It could take several years before a final conviction of a human rights violation. This creates practical problems as a convicted entity may have been reported as Taxonomy-aligned in past disclosures while a conviction in effect shows that those investments in fact were not Taxonomy-aligned. Furthermore, if the entity improved and audited their due diligence practices before the conviction, it does not affect current alignment, therefore having little impact on investment decision making.
The effectiveness of convictions as an indicator depends on the effectiveness of law enforcement. This is problematic in jurisdictions where human rights violations are most likely to occur. If the company is then also based (not just operating) outside of the EU/OECD, it is unlikely the issue would be addressed through such formal channels.
A methodology would be needed to establish the materiality of the non-compliance issue at hand. We argue that frequency and severity of incidents need to be accounted for. Depending on the severity, a single incident may be insufficient to determine the quality of due diligence, whereas a recurring incident would better indicate a systematic problem.
The current guidance on Minimum Safeguards only partly overlaps with the topics required under the SFDR Principal Adverse Impacts (PAI) statement and good governance requirements. We recommend integrating the other relevant topics to create a harmonized implementation and data requirement, thus leading to a more cohesive sustainable finance framework.
The accepted criteria for Minimum Safeguards may have practical implications for current SFDR PAI indicator practices. For example, many market participants estimate violations using controversies screening. Although we acknowledge that SFDR PAI indicators are more for disclosure purposes and the Minimum Safeguards serve as screening criteria, it still would be inconsistent if certain practices becomes unacceptable under Minimum Safeguards but acceptable for the PAI statement.
Would you like to respond, or should you have any questions? We would be pleased to hear from you. Please feel welcome to e-mail Ivan aan den Toorn, DUFAS policy advisor sustainability, at email@example.com.