UK: Revamp Of The OECD Guidelines: What's Changed?

On 8 June 2023, the Organisation for Economic Co-operation and Development ("OECD") published an updated version of its Guidelines for Multinational Enterprises (the "Guidelines"). The update was developed collaboratively by OECD member countries and supported by numerous institutional stakeholders – including the European Union. This briefing outlines the key revisions to the Guidelines and discusses how, perhaps unsurprisingly in light of the EU's contributions, they align and interact with current and proposed EU sustainable finance and ESG regimes, such as the Sustainable Finance Disclosure Regime ("SFDR"), the EU Taxonomy Regulations ("EU TR"), the Corporate Sustainability Due Diligence and Reporting Directives and voluntary initiatives such as the United Nation's Principles for Responsible Investment ("UNPRIs").

1. The OECD guidelines - background

The Guidelines, which were last reviewed in 2011, provide in themselves, voluntary principles and standards for responsible business conduct in a global context and cover a range of topics, including the environment, human rights, labour rights, bribery and corruption as well as innovative technologies. In doing so, they provide a reference point for companies to practice responsible business conduct in those key areas, providing guidance on, for example, due diligence, transparency and disclosure standards.

The Guidelines' status has historically been that of Government-backed "soft" law – i.e. voluntary standards only, with adherence encouraged rather than required. In recent years there has been increasing uptake by companies on a voluntary basis of the Guidelines and their principles, for example, via public commitments or signing up to initiatives like the UN Global Compact or the UNPRIs. An even greater accelerant has been the implementation of (and proposals for) EU legislation that puts adherence to the Guidelines and their principles on a statutory footing. Whether compliance is driven by voluntary commitments or these developing regulatory obligations, it has become more important than ever to understand the principles and requirements within the Guidelines.

2. The revised guidelines

While none of the topics covered in the Guidelines have changed, there are a number of updates to the details within the topics. Even the name of the Guidelines has been updated, 'Guidelines for Responsible Business Conduct', to reflect updated understanding and societal attitudes to businesses' risk areas and to the concept of responsible business practices. A number of these updates are discussed below.

Environment and climate change

The Guidelines have previously covered recommendations around the conduct of business activities in a way that takes account of the need to protect the environment and the wider public. The 2023 updates to the Guidelines build out this topic in a number of areas.

Firstly, the Guidelines more clearly set the expectation that enterprises should use risk-based due diligence to assess and address adverse environmental impacts. In addition, a new non-exhaustive list of those environmental impacts has been provided, including a) climate change; b) biodiversity loss; c) degradation of land, marine and freshwater ecosystems; d) deforestation; e) air, water and soil pollution; and f) mismanagement of waste, including hazardous substances.

Environmental Objectives and Action to Combat Climate Change

These impact categories reflect a number of global and EU developments, pulling in the growing emphasis on the role corporates are expected to take in efforts to combat climate change. They will also be recognised by those considering principal adverse impact (PAI) reporting under the EU's SFDR where environmental adverse impact disclosure indicators track the same topics. The six topics are also very much in line with the EU TR's six environmental objectives (climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control and protection and restoration of biodiversity and ecosystems) which serve as criteria to measure both substantial contribution to an environmental objective and any significant harm caused to the same.

The updated Guidelines further reflect the shift in focus towards climate action in the commentary around how businesses should act to contribute towards net-zero greenhouse gas emissions and a climate resilient economy necessary for achieving internationally agreed goals on climate change. This includes recommendations that businesses should implement, monitor and report on emissions and other mitigation targets. In line with the Taskforce on Climate Related Financial Disclosures (TCFD), the Guidelines suggest that such emissions targets should take into account scope 1, 2, and, to the extent possible, scope 3 GHG emissions and that enterprises should prioritise eliminating or reducing sources of emissions over offsetting.

Environment and Human Rights

The environment section has also been updated to draw across key terms (as part of the due diligence obligation) from the UN Guiding Principles on Business and Human Rights ("UNGPs"), where they were developed in the context of human rights due diligence. This development in particular draws together developing views and recent litigation trends that inexorably link human rights to the environment. It also tracks the proposed Corporate Sustainability Due Diligence Directive ("CS3D") which will impose a corporate duty of human rights and environmental due diligence. Specifically, the Guidelines confirm that an enterprise can be involved in an adverse environmental impact in one of three ways (in language adopted by the EU Parliament in its negotiating position):

• an enterprise can “cause” an adverse environmental impact if its activities on their own are sufficient to result in the adverse impact;
  
  
• an enterprise can “contribute to” an adverse environmental impact if its activities, in combination with the activities of other entities cause the impact, or if the activities of the enterprise cause, facilitate or incentivise another entity to cause an adverse impact; or
  
  
• adverse environmental impacts can also be directly linked to an enterprise's business operations, products or services by a business relationship, even if it does not contribute to those impacts.

