Mastering the EU Taxonomy’s Minimum Protection Criteria Effectively

The requirement to implement the EU Taxonomy’s minimum protection criteria has been in effect since 2021. However, starting in 2025, the scope of application will be expanded to include all large companies. To best prepare for the implementation of the taxonomy now, it makes sense to review the available guidance. In addition to the detailed FAQs, the report on minimum safeguards published in 2022 is particularly helpful as a guide to the EU taxonomy. In this article, learn what the report covers and how you can make the most of it.

The EU Taxonomy at a Glance

The EU Taxonomy Regulation establishes a clear framework for classifying “green” or “sustainable” economic activities in the EU. It sets out clear rules for when an economic activity is considered sustainable. As a result, such companies stand out positively and attract more investment. The legislation aims to promote environmentally friendly business practices and focuses on six environmental objectives, to which a total of 243 economic activities are currently assigned: climate action, adaptation to climate change, sustainable use and protection of water and marine resources, transition to a circular economy, prevention and reduction of pollution, and protection and restoration of biodiversity.

If you are affected by the EU Taxonomy, you must demonstrate how sustainable or “green” your business activities are. To do so, you must determine and report the proportion of your business that is taxonomy-eligible and taxonomy-compliant for the following three indicators through a five-step process: Green revenue, green investments, and green operating expenses. The regulation already applies to fiscal years beginning in 2021, albeit with a limited scope. This scope will now be expanded to include all other large companies for fiscal years beginning on or after January 1, 2025. It thus affects the same companies that are now also subject to CSRD sustainability reporting for the first time. The Delegated Regulation on the EU Taxonomy can be found here.

The Significance of the Report on the EU Taxonomy’s Minimum Safeguard Criteria

In October 2022, the Platform on Sustainable Finance published its report titled“Final Report on Minimum Safeguards.” The Platform on Sustainable Finance is an expert group of the European Commission. It serves in an advisory capacity. As such, the report on minimum safeguards is intended as an opinion on EU legislation and is not legally binding. Nevertheless, the report provides useful guidance for the implementation of the Taxonomy Regulation. In particular, Article 18 of EU Regulation 2020/852 addresses minimum safeguards. Within the framework of the EU Taxonomy, these minimum safeguards are intended to ensure that economic activities comply with minimum requirements regarding human rights, taxation, corruption, and fair competition.

What does the Sustainable Finance Report say?

The report on minimum safeguards outlines criteria that can be used to determine whether sustainable business practices also respect human rights and other social and governance issues, and are therefore “truly sustainable.” The report is based on the following principles:

OECD Guidelines for Multinational Enterprises,
United Nations Guiding Principles on Business and Human Rights (UN Guiding Principles),
Fundamental principles and rights set forth in the eight core conventions of the International Labor Organization (ILO) and
International Charter of Human Rights

Companies should adhere to the principle of “avoiding significant adverse impacts.” This minimum standard covers four areas in which companies must comply with the minimum requirements:

Human rights (including labor and consumer rights)
Bribery, Solicitation of a Bribe, and Extortion
Taxation
Fair Competition

The report explains that the first step is to ensure that appropriate processes are in place within the company. The second step involves evaluating the actual results of these processes. This results in two criteria for reviewing the four topics mentioned above, although these criteria vary slightly depending on the topic:

Process criteria
This pertains to the existence of appropriate due diligence procedures. An actively implemented due diligence process is important here. The requirements covered here are also reflected in a similar manner in the CSRD, e.g., under GOV-4.

Performance and Outcome Criteria
This criterion assesses whether there are any controversies in the areas mentioned above. In this context, “controversy” refers to a court-established violation of human rights, including labor rights, or a violation of tax laws or competition law. In addition, the assessment examines whether the OECD National Contact Point was not engaged or whether the company failed to respond to communications from the Business and Human Rights Resource Centre (BHRRC). Even if a controversy has already been resolved but the relevant processes have not yet been implemented, the company fails the assessment. However, if the processes are in place, compliance can be achieved despite the controversy. The performance criterion is therefore viewed more as a warning sign of inadequate processes, while the process criterion represents the more dominant requirement.

If a company fails to meet either of these two criteria, it does not comply with the minimum safeguards. Any related economic activity would therefore not be taxonomy-compliant.

Optimally Meet the EU Taxonomy’s Minimum Protection Criteria with CONSUST

In addition to the detailed legal texts themselves, the EU has compiled a comprehensive collection of documents, including the paper described here and detailed FAQs. As a result, companies can easily lose track of the big picture during implementation. To make the most of this guidance and implement the taxonomy efficiently, we have integrated all FAQs and the minimum protection criteria into our FramesCube software. The FramesCube EU Taxonomy Software maps out the entire five-step process—all the way to the final EU Taxonomy Report—in a structured workflow. Contact us for a no-obligation consultation and learn more about the FramesCube software and its potential for your company.