On 8 June 2023, during their Ministerial Council Meeting in Paris, the Organisation for Economic Co-operation and Development ("OECD") launched an updated version of its Guidelines for Multinational Enterprises (the "Guidelines"). This is the first update to the Guidelines since 2011 and the changes represent substantial and far reaching new expectations for multinationals, particularly in relation to areas of their operations or business which may have human rights or environmental implications. This update sets out a brief overview of the OECD Guidelines and some of the key updates since the 2011 Guidelines.
What are the Guidelines and what are the implications for companies?
The Guidelines are a set of recommendations from governments to businesses and are voluntary. They cover all areas of business responsibility including human rights, worker rights, the environment, bribery and corruption, consumer protection, science and technology, competition, and taxation. Although voluntary for multinationals, governments adhering to the Guidelines must establish a grievance mechanism (the National Contact Point ("NCP") system) by which cases can be bought by stakeholders against multinationals for allegedly failing to meet standards of the Guidelines1.
Since the introduction of the NCP system in 2000, the various country NCPs (now numbering 50) have handled over 650 cases. Once a case is submitted by a stakeholder to the relevant NCP or NCPs, the NCP will make an initial assessment and, if the case is accepted, will issue a report or final statement in which the NCP may make recommendations in relation to the alleged non-observance of the Guidelines by the company in question. The NCP may also make follow-up enquiries in relation to the recommendations to ensure that they have been adopted or adhered to. A public record of all cases handled by the NCPs (including the final statement) is maintained by the OECD.
Cases bought before the relevant NCPs can pose significant reputational risk to the company in question, in addition to the administrative and financial impact of dealing with such cases. The new Guidelines are likely to increase the scope for referral to the NCP and are subject to possible NCP referral as early as their effective date, meaning that possible exposure to liability under the Guidelines is active as of 8 June 2023.
What are the main changes since the 2011 Guidelines?
Expanded due diligence, including downstream due diligence beyond the scope of standard contractual relationships
Chapter II of the Guidelines set out significant changes to the scope of due diligence expected of companies. In particular, risk-based due diligence is now expected for all business relationships, both upstream and downstream of the company in question beyond contractual or immediate (i.e. direct) relationships. The Guidelines make clear that this includes "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."
The commentary on Chapter II also specifically underscores the importance of stakeholder engagement in the due diligence process, particularly when dealing with marginalised or vulnerable persons (see commentary on Chapter IV below) and sets out examples of best practice in that regard. Specifically it refers to meaningful stakeholder engagement being: "two-way, conducting in good faith, [...] timely, accessible, appropriate and safe for stakeholders", including making any adaptions necessary in order to accommodate the needs of marginalised or vulnerable stakeholders.
This change mirrors the increasingly accepted position in relation to due diligence for companies arising out of developing best practice and other hard- and soft-law approaches. Its adoption in the Guidelines are likely to be particularly influential in making such an approach the accepted standard even before other countries follow Germany's and the EU's lead and introduce legislation that codifies the approach.
Expanded scope of human rights and labour rights
Chapter IV of the Guidelines now places special emphasis on "human rights defenders", Indigenous Peoples and other marginalised or vulnerable peoples: i) recognising the heightened risk that such persons or groups may face, and ii) highlighting the need for "Free, Prior and Informed Consent" and OECD guidelines in relation to the same for such groups.
In relation to employment and industrial relations (Chapter V), the Guidelines have expanded the scope of the rights of workers to freedom of association and collective bargaining beyond those employed by the company in question (as was the case in the 2011 Guidelines) to encompass all workers in all business relationships. Whilst this is consistent with the general changes to the Guidelines that expand the scope of companies' obligations beyond their immediate contractual relationships, this expectation does go beyond the scope of many national laws and regulations (the United States being just one example).
The Guidelines now also reflect the requirements to provide a safe and healthy working environment in accordance with the ILO Declaration on Fundamental Principles and Rights at Work and refers specifically to debt bondage in relation to forced labour.
Companies are now encouraged to consider training, up-skilling, and re-skilling of workers, anticipating future changes in operations and employer needs, including technological changes, automation, digitalisation, just transition and sustainable development. Should companies anticipate changes in their operations involving large scale layoff or dismissals and which would have major effects upon the livelihood of their workers, they are expected to provide "reasonable notice to the representatives of workers and relevant government authorities."
