Renewables Ensuring compliance with minimum social standards in the manufacture of solar modules
15.05.2024 • 5 Reading Time
Various laws and regulations at European and national level (including EU Disclosure Regulation¹, EU Taxonomy Regulation²) emphasise the need for companies to assume social and environmental responsibility beyond their purely economic interests. They also obligate market participants to monitor their impact on the environment and society, to report transparently and to implement targeted measures to promote sustainability.
The investment objective of klimaVest, which discloses in accordance with Art. 9 of the EU Disclosure Regulation, is to make a positive measurable³ contribution to the achievement of environmental objectives within the meaning of the EU Taxonomy Regulation, in particular climate change mitigation and climate change adaptation. In addition to examining the six environmental objectives of the EU Taxonomy Regulation in the context of the so-called “impact and ESG due diligence” to determine the taxonomy-alignment of investments, compliance with the minimum social and legal standards is an essential topic within this audit.
Excursion: What is the EU Taxonomy Regulation?
The EU Taxonomy Regulation sets out criteria to determine the extent to which an economic activity qualifies as environmentally sustainable. Their aim is to clearly define the degree of environmental sustainability of an investment. This regulation affects, among other things, financial market participants that launch and distribute financial products - including Commerz Real Group⁴ with the retail fund klimaVest.
The criteria for environmental sustainability focus mainly on the need to achieve certain environmental objectives. The EU Taxonomy Regulation defines a total of six environmental objectives:
What are these minimum social and legal standards?
Companies have a responsibility to ensure that their activities respect and protect human rights. This includes the implementation of a so-called minimum protection or minimum standard that ensures compliance with the OECD Guidelines for Multinational Enterprises⁵ and the United Nations Guiding Principles on Business and Human Rights⁶. This also includes the fundamental principles and rights set out in the eight core conventions of the International Labour Organisation⁷, as set out in the Declaration on Fundamental Principles and Rights at Work, and in the International Charter of Human Rights⁸.
The minimum protection also covers aspects of good corporate governance, including the fight against corruption, the promotion of fair competition and compliance with tax regulations.
Why is compliance with minimum social and legal standards so relevant right now?
However, forced labour affects not only the automotive industry, but also the manufacture of solar modules, which are the main component of any photovoltaic system. Almost half of the polysilicon processed in photovoltaics worldwide comes from four large plants in Xinjiang. China is suspected of subjecting the Uighur minority living in this region to forced labour. The majority of solar projects in the current market are or will be equipped with Chinese modules.
klimaVest is committed to a minimum proportion of taxonomy-aligned assets. In order to classify an object as “taxonomy-compliant”, minimum social and legal standards must be complied with, among other things.
How is the Commerz Real Group reacting to this issue?
As part of the regular purchasing process, all direct business partners are checked using the Business Partner Due Diligence Tool. Due to the criticality of solar module manufacturers, all component manufacturers must be audited regardless of their registered office, even if this is not explicitly required by regulations, as there is no direct business relationship with them.
As a result, the so-called whitelist was introduced: This list provides an assessment of the most important manufacturers by the Commerz Real Group’s sustainability unit on the basis of publicly available information and classifies them as “White Listed” if they meet the minimum standards, or as “Black Listed” if they do not. The whitelist serves to ensure an efficient and uniform approach for the analysis of photovoltaic suppliers with regard to minimum social standards as part of the procurement process.
² Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 2020 June on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 sets out criteria for determining whether an economic activity should be classified as environmentally sustainable in order to determine the degree of environmental sustainability of an investment (European Parliament and Council (2020), Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 2020 June on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 ( https://eur-lex.europa.EU/legal-content/en/TXT/?uri=CELEX%3A32020R0852 ).
³ Statements on the “avoidance” or “measurability” of CO₂ emissions or similar statements regarding CO₂ and/or CO₂e (meaning here the CO₂ equivalent that takes into account other greenhouse gases in addition to the greenhouse gas carbon dioxide (CO₂) such as methane (CH₄), nitrous oxide (N₂O) or hydrofluorocarbons (HFCs). For better readability, however, the term CO₂ is used here) must always be read and understood in connection with the methodology explained on https://klimavest.de/messbar/. Measurable contribution means that klimaVest promotes electricity generation from renewable energies and thereby avoids CO₂ emissions that would have arisen in the generation of electricity from fossil energy sources. CO₂ avoidance is calculated on the basis of country-specific avoidance factors of the Technical Working Group of International Financial Institutions (IFI), based on the Combined Margin Approach of the United Nations Framework Convention on Climate Change (UNFCCC), taking into account sector-specific upstream CO₂ emission factors of the Federal Environment Agency. Avoidance factors will decrease in the future due to the expected increasing share of renewable electricity in the electricity mix. Statements on achieved or planned CO₂ avoidance are not a reliable indicator of actual future CO₂ avoidance. Objectives can be exceeded or undershot.
⁴ The management company of klimaVest is Commerz Real Fund Management S.à r.l.
⁶ https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf ⁷
https://www.ilo.org/declaration/lang--en/index.htm ⁸
https://www.ohchr.org/en/what-are-human-rights/international-bill-human-rights ⁹
China: Automotive companies involved in forced labour by Uighurs (2024) - see https://www.hrw.org/de/news/2024/02/01/china-carmakers-implicated-uyghur-forced-labour.