Risk-based due diligence – general updates

Due diligence is not only recommended in respect of environmental impacts. As previously, the Guidelines continue to recommend that businesses carry out risk-based due diligence in line with a separate OECD guidance document, the 'OECD Due Diligence Guidance for Responsible Business Conduct'* ("Due Diligence Guide"). The Due Diligence Guide does not cover the Guidelines' chapters on science and technology, fair competition and taxation. This is because (in the previous draft that pre-empted the Due Diligence Guide) these chapters largely focused on: (i) positive contributions businesses can make to sustainable development (science and technology); and (ii) the main adverse impacts caused by the enterprises' own activities (competition and taxation).

It is significant that the latest Guidelines now include due diligence expectations in the re-framed "Science, Technology and Innovation" chapter relating to the development, financing, sale, licensing, trade and use of technology, including gathering and using data. In its 'Final Report on Minimum Safeguards' the Platform on Sustainable Finance ("PSF") noted that science and technology was not considered relevant in the context of determining alignment with the minimum safeguards under Article 18 of the EU TR. This was on the basis that the due diligence requirements did not extend to this chapter. Given the OECD update, it will be interesting to see whether this development will be built into future guidance (including an updated Due Diligence Guide) and recommendations relating to the EU TR minimum safeguards assessment and, by extension, the SFDR's 'do no significant harm' assessment (see our briefing for further details on the PSF's report and recommendations).

Proportionality and risk-based approaches

The Guidelines have previously qualified due diligence expectations as being those that are "appropriate" to the nature of the entity and the underlying actual or potential adverse impact. This has been updated to align with the Due Diligence Guide to more clearly emphasize risk-based due diligence processes and measures that are both commensurate to the severity and likelihood of the adverse impact and appropriate and proportionate to its context. Consequently, adverse impacts which are severe or likely should be prioritised over those that are less severe or unlikely.

The risk-based approach has been drawn on heavily in the EU Parliament and Council's approach to the draft CS3D's due diligence requirements and is a key element of the double materiality assessment that will precede and inform the reporting of sustainability information by companies under the Corporate Sustainability Reporting Directive (CSRD) (see our previous briefings here and here).

Business relationships

Business relationships are widely defined under the Guidelines and can include entities in the supply chain, which supply products or services that contribute to the enterprise's own operations, products or services, or which receive, license, buy or use products or services from the enterprise. It may also include relationships with investee companies, clients and joint venture parties.

There is a shifted focus away from an MNE's own operations and activities to the operations and activities of its value chains (this is an ongoing trend in UK litigation and EU legislation – see our recent briefings on UK value chain liability and CS3D here).

The Guidelines recognise that by focusing on value chains there is a risk that the responsibility will shift away from the entity causing or contributing to an adverse impact, to an entity less equipped to bear it, at a different point in the supply chain or value chain. Instead of offloading responsibility, the Guidelines recommend that multinational enterprises use their “leverage” to prevent or mitigate impacts in their value chains. The Guidelines define leverage as the ability to "influence or encourage" or effect change in the practices of another entity that is causing an adverse impact or to prevent or mitigate that impact.

While the DD Guidance is applicable to businesses across all sectors, there are some challenges in applying it to, for example, investment activities. As reported in our recent Sustainability Insights briefing, the UNPRI* has developed guidance on Human Rights Due Diligence for Private Markets Investors summarising the requirements of the UNGPs, and their specific application to investors with significant influence or control. As noted in our briefing, the guide makes a clear distinction between the obligations of an investor in a company, including a private equity investor with a control position, and the obligations of the company itself. Generally, an investor will be "linked to" the impacts of its portfolio companies, rather than having a greater level of involvement (although that is an important factual question which should be answered based on the specific circumstances). Investors who are "linked to" adverse impacts should contribute to the "remedy ecosystem", but may not have to provide the remedy themselves. This aligns, again, with the position by the European Parliament for the CS3D.

Stakeholder engagement

Stakeholder engagement has always been a core tenet of the Guidelines. The revised Guidelines emphasise this element and provide further detail as to what is expected of enterprises in their engagement with stakeholders. Specifically, the Guidelines require engagement in meaningful consultation with individuals or groups who may be adversely affected by a business's activities. A description of who such stakeholders might be is also expanded upon in the updated Guidelines, namely "persons or groups, or their legitimate representatives, who have rights or interests related to the matters covered by the Guidelines that are or could be affected by adverse impacts associated with the enterprise's operations, products or services".

