While all eyes are on the EU awaiting the delayed EU Council vote on the Corporate Sustainability Due Diligence Directive (CSDDD), inspiration may be drawn from the agreement that was reached on an even more ambitious instrument. On 8 June 2023, the 38 OECD countries and 13 adhering countries endorsed updates that ensure that the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct continue to be the leading sustainability guidelines. The updated OECD Guidelines tackle the key challenges of our time, cover all issues that a modern and responsible company should address, including issues less often on the sustainability agenda, like taxation and consumer interests. The updates came after two years of negotiations between governments and consultations with business, trade unions and civil society stakeholders. The Guidelines are the foundation for sustainability regulations – what some call the ‘source code’ for Responsible Business Conduct. Even for those of us who are not the most tech-savvy, this is a source code worth learning.
What is new in the revised OECD Guidelines?
While well-aligned with international instruments in some thematic areas, the Guidelines were seriously outdated when it came to the environment. The expectations of enterprises now reflect international agreements and goals to combat climate change and protect biodiversity, including the Paris and Montreal agreements. Greenhouse gas emissions and impact on carbon sinks should be consistent with internationally agreed global temperature goals based on best available science, including as assessed by the Intergovernmental Panel on Climate Change. Enterprises are expected to introduce and implement science-based policies, strategies and transition plans on climate change mitigation and adaptation. This should include mitigation targets that are short, medium and long-term, science-based and include absolute, and as relevant, intensity-based targets. They should take into account scope 1, 2, and to the degree possible, scope 3 (value chain) emissions.
The Guidelines emphasise that enterprises should adopt technologies to improve environmental performance; products or services that among other things, are durable, reparable and can be reused, recycled, or disposed of safely. Enterprises are expected to contribute to the conservation of biodiversity. They should avoid and address land, marine and freshwater degradation, including deforestation and they should contribute to sustainable land and forest management. The Guidelines now also have recommendations on animal welfare. The environment chapter highlights the imperatives of a just transition, which not least means addressing impacts on the workforce in the transition to greener industries and practices.
The recommendations on human rights have for the most part stood the test of time. The latest updates further highlight attention to vulnerable individuals and groups, including Indigenous Peoples. In situations of armed conflict or other heightened risk of gross abuses, enterprises should conduct enhanced due diligence, also in relation to violations of international humanitarian law. The employment chapter highlights that enterprises should respect the rights of all workers to freedom of association and collective bargaining; so-called enabling rights. They should provide a safe and healthy working environment, in line with the ILO Fundamental Principles and Rights at Work.
Expanded recommendations on due diligence
General recommendations on due diligence were introduced in the Guidelines in 2011 and initially applied to human rights, employment, anti-corruption, disclosure and consumer interests. The updated Guidelines extend the due diligence recommendations to the environment and technology. The Guidelines now emphasise that enterprises should carry out risk-based due diligence to assess and address adverse environmental impacts and include examples of such impacts: climate change; biodiversity loss; degradation of land, marine and freshwater ecosystems; deforestation; air, water and soil pollution and mismanagement of waste, including hazardous substances. The list is non-exhaustive. The environment chapter also clarifies how enterprises can be involved in adverse impacts; whether by causation, contribution or direct linkage – key concepts under the Guidelines.
The due diligence recommendations have also been expanded to cover all forms of corruption. The technology chapter in the Guidelines has undergone significant revisions. Importantly, enterprises are now expected to conduct risk-based due diligence also when it comes to science, technology and innovation – including gathering and using data.
The general due diligence recommendations in the OECD Guidelines have also been expanded and are better aligned with the OECDs practical due diligence guidance. The commentary to the Guidelines now refers to all six steps in the due diligence framework, including providing for or cooperating in remediation. Companies are also called on to engage meaningfully with relevant stakeholders or their legitimate representatives as part of carrying out due diligence. The disclosure chapter complements these recommendations. Companies are expected to disclose Responsible Business Conduct information in line with the six-step due diligence framework.
From soft to hard law
The updates in the OECD Guidelines are relevant to sustainability regulations. This can be traced back to 2011, when the OECD Guidelines were updated with respect to human rights and due diligence, in line with the UN Guiding Principles on Business and Human Rights. Whereas due diligence traditionally had been employed to minimize risk in financial transactions, applying due diligence to human rights and other sustainability issues has proven to be a paradigm shift. Now, sustainability laws and regulations often use due diligence as a building block, sometimes with specific reference to the OECD Guidelines.
The Norwegian Transparency Act, which entered into force in July 2022, requires larger enterprises to carry out due diligence in line with the OECD Guidelines when it comes to human rights and decent working conditions, including a living wage. The due diligence duty covers the six steps in the OECD due diligence framework.
The EU Corporate Sustainability Reporting Directive requires companies to provide a description of their due diligence, and the due diligence elements are well-aligned with the recommendations in the OECD Guidelines. Due diligence reporting is to include the principal actual or potential adverse impacts of own operations and value chains as well as actions taken to prevent, mitigate, remediate or bring an end to such impacts. The directive also requires companies to report on plans to ensure that business models and strategies are compatible with limiting global warming to 1.5 degrees, in line with the Paris Agreement. The due diligence framework in the OECD Guidelines is also key to understanding the much anticipated Corporate Sustainability Due Diligence Directive, where the EU Council has just announced a postponement of the vote.
Another noteworthy development is references to the Guidelines and due diligence in recent regulations for the financial sector. The Sustainable Finance Disclosure Regulation requires financial market participants to report on investments that are aligned with the OECD Guidelines and includes compliance with the Guidelines among the indicators. The Taxonomy Regulation expects undertakings to conduct economic activities aligned with the OECD Guidelines, i.e. conduct due diligence. The question of whether the OECD Guidelines were relevant to the financial sector was ultimately settled with the OECDs work to operationalize Responsible Business Conduct due diligence for different financial transactions and actors. This resulted in tailored OECD due diligence guidance for institutional investors, corporate lending and project-based and asset finance transactions.
Due to the synergies between new regulations and the OECD Guidelines, companies and investors may increasingly look to outcomes in so-called specific instances – complaints that are handled by the National Contact Points for alleged non-observance of the OECD Guidelines. The procedures for the National Contact Points have been revamped in the updated Guidelines. The grievance mechanism is non-judicial, where the goal is to reach an agreement between the parties through dialogue and mediation. The mastermind behind the UN Guiding Principles, the late professor John Ruggie, pointed to National Contact Points as important non-judicial grievance mechanisms. They can only play this role, however, if they are impartial, accountable and have adequate resources – and considering the latest updates in the Guidelines – increasingly specialized competencies.
Finally – a smart mix of measures?
According to the OECD Guidelines, the business of business is responsible business – a far cry from Milton Friedman’s old doctrine. The updated OECD Guidelines place people and the planet at the centre of shared expectations from governments. This makes the Guidelines even better positioned to guide companies to operate sustainably and influence their business relationships to do the same. Guidelines are necessary, but not sufficient. When combined with mandatory measures and government action, we are closer than ever to a smart mix of measures to foster corporate sustainability. With the delayed EU Council vote on the Corporate Sustainability Due Diligence Directive, the suspense is growing as we approach what could be a historic, full-circle moment.