EU Platform published recommendations on the compliance with the minimum social safeguards in the EU Taxonomy
Under the EU Taxonomy Regulation, an economic activity can be considered as environmentally sustainable only if it is carried-out in compliance with so-called minimum social safeguards set-out in Article 18 of the Regulation. Under the same Regulation, the EU Platform on Sustainable Finance received a mandate to advise the European Commission on the application of Article 18 and the possible need to supplement its requirements. The minimum safeguards recommend that companies implement procedures to comply with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights.
On 11 July, the Platform published a report[7] with recommendations on how compliance with minimum safeguards (MS) could be assessed.
The report identifies four core topics for which compliance with MS should be defined:
- Human rights, including workers’ rights
- Bribery/corruption
- Taxation
- Fair competition
The report specifically recommends considering as a sign of non-compliance with MS:
- Inadequate or non-existent corporate due diligence processes on human rights, including labour rights, bribery, taxation, and fair competition
- Final conviction of companies in court in respect of any of these topics
- Lack of collaboration with a National Contact Point (NCP)[8]
- Non-response to allegations by the Business and Human Rights Resource Centre
Amongst others, the report provides advice on project finance, SME financing, and green bonds, as well as advice on how to assess sub-sovereign compliance with MS.
ECB published the results of its first (bottom-up) climate stress test
On Friday 8 July, the ECB announced the results of its first bottom-up (based on real submissions from participating banks) climate stress test[9]. The objective was to optimise banks’ and supervisors’ capacity to assess climate risk and enhance the available information on climate risk stress testing. The ECB tested the participating banks on (1) own climate stress-testing capabilities, (2) reliance on carbon-emitting sectors, and (3) performance under different scenarios over several time horizons.
For climate stress-testing capabilities, the results showed that:
- Around 65% of the banks scored “poorly” and showed significant limitations in their stress test capabilities.
- Around 60% of the participating banks do not have a climate risk stress testing framework and most banks have not yet included climate risk in their credit risk models.
The reliance on carbon-emitting sectors showed that:
- Almost two-thirds of banks’ income from non-financial corporate customers comes from greenhouse gas-intensive industries.
- Banks lack actual data and often rely on proxies to estimate their exposure to emission-intensive sectors – which is acceptable at these early stages but will need to be improved over time.
And lastly, for performance under different scenarios over several time horizons:
- Banks don’t have robust long-term strategies in place and show little differentiation between different possible long-term scenarios.
- A sudden jump in carbon prices coupled with floods and droughts would lead to losses of at least EUR 70 billion for the euro zone’s largest banks.
- Ultimately, an orderly green transition translates into lower losses than disorderly or no policy action.
The conclusion of this test was that banks need to continue working on improving their stress test frameworks’ governance structure, data availability and modelling techniques. The ECB noted that there will be no direct impact on capital through the Pillar 2 guidance this year. Participating banks have received individual feedback and are expected to take action accordingly, in line with the set of best practices that the ECB will publish in the final quarter of 2022.
FCA to delay consultation on SDR and investment labels until autumn 2022
The FCA moved plans[10] to consult on policy proposals for the Sustainability Disclosure Requirements (SDR) and the Investment Labels (DP21/4)[i] from July 2022 to autumn 2022 to take into account other international policy initiatives. DP21/4 sought initial views on SDR and a new labelling system for sustainable investment products with the aim to increase transparency for consumers and meet information requirements of institutional investors.
The key focus areas for the proposal are to have a standardised product classification and labelling system that helps customers understand the sustainability characteristics of different products, standardised information on the product’s key sustainability attributes, and granular information essential to institutional investors and a broader range of stakeholders.
EU Social Taxonomy delayed indefinitely
The EU’s effort to create a ‘social taxonomy’ has been slowed by political divisions[11] and is unlikely to be published in the next few years. While there hasn’t been any official statement from the Commission, lack of progress means that the initial timeline will not be achieved as investors were originally promised an EU Commission report outlining how it would go about creating a social taxonomy by the end of last year. That process was never completed, and no guidelines have been put forward by the EU since. While the EU’s Platform on Sustainable Finance, a body that advises the Commission, did publish a set of proposals for the social taxonomy back in February, those recommendations did not expedite the process. However, the EU’s existing taxonomy already requires companies to comply with a minimum of social safeguards such as basic labour rights and the EU may pursue other policy initiatives to give investors and companies guidance on social areas.