Stakeholder engagement has equally been pulled across as an important piece of CSRD reporting and the proposed CS3D. Under the former, stakeholder engagement is a core part of the materiality assessment that will help identify the relevant sustainability impacts, risks and opportunities to be disclosed. Importantly, the disclosure standards that pull in the stakeholder engagement requirements have an expansive definition of stakeholder, noting that even "nature may be considered as a silent stakeholder" (3.3 AR 7).

Lobbying activities

Interestingly, one of the "Key Updates" to the Guidelines flagged by the OECD is the clearer guidance that enterprises are expected to avoid involvement in lobby activities that are inconsistent with their commitments and goals on matters covered by the Guidelines. It also creates an active requirement to ensure transparency and integrity in lobbying activities – going further than the previous, passive, "refrain from" language.

As noted in our briefing on Advance, the latest UNPRI initiative for investors to commit to and practice responsible stewardship, the initiative has three key objectives for those companies being "influenced" by Advance's signatory investors. The first and third are to implement the UNGPs and deepen progress on the most severe human rights issues (via the human rights due diligence processes as per the Guidelines). The second is to align the company's political engagement with their responsibility to respect human rights. Advance reportedly singled out political engagement as a focal point for investors because "corporate political engagement that is not undertaken in a responsible manner (including … lobbying activities include membership in or links to trade associations and business groups; engagement in international or national business alliances or initiatives; contributions to external, or non-governmental organisations) often undermine efforts to achieve global respect for human rights". In the context of these updates, this Advance objective appears less surprising, particularly as the UNPRI and the OECD Guidelines have long been described as being "derived from common values and …[having]… mutually reinforcing missions" and given the presence of OECD representatives in the Advance Technical Advisory Group.

The new topics added to the Guidelines, and clearer, updated expectations they set out, should be viewed alongside: (i) the concurrent updates to the National Contact Point and grievance mechanisms; and (ii) the integration of the Guidelines into primary legislation as these bring increasing legal and reputational risks for businesses. This is explained further below.

OECD National Contact Points for Responsible Business Conduct (NCPs)

Originally set up in 2001, the NCP's mandate is twofold:

• to promote the Guidelines and related due diligence guidance through the use of websites, training, workshops, events and the development of information materials such as flyers, and
  
  
• to handle cases (referred to as "specific instances") as a non-judicial grievance mechanism.

All 51 governments adhering to the Guidelines have the legal obligation to set up an NCP (in the UK the NCP is within the Department for International Trade). The Guidelines' implementing procedures have been updated to strengthen the NCP's primary mandate, which is to ensure that grievances are handled effectively and efficiently. NCPs will oversee the grievance process in three ways:

1. by making recommendations to the parties involved in a grievance;
   
   
2. by following up on the implementation of the recommendations; and

• by publishing a "final statement" on whether the enterprise observed the guidelines.

NCPs will also "publish case-handling procedures" and "coordinate in good faith" with other NCPs where required. These revisions are designed to strengthen the NCP's supportive role to their associate government's efforts to promote responsible business conduct.

3. Why are the updates important?

As noted, the Guidelines are linked to several important global and EU initiatives – both mandatory and voluntary. Under the SFDR, investors and asset managers reporting on principal adverse impacts across their investments will be required to disclose the proportion of investments that do not have policies to monitor compliance with the Guidelines (as well as the UNGPs) and which have been involved in violations of the Guidelines (or UNGPs). The question of alignment with the Guidelines is also engaged in respect of those Article 8 plus (so-called 'mid-green') and Article 9 funds that commit to make 'sustainable investments' (as defined in Article 2(17) SFDR). In addition, under the EU TR, an economic activity may only be considered "sustainable" if it meets all relevant, stringent requirements set out in the legislation, including that the entity carrying out the relevant activity has implemented procedures to ensure alignment with the Guidelines (the so-called "minimum safeguards" – as discussed above).

With this integration, understanding the principles and norms within the Guidelines is crucial to understanding how to assess (and act in) alignment with them. More stringent and clearer expectations in the Guidelines can be drawn on to pinpoint where entities are falling short, and this could not have come at a more pertinent time. Wider global trends in legislation and litigation seek to hold organisations to account for environmental and human rights impacts in their supply chain and value chains. There has been and will continue to be a dramatic upturn in the amount of ESG information in the public domain thanks for increased corporate reporting obligations (particularly under the EU's CSRD). Layering on a new focus on "greenwashing", "social washing" and "impact washing", the overall risk landscape is one which justifies a coordinated, effective and strategic approach to managing supply chains.

Originally published 27 June 2023

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