Updated OECD Guidelines – What do they mean for Business?
On 8 June 2023, the Organisation for Economic Cooperation and Development released a “targeted update” of the OECD Guidelines for Multinational Enterprises. The Guidelines have played a fundamental role in shaping responsible business standards in the last decades. This article looks at the key changes in the updated Guidelines and what they means for business.
- A business that does not set science-based emission reduction targets “consistent with internationally agreed global temperature goals” will be considered in breach of the Guidelines.
- The strengthening of the Guidelines is likely to result in more NCP proceedings. Due process concerns persist and the updated provisions, though a substantial improvement, are often couched in voluntary language.
- To mitigate litigation risks, whether before NCPs, civil courts or regulators, businesses need to act on these topics now. Climate disclosures, biodiversity assessments and human rights due diligence are increasingly less voluntary.
- Proper due diligence polices, coherently and consistently implemented and executed, remain the best way to avoid sustainability-related litigation. Legal departments need to refresh existing sustainability due diligence policies, or – if none exist – urgently develop them.
What are the OECD Guidelines?
Initially released in 1976, the Guidelines are recommendations to multinational enterprises aimed at enhancing the business contribution to sustainable development and addressing adverse impacts associated with business activities on people, planet and society.
The Guidelines are supported by an implementation mechanism: the National Contact Points for Responsible Business Conduct (NCPs). Parties affected by alleged violations of the Guidelines can bring a complaint before an NCP in specific instance proceedings. Although NCPs don't sit as judicial body and can't issue judgments or fines, their assessments can have a serious reputational impact.
The last major overhaul of the Guidelines took place in 2011. A major stepping stone in that update was the introduction of the concept of human rights due diligence. Initially set out in the 2010 UN Guiding Principles on Business and Human Rights, the principle requires businesses to identify, assess, prevent and mitigate human rights impacts in their own operations and value chains.
In June 2022, the OECD Working Party on Responsible Business Conduct began working towards an update of the Guidelines. The process included public consultation for interested stakeholders across the world. Explicitly excluding a complete overhaul of the existing Guidelines, the Working Party eventually proposed a "targeted" update.
Despite this attempt to downplay the breadth and scope of the revisions, the updated Guidelines contain important new provisions that will affect businesses around the globe.
What's in the update?
Climate change: The Guidelines now stipulate that enterprises should ensure their greenhouse gas emissions and impact on carbon sinks are consistent with internationally agreed global temperature goals based on best available science. This includes as assessed by the Intergovernmental Panel on Climate Change.
The Guidelines further emphasize that enterprises should introduce and implement science-based policies, strategies and transition plans on climate change mitigation and adaptation, including adopting, implementing, monitoring and reporting on mitigation targets that:
- are short, medium and long-term;
- are science-based;
- include absolute and, where relevant, intensity-based GHG reduction targets; and
- take into account scope 1, 2, and, to the extent possible based on best available information, scope 3 GHG emissions.
In climate change litigation against companies, claimants could – until now – not rely on any intergovernmental text confirming the need for companies to reduce emissions in line with the goals of the Paris Agreement. Instead, claimants had to build more complex arguments – for example, that the UN Guiding Principles require companies to prevent human rights impacts resulting from climate change.
Now, governments of 51 of the largest economies on the planet explicitly demand that companies develop science-based emission policies. A company’s failure to do so could well lead to an NCP assessment that it has violated the Guidelines.
Though not legally binding in nature, such a finding can have various consequences, such as an exclusion from government tenders, refusals by lenders to renew credit facilities, negative voting suggestions by proxy advisors, and reputational damage.
The Guidelines also say enterprises should prioritise eliminating or reducing sources of emissions over offsetting, compensation or neutralization measures. Carbon credits or offsets may be considered as a means to address unabated emissions as a last resort, should be of high environmental integrity, and should not divert attention from the need to reduce emissions or contribute to locking in greenhouse gas intensive processes and infrastructures.
The Guidelines recall the imperative of a just transition, and that enterprises must assess and address social impacts, including on the workforce, both in their transition from environmentally harmful practices, and their move towards greener industries or practices, such renewable energy.
