Benchmarking Alliance, will provide useful indicators of compliance with Minimum Safeguards.

As for assessing an undertaking's track record for criterion (2), indicators demonstrating that it does not adequately implement HRDD include:

• where the undertaking or its top management are found to be in breach of "human rights due diligence laws" (such as the CSDDD, labour laws, consumer protection laws, data protection laws, humanitarian laws, and criminal law); or
• where an undertaking refuses to engage into a dialogue with a National Contact Point of the Guidelines, or a National Contact Point concludes that an undertaking is in 'breach' of the Guidelines; or
• an undertaking does not respond to concerns raised by the Business and Human Rights Resource Centre within 3 months.

Evolving guidance

The PSF report was finalised while relevant EU legislation remains in draft. The PSF acknowledges that its guidance should be revised in due course as practice on implementing Minimum Safeguards evolves. In any event, the PSF acknowledges that the criteria will not be conclusive in each case, and certain aspects of their application are left unspecified. For example, the PSF report leaves open the question of when adverse litigation is sufficiently material to indicate non-compliance with Minimum Safeguards.

Further, applying the criteria as framed by the PSF may not always be appropriate – for example where the investment is direct and is not made through an undertaking (e.g. direct real estate investing).

While the two criteria provide a good starting point as to how to approach compliance with Minimum Safeguards, the PSF report does not provide a complete methodology to be adopted wholesale. There is no replacement for engaging with an undertaking fully to understand what policies and processes it has in place to meet the responsible business conduct expectations elucidated in the UNGP and the OECD Guidelines, as per the Minimum Safeguards requirement.