Updates to reflect best practice in relation to environment and climate change
The changes in relation to Chapter VI are potentially the most wide ranging and consequential of any of the updates to the Guidelines. The revised text sets out the expectations of companies in relation to a greatly expanded concept of environmental due diligence.
The Guidelines notes that companies should consider the following in the course of their environmental due diligence: "a) climate change; b) biodiversity loss; c) degradation of land, marine and freshwater ecosystems; d) deforestation; e) air, water and soil pollution; f) mismanagement of waste, including hazardous substances". The Guidelines note that this is a non-exhaustive list and that companies should understand environmental impacts to be: "significant changes in the environment or biota which have harmful effects on the composition, resilience, productivity or carrying capacity of natural and managed ecosystems, or on the operation of socio-economic systems or on people." As with other changes to the Guidelines, environmental due diligence will include due diligence in companies' operations and within their business relationships.
Importantly, the Guidelines concede that given that some environmental impacts are not well understood or evolving, it will not always be possible to assess environmental impacts based on available "science and information". In such circumstances, companies should therefore consider the extent to which the activity or proposed activity is in line with existing standards or benchmarks. The baseline for companies should therefore be to ensure that any activity is in line with existing standards or benchmarks, including by reference to international agreements, regulatory frameworks and existing processes and safeguards.
The Guidelines note that environmental impacts are interlinked with other factors covered by the Guidelines such as health and safety and worker rights and acknowledge that environmental due diligence will necessarily involve taking into account competing environmental or social priorities.
The Guidelines also place a greater emphasis on the "just transition", noting that the companies should address social impacts in their transition away from environmentally harmful practices and towards greener energy. Specifically, companies are encouraged to reduce emissions, instead of implementing other measures to offset, compensate, or neutralise them. Carbon credits are specifically referred to and the Guidelines require that they should be of "high environmental integrity" in order to not draw attention away from the need to reduce emissions.
Similarly, the Guidelines reflect the latest scientific assessment on emissions and includes text in relation to adopting, implementing, monitoring, and reporting short, medium and long term GHG emission reduction targets on scope 1, 2, and, to the extent possible based on best available information, scope 3 GHG emissions. The Guidelines note that companies should continually asses their emissions based on the latest internationally agreed global temperature goals.
Commentary
The changes to the Guidelines reflects an increasingly important development in relation to compliance and due diligence more generally. Companies are now being called upon to address a greater scope and number of risks, including environmental, human rights, fraud, bribery and corruption and others and which are increasingly interconnected. The expanded scope of due diligence set out in the Guidelines only emphasises the need for companies to take a holistic view of risk and adapt their compliance processes and systems accordingly. In that regard there are several non-profit organisations who have recently produced guidance for companies seeking to balance competing interests while taking action to adapt their policies and procedures to the Guidelines and other similar initiatives2.
Despite their non-binding nature, the Guidelines are significant in that they are likely to come to represent the baseline standard for companies of requisite size, rather than the minimum of what is expected from them. These are likely to be reflected in the expectations of investors, consumers and business partners both up and down value chains.
As set out in our previous blog posts, stakeholders will increasingly expect the requirements of the Guidelines (and other similar initiatives) to be considered at board and senior management level. Companies should therefore take steps now to ensure that the issues addressed by the Guidelines are sufficiently embedded into governance structures and consider whether existing processes are sufficiently robust to address these issues. This should go beyond mere oversight and should incorporate consideration of how boards will discharge their responsibilities by incorporating such considerations into long-term strategy. Where the expectations set by the Guidelines are not met, companies should increasingly expect these stakeholders to take action either via the NCP system, via shareholder proposals or simply by voting with their feet.
Footnotes
1. In addition to the grievance mechanism, the NCPs also act as a contact point in relation to the Guidelines in order to provide guidance and handle enquiries in relation to the Guidelines.
2. See, for example: https://shiftproject.org/wp-content/uploads/2023/02/Climate-Report-Feb-28-2023.pdf and https://www.humanrights.dk/files/media/document/Due%20diligence%20in%20the%20downstream%20value%20chain%20-%20case%20studies%20of%20current%20company%20practice.pdf
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