The role of minimum safeguards in the EU taxonomy is critical for any organisation reporting on the taxonomy. There is certain criteria for minimum safeguards that have to be met in order to be compliant. In this blog, we will explain what the EU taxonomy's minimum safeguards criteria is. We will also explain what is the meaning of minimum and the related risks.

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In the technical report published in 2020, some attention was paid to the minimum safeguards criteria within the EU taxonomy, implying that companies did not just need to meet  the environmental requirements in the taxonomy, but also the social ones. The latter were at this time very imprecise, however last October a suggested guidance document was issued.

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Alignment with the minimum safeguards referred to in Article 18 require procedures and actions implemented by an undertaking that is carrying out an economic activity to ensure compliance with the OECD guidelines for multinational enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identifies in the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work and the International Bill of Human Rights. 

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While no real clarity was initially provided on the actual content of the minimum safeguards, the below matrix illustrates the content of the underlying instruments:

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From this, a two pronged approach was created that addresses the concerns to measure alignment with the Minimum Safeguards requirements:

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1. Human Rights Due Diligence (PROCESS):

• The undertaking has implemented adequate HRDD processes which follow the UNGP and OECD guidelines.

2. Checks on outcome (PERFORMANCE):

• The undertaking should not have been involved in certain activities or incidents. 
• No refusal to enter into dialogue on a case at an OECD National Contact Point (NCP) or no final statement on non-compliance from an OECD NCP
• No not-responding to allegations by the Business & Human Rights Resource Center (BHRRC)

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Thus in order to be compliant, the company should not only be doing the risk based human rights due diligence (the positive), but it also should not have been held liable in court for human rights violations or workers rights violations (the negative).

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Human Right Due Diligence: What is it and how does it work?

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The risk based due diligence process is prescribed both in the UN Guiding Principles for Business and Human Rights and OECD Guidelines for Multinational Enterprises. While this is a dynamic and cyclic process, the ‘policy’ step can be considered as the first step. An enterprise needs to have a commitment, or a statement, describing its stance on human rights, and highlighting the commitments that it makes. It is preferred that the OECD Guidelines and UN Guiding Principles are referred to in this statement. 

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Alternatively, the enterprise can start with the ‘risk assessment’, as once risks are mapped, a clearer pathway to creating the policy framework for the enterprise is outlined. 

Once the risk assessment is done, the next step is to put in place proper, relevant and effective measures to handle the most salient risks. This means that an organization shouldn’t work with all the risks, all the time. Rather, it should prioritize. And subsequently, the measures should be tracked to ensure that they work as intended. The last step involves reporting on the risks identified, and what the company has done to handle those. These essentially are the key steps of the required due diligence process. 

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It is important to use a risk based approach, but the important question is: risk to whom? Often companies  interpret this as a risk to themselves, and what they need to do to protect themselves. But in this case, it is different.

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When applying a  risk based due diligence process regarding human rights, companies  need to identify if or what negative effects its activities might have on people - being employees, local communities etc.  

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What is social risk?

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Human rights risks are often far from companies’ activities, but they can also be very close to. Public safety, child labour, forced labour, corruption, unregulated work, low wages, pollution - all of these, and more, are social risks or human rights risks that can be linked directly to companies’ activities. 

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How to map risk?

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We recommend starting the analysis of risk in the following order:

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1. Own company and employees: Analyze working conditions and other internal issues in the company and through partnerships with shared responsibility i.a. through joint ventures or the use of subcontractors. 
2. Customers and end users: Analyze if you are an enabler for the customers’ activities and how your products are used. This also includes evaluating that your products are used in a good way. 
3. Local community: Assessing the risks that the local community can be negatively affected. This includes potential risks that may rise by not interacting with the local community in a proper manner.
4. Supply chain: The responsibility gets weaker further out in the supply chain, but grows where there is risk for more serious violations that the buyer should have known about. 

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Inherent risks

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There are certain risks, as discussed above, that are related to the field or area of work that an organization is involved in. This can be understood as ‘sector risk’. While there are some sector risks, there are also some risks related to countries.One can do a  high level assessment of the risks before investigating deeper. To better understand where in the company’s activities the risks might be, one can use indexes and tools to map country risks and sector risks. One can also use reporting about risks or misconduct in other companies in the same sector as your company. 

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When it comes to country risks, there are some indexes that can be used:

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• The Rule of Law Index
• The World Press Freedom Index
• Transparency International’s corruption perception index
• The International Trade Union Confederation’s index on workers’ rights
• The Freedom House index
• The US State Department index showing high-risk products

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Prioritization of risk

There are certain indicators that can be used for prioritizing among different risks that may have come up in your assessment:

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1. Scale: Level of severity of the identified risks and/or violations
2. Scope: Number of people that risk being negatively impacted 
3. Leverage: Economy and other key inputs like how critical a buyer the company is in relation to particular supplier. 
4. Probability: The likelihood of a negative incident.

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Mitigative and preventative action

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In order to prevent and mitigate identified risks, one should introduce different measures for different stakeholder groups. Here are some examples of preventative actions to reduce risks for different groups:

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1. Own employees: implementing health and security measures, closing gender pay gap
2. End user: secure and safe use of products, no misuse
3. Local communities: Initiate dialogue and involvement, reducing pollution
4. Suppliers: Joining industry dialogue, improving procurement practices 

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It is key to have a dialogue with stakeholders at all levels, from employees to the local community, to be able to correctly identify risks and put in place relevant measures. 

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The company needs to report on the risks that have been identified and the measures that have been put in place. Thus communication and remediation are very important. 

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What are the new topics introduced in the guidance? 

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In addition to the human rights due diligence requirements, the expert group has suggested adding three more topics; from the OECD guidelines for multinational enterprises. 

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Anti corruption: 

• Process: The undertaking shall develop and adopt adequate internal controls, ethics and compliance programs, or measures for direction of corruption or bribery.
• Performance: The undertaking or the senior management should not have been convicted of bribery. 

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Taxation: 

• Process: the undertaking shall treat tax governance and compliance as important elements of oversight. It should also have tax risk management strategies to ensure full identification and evaluation.
• Performance: The undertaking should not have been found guilty of tax evasion.

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Fair competition:

• Process: The undertaking shall promote employee awareness and training of senior management in relation to competition issues.
• Performance: The undertaking should not have not been found in breach of anti-competition laws.

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How can Celsia help?

At Celsia, we aim to make all aspects of your reporting on the EU taxonomy easy, so you can concentrate on more tactful goals and not get caught up within the reporting itself. When it comes to evaluating the Minimum Safeguards criteria for your organization, we have templates within our EU taxonomy solution that can help you assess your risks and take action as required.

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