The EU's Platform on Sustainable Finance ("PSF") – an expert group established to advise the European Commission – recently published a helpful draft report on so-called "minimum safeguards" ("MS") under sustainable finance legislation.
The concept of "minimum safeguards" appears in various recent EU ESG rules and is concerned with the negative impacts of economic activities. Most notably, the EU Taxonomy Regulation makes clear that an activity will not be "taxonomy-aligned" unless it is "carried out in compliance with minimum safeguards", which are defined as "procedures implemented by an undertaking … to ensure … alignment with the OECD Guidelines for Multinational Enterprises ("OECD Guidelines") and the UN Guiding Principles on Business and Human Rights ("UNGP").
The report finds that, at present, only a small percentage of entities are complying with these minimum safeguards. However, there is an increasing market awareness of the need to implement due diligence ("DD") processes in preparation for upcoming EU rules, leading to an expectation that significantly more entities will be compliant in the future. The overriding message from the report is that compliance with MS involves two distinct elements – process and performance.
Firms should note that the report is still only in draft and is not expected to be finalised until later this year. There may be some pushback against the relatively high burden imposed on asset managers and other investors. Moreover, this advice, even when finalised, will not have any particular legal status and will not require the Commission to take any action; indeed, it is entirely possible that the Commission will act in a way that is inconsistent with the PSF's advice. For now, however, the report provides welcome clarity to corporates looking to ensure compliance with minimum safeguards, as well as to investment firms looking to design and implement due diligence procedures to check an entity's compliance with minimum safeguards.