The updated Guidelines confirm a broader trend evidenced by the EU's Corporate Sustainability Reporting Directive and Due Diligence Directive, the SEC's proposed climate disclosure rule, and court judgments around the world. Namely that it is a risk not to develop clear, Paris-compliant and science-based emission reduction paths in collaboration with in-house legal teams.
Environmental due diligence: The Guidelines now clarify that businesses should include impacts on climate change, biodiversity, deforestation, animal welfare and pollution in their due diligence process to identify and assess negative impacts in their operations and supply chains.
This confirms the EU's approach, in the proposal for the Due Diligence Directive to apply human rights due diligence to environmental and climate change impacts. This aligns with a broader trend to increasingly consider environmental damage and climate change as closely linked to human rights impact.
This is evidenced by multiple courts around the world considering climate change through a human rights angle, and the UN General Assembly resolution to recognize the human right to a clean and healthy environment.
Biodiversity: For the first time, the Guidelines include explicit provisions on biodiversity, in line with a broader trend towards increased focus on biodiversity impacts of business.
They state enterprises should contribute to the conservation of biological diversity and avoid and address land, marine and freshwater degradation, including deforestation. These efforts to prevent or mitigate adverse impacts on biodiversity should be guided by the biodiversity mitigation hierarchy.
This recommends first seeking to avoid damage to biodiversity, reducing or minimising it where avoidance isn't possible, and using offsets and restoration as a last resort where adverse impacts can't be avoided.
There are direct consequences for business. Companies will need to develop the expertise needed to make these type of assessments and to properly report on them. Financial institutions are already hiring biologists, and large industrials are recruiting ecosystem specialists.
Biodiversity risks for business: For many European companies, obligations on biodiversity impacts don't just come from the updated Guidelines. They also come from the two EU Directives discussed above – on Sustainability Reporting and Due Diligence – which are designed to tackle biodiversity impacts across value chains.
Failure to do so has two critical consequences.
First, businesses risk loss of access to financing if they cannot show a commitment to the global challenge of protecting and enhancing biodiversity. Investors are already considering how to address biodiversity as part of their investment risk assessments.
Under the EU Taxonomy Regulation and Sustainable Finance Disclosure Regulations, the protection and restoration of biodiversity and ecosystems is a reportable objective. As such, investors and banks are increasingly directing capital toward companies that can better demonstrate a nature-positive strategy underpinned by robust, science-based targets.
The second risk is that businesses who fail to take biodiversity impacts into account will be increasingly exposed to the risk of biodiversity-related litigation. The growing use of data from remote sensing and in supply chain management is facilitating a better understanding of where biodiversity loss is happening and who may be responsible.
Cases are increasingly being brought on the direct impact of companies on ecosystems or particular species. These cases are often on account of the deprivation of related ecosystem services to communities or other companies that depend on them. Litigation risks also arise from a failure to adequately or truthfully report on biodiversity-related risks, or misrepresenting nature-positive credentials.
Human rights due diligence: The updated provisions on due diligence mostly clarify the concept. Most of the recommendations in these provisions had already been clarified in the extensive body of advice and recommendations on due diligence developed by the OECD Secretariat. For example, that due diligence should be risk-based, commensurate to the severity and likelihood of the adverse impact, and appropriate and proportionate to its context. Another change is the express reference to free, prior and informed consent in respect of engagement with Indigenous Peoples.
The Guidelines clarify that where it's possible for enterprises to continue a relationship and demonstrate a realistic prospect of, or actual, improvement over time, such an approach will often be preferable to disengagement. When enterprises decide to disengage, they should do so responsibly.
Disclosures: The Guidelines also say enterprises should disclose information obtained in the due diligence process and that such information could be considered material if its omission or misstatement can reasonably be expected to influence:
- an investor’s assessment of an enterprise’s value;
- The timing and certainty of an enterprise’s future cashflows or an investor’s investment; or
- an investor's voting decisions.
On this basis, it's easy to imagine that companies who fail to properly disclose due diligence data will face investor claims. The increased disclosure expectations in the Guidelines correspond with a broader trend towards increased non-financial disclosures and increased scrutiny.
In the EU, the Corporate Sustainability Reporting Directive demands extensive sustainability disclosures from multinational enterprises. In the US, the SEC continues to increase its scrutiny of sustainability disclosures ahead of the SEC Climate Disclosure rule.
