Updated OECD MNE Guidelines redefine “business relationships”

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The Organisation for Economic Co-operation and Development (OECD) updated its Guidelines for Multinational Enterprises on Responsible Business Conduct (MNE Guidelines) in early June 2023. Several elements of the guidelines have been adapted to the social, environmental, and technological issues facing the world today, however, this blog post focuses on the OECD’s new definition of “business relationships” and its implications.

Why do the MNE Guidelines matter?

The MNE Guidelines are the foundation of almost every regulation on sustainability and responsible business conduct that exists in the world, and thus are critical for thousands of corporations and financial institutions. First adopted in 1976, these recommendations are endorsed by OECD-member governments and other adhering countries. They urge companies to meaningfully contribute to sustainable development and to address adverse impacts on the environment, people, and society that are linked to their business activities.

Furthermore, the EU’s Sustainability Taxonomy Regulation refers to the guidelines as minimum safeguards that need to be considered for an economic activity to qualify as environmentally sustainable; under the EU Sustainable Finance Disclosure Regulation, Article 8 and Article 9 funds must disclose how their investments align with the guidelines and whether an investment is in breach of them.

Key updates to the MNE Guidelines

It has been 12 years since the MNE Guidelines were updated, and the following are a few of the most noteworthy additions:

• Recommendations for enterprises to align with internationally agreed goals on climate change and biodiversity;
• Expectations for enterprises to engage in due diligence that:
  • identifies and addresses their adverse impacts on climate change, biodiversity, forests, animal welfare, and other environmental concerns as well as the pollution they are linked to;
  • identifies and addresses impacts and business relationships related to the use of their products and services;
  • covers all forms of corruption;
  • includes the development, financing, sale, licensing, trade, and use of technology, including gathering and using data;
• Better protection for at-risk persons and groups, including those who raise concerns regarding the conduct of businesses;
• Updated recommendations on disclosing responsible business conduct information;
• Recommendations for enterprises to ensure lobbying activities are consistent with the guidelines; and
• Strengthened procedures to ensure National Contact Points for Responsible Business Conduct are visible, more effective, and functionally equivalent.

The expanded scope of “business relationship”

There is one seemingly small change that could have major consequences for financial institutions and other corporate entities that invest in securities.

In the 2011 version of the MNE Guidelines, “business relationship” was defined as follows:

The term “business relationship” includes relationships with business partners, entities in the supply chain and any other non-State or State entities directly linked to its business operations, products or services.

(MNE Guidelines 2011, paragraph 14, page 23)

In the 2023 version, the scope of “business relationship” has been expanded and clarified to include all the following:

The term “business relationship” includes relationships with business partners, sub-contractors, franchisees, investee companies, clients, and joint venture partners, 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, and any other non-State or State entities directly linked to its operations, products or services.

Relationships with individual consumers, who are natural persons acting for purposes that are unrelated to a business, commercial, or governmental activity, are not generally considered ‘business relationships’ under the Guidelines although an enterprise can contribute to adverse impacts caused by them.

Business relationships include relationships beyond contractual, “first tier” or immediate relationships.

(MNE Guidelines 2023, paragraph 17, page 18)

For financial institutions, the crucial new element is “investee companies”. In line with earlier guidance in other contexts,^[1] the MNE Guidelines now stipulate that holding securities (i.e. stocks or bonds) of a company, including minority shareholding, constitutes a business relationship between the investor and the investee.

Implications for financial institutions

The new definition of business relationships has ramifications: before any investment decision, i.e. the purchase of a corporate stock or bond, financial institutions and other investors are expected to “undertake risk-based due diligence” on the investee company “to identify … actual and potential adverse impacts” on the environment, human rights, labor rights, and other “matters covered by the Guidelines” to which its services could be “directly linked … by a business relationship” (MNE Guidelines 2023, pages 14–15).

If adverse impacts are identified, investment companies are expected to “seek to prevent or mitigate an adverse impact where they have not contributed to that impact, when the impact is nevertheless directly linked to their operations, products or services by a business relationship” (MNE Guidelines 2023, page 15). The means “using leverage alone or in co-operation with other entities, to influence the entity causing the adverse impact,” for example through dialogue with investee companies, individual or collective engagement, and exercising voting rights (MNE Guidelines 2023, page 19).

Applying a risk-based approach

Conveniently, the updated MNE Guidelines provide an effective and reasonably efficient approach to conducting due diligence. They stipulate that due diligence should be “risk-based, commensurate to the severity and likelihood of the adverse impact and appropriate and proportionate to its context” (MNE Guidelines 2023, page 18). The MNE Guidelines also recognize that “it may not be feasible for most enterprises to assess or to engage with all the individual entities with which they have a business relationship” (MNE Guidelines, page 18). In such situations, companies are “encouraged to identify general areas where the risk of adverse impacts is most significant and, based on this risk assessment, prioritize these areas for due diligence” (MNE Guidelines, page 18).

Financial institutions and all other investors are advised to set up a structured due diligence process that identifies and addresses adverse impacts through sequential steps. The first step would typically be an initial, high-level screening of investee companies (those already in the portfolio and any potential future investees) to identify those at significant risk of adversely impacting matters covered by the MNE Guidelines. Significance of an adverse impact, under the MNE Guidelines, is understood as a function of an impact’s scale (i.e., gravity of the adverse impact), its scope (i.e., reach of the impact, such as the number of individuals affected or the extent of environmental damage), and being of irremediable character (i.e., limits to the ability to restore the individuals or the environment affected to a status held before the adverse impact occurred).

Identification of the most significant risks related to an investee company can be based, for example, on:

• the industry sector in which the investee is active;
• the countries in which it operates (or its suppliers operate) production sites; or
• specific characteristics of its products and services.

This initial screening should allow investors to designate a reasonably large proportion of investee companies as comparatively low risk, and then, in a second step, to conduct more thorough in-depth due diligence on the investees with the most significant risk of adverse impacts.

Guidance on setting up and operating risk-based due diligence procedures is provided in helpful documents issued by the OECD, such as the cross-sector OECD Due Diligence Guidance for Responsible Business Conduct (published in 2018) and the sector-specific paper Responsible Business Conduct for Institutional Investors (published in 2017).[2]

Figure 1. Due Diligence Process and Supporting Measures
Source: OECD Due Diligence Guidance for Responsible Business Conduct, p. 21.

At ECOFACT, we specialize in due diligence requirements and track their evolution. We can help you understand and align with stakeholder and regulatory expectations. If you need support in adjusting your company’s approach to due diligence and ESG risk management, do not hesitate to reach out.

[1] While such a business relationship is now stated explicitly in the updated MNE Guidelines, the Office of the High Commissioner on Human Rights (OHCHR) had already opined in April and November 2013, respectively, that shareholdings constitute a business relationship under the UN Guiding Principles on Business and Human Rights, and that minority shareholders are “directly linked” to adverse human rights impacts caused or contributed to by an investee company through the business relationship established by the investment. In 2012, the Norwegian National Contact Point (NCP) for the MNE Guidelines had postulated a business relationship existed in the Specific Instance involving investments by the Norwegian Government Pensions Fund in the South Korean steel producer POSCO. This is also acknowledged in the OECD’s 2017 guidance paper Responsible business conduct for institutional investors.

[2] Other diligence guidance for financial-sector activities has been issued: Responsible Corporate Lending and Securities Underwriting (2019) and Project and Asset Finance Transactions (2022).