Recent decisions clarify investor responsibility to address human rights concerns

How the OECD Guidelines for Multinational Enterprises relate to investors

Several previous RI articles have reported on two related cases involving the application of the OECD Guidelines for Multinational Enterprises to the investment community and investor responsibility towards human rights concerns linked to a company in which the investors are minority shareholders.

The first involved Dutch pension investment giant APG. The second addressed Norway’s Norges Bank Investment Management (NBIM) that manages Norway’s enormous sovereign wealth fund. Both cases involved minority shareholdings in the same company – POSCO. The APG case highlights an important function of the OECD National Contact Point (NCP) system – providing an active mediation service between an OECD based company and those who bring a claim against it (typically NGOs and trade unions) about its application of the guidelines. The APG case concluded with a mediated agreement between the NGOs and APG. The NBIM case demonstrates another equally important function of the NCP system — explaining the application of the OECD Guidelines to different sectors and in different contexts – in this case the financial sector and more particularly, investors, as set out below.

The 2011 update of the OECD Guidelines for Multinational Enterprises added an entirely new chapter on human rights aligned with the more detailed UN Guiding Principles on Business and Human Rights, which were endorsed unanimously by the UN Human Rights Council in 2011.

The new chapter reflects the increasingly mainstream place of human rights on the business agenda, including for the financial sector. The underlying tenet of the UN Guiding Principles and the OECD Guidelines is that all businesses, including and especially state-owned enterprises, have a responsibility to respect human rights – and that includes the financial sector and investors. This is why the NBIM case is so timely.

When the parties to an OECD NCP case do not agree to participate in the mediated process, the NCP is able to issue a final statement clarifying the application of the OECD Guidelines to the situation presented to it. The final statement of the Norwegian NCP in the NBIM case does just that by setting out in a clear, step by step discussion, why and how the OECD Guidelines apply to investors and in particular, to minority shareholders. In doing so,the statement provides valuable guidance to investors who are looking for direction on meeting their own responsibility to respect human rights. There is no doubt that OECD Guidelines apply to the financial sector. They specifically reference the financial sector and as the Norwegian and Netherlands NCP final statements point out, there are no exceptions. The OECD Guidelines therefore apply to all investors, including minority shareholders, whether state or privately-owned. While being a minority shareholder is not relevant to the existence of the responsibility to respect human rights, it is certainly relevant to how minority shareholders meet that responsibility (as explained below).

The UN Guiding Principles (and subsequently the OECD Guidelines) built on existing business approaches. Long before the UN process to develop the Guiding Principles, the business community and wider society had accepted that responsibility for human rights impacts runs along supply chains. In fact some of the earliest sparks in the business and human rights movement were the pictures of children sewing footballs and stories of workers burned to death in factories with locked doors. The associated clothing brands were targeted in the media, took responsibility for conditions in their supply chains, established elaborate new contractual requirements for their suppliers and equally elaborate risk management and monitoring systems that exist to this day and have spread widely to many other sectors.

The UN Guiding Principles and the OECD Guidelines built on this well-established concept of responsibility and crystallised it in an expectation that all businesses should seek to prevent and mitigate adverse human rights impacts “directly linked” to their products, services, or operations by a business relationship. There has been some confusion, particularly in the financial community, about what such direct linkage means; it’s been construed by some to narrow the concept almost to the point of meaninglessness.

Some mistakenly contend it requires that a financial institution must be directly linked to the human rights harm itself – rather than the correct interpretation where the linkage is a business relationship to a client or investee company that is the source of the human rights harm. The former interpretation is only possible by ignoring key parts of the relevant OECD text and the well-accepted business practice that gave rise to the concept.

Just as Nike has long since accepted that it has responsibility to work with its business relationships to address potential human rights harms in factories where its products are stitched, financial institutions are equally directly linked to human rights harms created by clients using the financing they provide.

As for investors, there can be no more direct linkage between one organisation and another than through ownership, even minority ownership.

The remaining key question addressed in the Norwegian NCP statement is what is expected of a financial institution – in this case, a minority shareholder, given direct linkage but clearly no operational control over the company.

Here, the NCP statement clearly lays out what is expected, based on the OECD Guidelines: essentially investors should take the same steps expected of all businesses to take a systematic approach to human rights across their investments. First, investors (like all business) are expected to adopt a policy commitment to respect human rights, thus providing a clear signal to their own staff and the companies they invest in. Second, they should carry out human rights due diligence. Not surprisingly, the UN Guiding Principles and OECD Guidelines took their inspiration from familiar, long standing business practices — due diligence, impact assessments and risk management – in designing an approach to identifying and managing human rights risks.

What the UN Guiding Principles signal, and the NCP case clarifies, is the shift away from a topic-focused approach that some investors have taken (focusing for example on selected human rights topics such as child labour or the extractive industries) towards an approach that is systematic and prompts businesses, including investors, to address all their key human rights impacts – identified (and then managed) through the human rights due diligence process.