For example, Vale concluded a USD55.9 million settlement with the SEC following charges that its "Sustainability Reports and other public filings fraudulently assured investors that the company adhered to the 'strictest international practices' in evaluating dam safety."
Revision of the NCP procedure
Specific instance proceedings with the NCP have proven a popular tool for holding multinational enterprises to account over alleged violations of the Guidelines. We've seen a clear preference from NGOs to bring such proceedings before NCPs perceived to be more progressive, such as the Dutch, UK and Norwegian NCPs.
This has often led to a phenomenon called forum-shopping. For example, cases being brought before the Dutch NCP because one of the indirect minority investors is Dutch, whereas the actual multinational enterprise is headquartered elsewhere.
The frequent use of the proceedings has also laid bare some procedural concerns in the process, as expressed by the Business at the OECD group. On the other hand, NGOs have viewed the process as too business-friendly and have demanded increased transparency.
To accommodate due process concerns, the updated Guidelines say NCPs will publish case-handling procedures and recommend to consult their stakeholders in developing these case-handling procedures. Our business and human rights team will monitor when and how NCPs will start this consultation process, as this provides an opportunity for businesses to engage.
To address the NCP forum-shopping concerns, the updated Guidelines introduce an initial step in the procedure to choose the lead NCP in a case whereby several NCPs are concerned. This would generally be "the NCP of the country in which the issues have arisen."
The Guidelines also clarify the criteria for initial assessment of specific instances, specifying when and how issues are material and substantiated. In a most welcome clarification, the Guidelines now explain how and when applicable law or parallel proceedings limit the NCP's ability to contribute to the resolution of an issue.
For example, if the question whether or not a business has violated local labour laws is subject to local court proceedings, the NCP should assess whether opening a specific instance procedure would create serious prejudice for either of the parties involved in these other proceedings or cause a contempt of court situation. The commentary clarifies that the NCP could in such cases also suspend its examination while the parallel proceedings are ongoing.
What does this mean for business?
The new provisions on climate change, the environment and biodiversity will have wide-reaching consequences. A business that does not set science-based emission reduction targets “consistent with internationally agreed global temperature goals” will be considered in breach of the Guidelines.
This could lead to specific instance proceedings with the negative impacts discussed above. Such a violation can be used as stepping stone towards civil liability. This is another reason for businesses to develop clear, Paris-compliant and science-based emission reduction paths in collaboration with their in-house legal teams.
Indirectly, the revised Guidelines may affect the final negotiations on the Due Diligence Directive that are about to start. The European Commission and European Council had sought to deviate from the exiting UNGP and OECD Guideline regime by adopting a relationship-based approach to due diligence, excluding downstream activities and partially excluding the financial sector. The Guidelines reconfirm that risk-based due diligence in the entire value chain, including downstream activities and including the financial sector, is the global standard.
The strengthening of the Guidelines is likely to result in more NCP proceedings. Due process concerns persist and the updated provisions, though a substantial improvement, are often couched in voluntary language.
Businesses shouldn't assume NCPs will automatically apply these updates to their advantage. There's a substantial risk that NCPs will continue to conduct specific instance proceedings as they have in the past, unless hard pressed by external counsel.
To mitigate litigation risks, whether before NCPs, civil courts or regulators, businesses need to act on these topics now. Climate disclosures, biodiversity assessments and human rights due diligence are increasingly less voluntary.
Legal departments need to refresh existing sustainability due diligence policies, or – if none exist – urgently develop them. Proper due diligence polices, coherently and consistently implemented and executed, remain the best way to avoid sustainability-related litigation.
Similarly, the topic of non-financial disclosures has migrated from communications teams to the legal department and requires active involvement of the general counsel. For businesses that fall under the Sustainability Reporting and Due Diligence Directives, the issue is even more pressing.
Frustratingly, due diligence and sustainability reporting requirements differ from jurisdiction to jurisdiction, resulting in a compliance nightmare for multinational companies.
The legal department is tasked with developing common principles to navigate these issues globally. The principles set out in the updated Guidelines are a good starting point to develop global policies. Our Business and Human Rights team are here to help.