Advancing Latin America's Taxonomies for Social Safeguards Compliance

Minimum Social Safeguards in Taxonomies

Minimum Social Safeguards (MSS) in sustainable finance taxonomies ensure that economic activities seeking to be labeled 'sustainable' or 'green' meet basic compliance with rules and regulations designed to uphold key social objectives. These objectives, sometimes also called priorities or pillars, vary depending on the national context. Human rights, including labor and working conditions, alongside the elements of corporate governance, considering the prevention of corruption and bribery, fair competition and gender equality are among the most common types of established social objectives.

These priorities or pillars are embodied in a set of international references that establish basic rights or national and international standards and guidelines on social and human rights. Among the most referenced in the eight taxonomies within the Latin American and Caribbean (LAC) region and the European Union (EU) are (See Table)

· The International Bill of Human Rights

· The Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises

· The United Nations Guiding Principles on Business and Human Rights (UNGPs)

· The International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work

· The International Finance Corporation Performance Standards.

Table: Minimum Social Safeguards – International References and Guidelines

Notably, most taxonomies reference international frameworks as a guide for MSS, following the EU model, which requires entities (businesses, companies and investors) seeking classification under the taxonomy to align their procedures with the first four documents mentioned above.

In other cases, these international frameworks are complemented by national legislation and general criteria for the fulfillment of social objectives. For example, in Panama, Costa Rica, Paraguay, the Dominican Republic and the Regional Taxonomy of Green Finance, the entity is required to have a social management plan or system tailored to the characteristics of the activities to be developed and aligned with the international and national agreements, laws and/or regulations established by the jurisdiction.

Despite the recent momentum around including social objectives, specifically MSS in taxonomies, the level of detail in terms of how MSS are applied in most taxonomies is still very low, which affects their lagging compliance rate. For example, at the beginning of 2025, the Report of Results and Recommendations of the Pilot Program of the Sustainable Taxonomy of Mexico identified that 61.5% of the financial operations studied do not provide information or knowledge on the minimum safeguards’ compliance. The documents to which Mexico refers (also reflected in the EU section of the table above) are mainly Responsible Business Conduct documents. These documents are characterized by covering a wide range of social issues and establishing general principles for voluntary implementation. However, they lack clear indicators for measurement, which limits their effectiveness and the utility of the taxonomies that reference them.

In the same way, the EU Taxonomy expert group—in its Final Report on Minimum Safeguards (2022)—identified the low level of compliance with their MSS, which led to stronger safeguards by incorporating due diligence through adopting the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD).

Due diligence, an opportunity to facilitate the implementation of MSS

Due diligence, according to the OECD Guidelines for Multinational Enterprises, is understood as the process through which entities can identify, prevent, mitigate and be held accountable for their actual and potential negative impacts as an integral part of business decision-making and risk management systems.

What is the benefit of using this concept as a standard? Due diligence allows the evaluation to be adjusted to the size and circumstances of the entities. It helps to avoid extensive and detailed reports that serve as obstacles to showing compliance. This element is particularly important as excessive information requirements make it difficult for small and medium-sized enterprises to access sustainable finance.

For example, the EU Taxonomy is based on the OECD definition and establishes two MSS criteria in its Final Report on Minimum Safeguards. In particular, the first of them, "Existence of adequate due diligence processes for EU companies covered by the CSRD," includes five requirements associated with OECD guidelines compliance, the UNGPs and the European Standard for Sustainability Reporting.

Also, in the Australian Taxonomy draft (December 2024), criteria are proposed to cover three social pillars:

1) Corporate governance

2) Human rights

3) Rights of First Nations peoples and cultural heritage.

In each pillar, Australia proposes a series of criteria, where under the second pillar (human rights), it adopts the concept of due diligence, thus aligning itself with the EU and seeking compliance with the OECD and the UNGPs guidelines.

The first MSS approach in the LAC region that includes due diligence

In the LAC region, Chile has spearheaded the inclusion of MSS in its national Taxonomy of Environmentally Sustainable Activities (T-MAS) by incorporating due diligence elements and creating technical screening criteria (TSC). The T-MAS has made significant advancements in creating robust MSS frameworks by becoming the first taxonomy in the region that aligns with international standards by translating their principles into two key safeguards and eight TSCs, ensuring seamless implementation.

The first proposed safeguard focuses on meeting the need to demonstrate that the entity has effective procedures to prevent non-compliance with national regulations on environmental, labor, free competition, consumer protection, as well as the prevention of economic and/or environmental crimes. For the second safeguard, Chile aligns with the EU Taxonomy by explicitly introducing due diligence to demonstrate compliance with human rights. In this way, it establishes that for an entity to "identify, prevent, mitigate and report on its actual and potential impacts on human rights, it must demonstrate due diligence,” which aligns with the OECD definition.

To accompany these two safeguards, Chile's T-MAS includes eight TSCs—three for each MSS and two (one for each) negative conditions. These negative conditions refer to sanctions or regulatory non-compliance, that if adhered to, the entity would not be able to obtain the sustainable label.

The image below illustrates the two safeguards mentioned above and their criteria:

Source: Own elaboration

*CCSBSO: Central American Council of Superintendents of Banks, Insurance and Other Financial Institutions. This council has actors from Nicaragua, Guatemala, the Dominican Republic, Panama, Honduras, Costa Rica and Colombia.

Although these TSCs should be developed in greater detail and with clarity by the T-MAS governing body, their inclusion undoubtedly constitutes a step forward in the safeguards’ development, implementation and compliance within the LAC region. With this step, Chile becomes a pioneer country in the region and one of the first globally to provide a greater level of detail in the implementation of MSS. The establishment of specific safeguards and technical criteria will facilitate compliance and set the tone for the development of more detailed and specific indicators to protect the social pillars in the environmentally sustainable activities around the world.

Building off Chile’s Momentum

Based on this regional milestone, countries that aspire to develop their taxonomy count on Chile's MSS as a solid reference that they can adopt and adapt to their local context. In addition, this sets the standard for MSS to not only remain as a reference to international guidelines and documents but rather encourage existing taxonomies to strengthen their established safeguards. This will help to ensure that "green" or "sustainable" investments meet minimum social criteria, as well as contribute to environmental and climate goals.

Key messages:

1. In the Latin American and Caribbean (LAC) region, all sustainable finance taxonomies incorporate Minimum Social Safeguards (MSS) to ensure that taxonomy-aligned activities labeled as “green” or “sustainable” comply with established human rights, labor and governance standards. However, most taxonomies refer to international and national documents without offering detailed guidance on their application, leaving users without sufficient direction to implement them and demonstrate compliance.

2. Due diligence in taxonomies, such as those implemented by the EU and Australia, enhances MSS compliance by enabling entities to identify and address potential negative impacts on human rights. These are tailored to the company or business’ specific size and circumstances, reducing the need for overly burdensome reporting.

3. Chile has emerged as a pioneer in the LAC region by incorporating due diligence into its Taxonomy of Environmentally Sustainable Activities (T-MAS) and establishing clear criteria for evaluating MSS.