EU Taxonomy minimum safeguards: Criteria for the application of external checks should be further defined

ESBG submitted its final response to the Platform for Sustainable Finance (PSF) consultation on its draft report on minimum safeguards (MS) on 6 September.

The report is intended to provide advice on the application of the minimum safeguards which bring a social and governance component to the EU Taxonomy. The report looks at human rights including workers’ rights and consumers´ rights, bribery/corruption, taxation and fair competition as core substantive topics for which compliance with minimum safeguards has to be defined. The draft report proposes a two-pronged approach for identifying non-compliance with MS, namely one related to adequate due diligence processes implemented in companies (internal checks) and the other related to the actual outcome of these processes or the company’s performance (external checks).

In its response, ESBG highlights that assessing whether a company complies with the due diligence processes should, other than relying on external checks as only possibility, be demonstrated by: i) proving that the applicable national legislation provides for sufficient guarantees concerning the specific topic; ii) self-declarations made by the client concerning the specific topic.

Moreover, ESBG emphasises that gravity thresholds for non-compliance should be defined, so that not every minor violation (e.g. of taxation or work laws) leads to the establishment of an external check.

Furthermore, when assessing compliance with MS, the report recommends that the focus should be on assessing the human rights due diligence processes of a company, rather than on controversy checks e.g. media coverage (currently employed by ESG ratings agencies), as it is considered that the latter is based on value judgement and is sometimes difficult to justify. ESBG believes that the administrative cost derived from direct analysis of due diligence processes would be too burdensome for institutions and emphasizes that they should rely on ESG ratings agencies in order to not impair financial activity.

Finally, ESBG calls for further clarifications on the level of application of MS in particular cases, e.g. an exposure to a company active in sectors that by definition do not fulfil the minimum safeguards to be taxonomy-eligible or -aligned, even if the specific transaction finances activities that fulfil all requirements.

As a next step, the Platform will analyse the feedback received and prepare the final report. ESBG will continue to monitor this very important topic, with the possibility to get involved at a later stage.