OECD issues new guidance for investors on the application of the Multinational Enterprise Guidelines
Following the release this week of the OECD paper Responsible Business Conduct for Institutional Investors: key considerations for due diligence under the OECD Guidelines for Multinational Enterprises, investors now have clarity around how the OECD Guidelines for Multinational Enterprises—a set of non-binding principles and standards for responsible business conduct in line with recognised standards—can be applied to their organisations. The Guidelines are the only multilaterally agreed and comprehensive code of responsible business conduct that governments have committed to promoting. The new report comes after a number of high profile cases brought against investors in recent years, fuelling marketplace uncertainty.
The paper was approved by the members of the OECD Working Party on Responsible Business Conduct, comprised of 46 countries, and provides practical approaches for investors to carry out due diligence as recommended in the Guidelines.
Responsible investment, including the approaches set out within the paper, can help investors avoid financial and reputational risks and to respond to expectations of clients, beneficiaries and wider stakeholders. Where environmental and social risks are severe, they are often financially material and addressing them is consistent with fiduciary duty. The recommendations within the paper build on existing practices among many signatories and set out an approach which is complementary to the PRI principles. PRI encourages signatories to consult this paper and use it as a resource to apply responsible investment approaches which conform to international standards.
Key expectations for investors are:
- Embed responsible business conduct into relevant policies and management systems.
- Identify actual and potential environmental risks and impacts throughout their portfolio and potential investments – the starting point for this assessment of impacts focuses on the severity of impact – however it is recognised that this often coincides with financial materiality.
- Use leverage to influence investee companies that are causing an adverse impact to address it – through engaging with companies, collaborating with other investors in engagement, escalating engagement, for example through shareholder resolutions, or divestment, as a last resort. These efforts can be prioritised across a portfolio based on severity of risk.
- Account for how adverse impacts are addressed, by tracking performance of the investor’s management of risks and impacts, and communicating results.
- Having processes to enable remediation in instances where an investor has caused or contributed to an adverse impact. However, note that the paper states that in most cases, minority shareholders can be directly linked to an adverse impact, but are unlikely to cause or contribute to one. While there can be no transfer of responsibility from the entity which caused or contributed to the impact to the investor, investors are nevertheless responsible to show that they have adopted sufficient due diligence practices.
As the UN Guiding Principles on business and human rights also fall within the Guidelines, the approach within the document also provides a model which investors can adopt when thinking about how they can meet the due diligence expectations of the UN Guiding Principles within their investment process.
How can PRI help signatories to respond?
- We are pleased to be working with Aviva on a new collaborative engagement that will engage companies that have been linked to some of the most severe instances of social and environmental impacts brought to OECD National Contact Points.
- The PRI is hosted a webinar on 28 March with representatives from OECD, as well as APG and Aviva. Signatories can listen to the recording to find out more (password: OECDguide1)
- The PRI will release a short briefing note for signatories including a mapping for signatories of PRI resources against this framework
- Signatories are encouraged to use the PRI Collaboration Platform to share information and collaborate in their engagement, where they identify significant social and environmental impacts.
- We will reference the document and its recommendations in our forthcoming guidance on engagement and proxy voting, linked to Principle 2
- We will undertake a mapping of the paper against the PRI Reporting Framework, and add guidance notes to relevant indicators to facilitate reporting by investors that wish to do so.