As the Norwegian NCP case states: “companies should not simply choose to only address a small spectrum of human rights if they may have a significant impact on a range of other rights. Rather responsibilities are tied to impacts: enterprises should be prepared to address the impacts they have, not just those they find of interest.”

Building on the pragmatic approach taken in the OECD Guidelines, as the Norwegian NCP case highlights, there is recognition that carrying out due diligence on every company an investor may invest in may not be possible.

Instead, investors that do not do have the capacity to do this should focus on high-risk areas – those sectors,geographies, situations and products that run the highest risk of creating human rights harms. An increasing range of investors – through developing their in-house capacity or working with service providers – have built these kinds of considerations into their screening.

Similarly, once investments are made, the idea is to put in place systems to focus on investee companies that may present the highest human rights risks, using typical investor tools such as active engagement, voting shareholder resolutions, and speaking at AGMs.

Where particular human rights concerns are brought to the investor’s attention as in this case when NBIM and APG were alerted to concerns about POSCO’s activities in India, the expectation is that investors should assesses the risks involved. If allegations raised are deemed credible, they should then use their leverage to persuade companies to stop actions that cause or contribute to human rights impacts as well as prevent future harm.

As the Norwegian NCP statement makes clear, no one is expecting minority shareholders to solve or remedy the problem – that is clearly the responsibility of the company causing the harm. What is expected is that investors do not turn a blind eye but instead use their leverage to address the situation at the company level.

As the Norwegian NCP noted, “[a]lthough minority shareholders may need to exercise more creativity to obtain leverage than majority shareholders, they should bear in mind that leverage is not a mathematical calculation that automatically equates to the percentage of ownership. Leverage can be increased using a range of contractual and non-contractual techniques and exercised alone or together with others, and over a period of time and through different settings.”

In other words, no one expects miracles from minority shareholders.

Ironically, as the NCP statement pointed out, NBIM is already well on its way to meeting these expectations and could have used the case to highlight its leadership.

The NCP has credited the fund with developing the kind of systematic approach in certain areas, such as children’s rights, that the OECD Guidelines seek to promote.

The final statement also highlights the important steps that NBIM has taken in tackling thorny human rights issues such as child labour, by exercising shareholder rights to improve human rights approaches by companies in its portfolio and establishing a database across a range of non-financial issues, including human rights.

The final statement highlighted that NBIM needed to adjust its system to take a broader look at the range of human rights that might affect such a vast portfolio or look at where better disclosure would be valuable as well as disclosing a strategy or indicators to determine when it should engage companies.

The Norwegian fund has a separate Council on Ethics, independent of the government and separate from NBIM, that advises the government. The Norwegian NCP suggests coordination with the Council as one way NBIM could more efficiently identify human rights impacts as a basis for its active ownership priorities.

Given this recognition and the clear role the Government of Norway plays globally in promoting and supporting human rights and its ownership of the Fund, it is surprising that NBIM and the Central Bank chose the path they have (not engaging with the NCP and contesting the application of the Guidelines), rather than taking the opportunity to reinforce their leadership position among sovereign wealth funds.

NBIM’s position is a surprisingly limited view of how standards like the OECD Guidelines work.

The values that the Government of Norway, NBIM and its Council on Ethics haves always professed and which the OECD Guidelines seek to capture seem to have been forgotten in NBIM’s narrow, poorly constructed legal argument. Moreover, the expectations of the OECD Guidelines go hand in hand with NBIM’s expressed belief in various documents, including in the context of the International Forum of Sovereign Wealth Funds that “long-term financial performance can be affected by environmental, social and governance issues.”

The NCP final statement presents a clear set of recommendations to keep NBIM up to date with evolving responsible investment requirements.The Strategy Council currently mandated by Norway’s government to assess the strategy for responsible investment now has the opportunity to act on those recommendations, maintaining the Fund’s leadership in an increasingly transparent, fast-paced investment environment.

What are the implications of these cases for investors more generally? At one level, the NCP statement is a useful tool for investors who have been following the business and human rights discussion. Some investors have been actively engaging with their investee companies to address human rights risks. What is new is that the principle now works both ways: the same expectations about taking a more systematic approach to avoiding human rights harms applies not only to investee companies but equally to investors themselves.

For many investors, human rights issues are still seen as applying mainly to large oil and gas companies operating in difficult locations or branded apparel companies. The fact that governments have affirmed that all businesses, including investors, have human rights responsibilities may come as a surprise. Fortunately, the surprise now comes with basic instructions in the form of an NCP statement that all investors should make it their business to know and act on accordingly.

Margaret Wachenfeld is Director of Legal Affairs at the Institute for Human Rights and Business
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