Clarifying how the OECD Guidelines for Multinational Enterprises affect investors

In March this year, an international coalition of civil society groups wrote to five financial institutions with reported investments in South Korean steel giant POSCO. They asked the investors to use their leverage over POSCO-India to urge it to address human rights concerns associated with its steel and port project in Odisha, India. Later that month, the Dutch National Contact Point (NCP) for the OECD Guidelines for Multinational Enterprises said Dutch pension fund APG has a role to play in POSCO-India, because of its shareholding in the parent company.

APG had already been engaging with POSCO, because it is prepared to use its leverage if its portfolio companies do not appear to be operating in line with UN Global Compact principles. But APG notes that there is no consensus yet on the extent of shareholders’ obligations to remedy environmental and human rights violations in companies it invests in.

The obligation for financial sector companies to adhere to the OECD Guidelines has been recognized for more than a decade, but NCPs were sending out conflicting messages. The Australian NCP, for example, argued that the Guidelines did not apply to the financial sector. As a result, it was made even more explicit when the OECD revised the Guidelines in 2011 to bring them into line with the UN’s Guiding Principles for Business and Human Rights – John Ruggie’s Protect, Respect and Remedy framework.

“The financial sector needs to realise that there are far reaching consequences,” Herman Mulder, chair of the Dutch NCP and chairman of the Global Reporting Initiative (GRI), says. “It’s not just the OECD Guidelines. It is their role in the value chain – the footprint that they leave. But we realise this needs to be defined better.”

Mulder admits that one of the difficulties is that the OECD Guidelines are seen as “soft law” – which means that many lawyers may not have been paying sufficient attention.“The idea is that the NCP tries to de legalise issues because it is a mediation process. We want to use bad practice to create better practice. It’s very much voluntary – but it is defined by 44 countries. We hope courts will consider it in an international context as a reference point, to see if banks and investors have used their best efforts to follow the UN Guiding Principles – because this has now been set as the standard.”

The UN’s Office for the High Commissioner for Human Rights has reinforced the view of the Dutch NCP, by recently confirming that the Guiding Principles apply to institutional investors’ minority shareholdings. The financial sector should see this as an opportunity, Mulder suggests, because it is a reputational issue and a responsible business issue. But it is early days when it comes to achieving consensus on the criteria for accepting a case for NCP mediation. “It is a very interesting discussion. It’ll be in the self-interest of pension funds to speak out,” he says.

Work on clarifying the application of the OECD Guidelines to the entire financial sector has begun. The OECD has just finished a consultation on the issue and has set up a working party on responsible business conduct, under the chairmanship of Roel Nieuwenkamp, the Dutch chair of the OECD working party on international investment. The responsible business conduct group will recommend a due diligence and risk management framework for the financial sector.

“The UN Guiding Principles language was drafted to apply to supply chains. We knew that cases would come down the track to the OECD’s National Contact Points from the investment and financial sector,” Nieuwenkamp says.

The working party started with the basics. It has conducted a mapping exercise, asking: What does the financial sector look like? What are the parameters for each part of the industry? What is the sector’s leverage?

What are the environmental, social and governance risks? The results will be revealed at the OECD Responsible Business Forum in Paris at the end of June.

Some issues are clear. “From the government perspective there is certainty that the financial sector is covered by OECD Guidelines and by the UN Guiding Principles,” Nieuwenkamp says. “This means that investment and business relationships are covered. The questions of what are you investing, how much leverage you have, your personal relationships within these businesses and your history become very important.”

The OECD Guidelines state that companies should not cause an adverse impact, should not contribute to an adverse impact, and if they are linked by a business relationship, should seek ways to prevent and mitigate adverse impacts.

“In the APG/POSCO case, we had to be specific about which paragraph of the OECD Guidelines was being violated by pension funds. It was the one that says entities should seek to prevent an adverse impact,” Joris Oldenziel of NGO SOMO, says. The NGO helped bring the case to the Dutch NCP, arguing that impact can be directly linked to products and services and for pension funds, the product or service is their investment.

APG was already engaging with POSCO on the allegations of environmental and human rights violations at the Indian plant, long before the NCP became involved. “We will investigate concerns raised about our portfolio companies wherever possible,” Anna Pot, senior sustainability specialist at APG says. “Our primary goal is to improve companies’ performance through engagement, and we only exclude companies as a last resort if engagement does not result in sufficient change.”

APG and the NGOs involved in the POSCO case issued a joint statement pointing out that the OECD Guidelines are not clear. But the lawyers may need to cast the net wider. “There are not many cases where courts have ruled on corporate complicity in human rights litigation,” Pot notes. “But the OECD NCP statement draws attention to the question of what litigation might mean for financial institutions.”

APG, like other financial institutions, is well aware ofpotential reputational damage, whatever the legal position. “The court of public opinion is important and there is a tendency to hold companies to account and hold investors to account. That’s where the OECD Guidelines play a role. It is good to make companies more accountable, but what does it mean in practice? We have long been pursuing our own engagement agenda, are committed to ensuring that our investee companies operate responsibly and use our leverage where appropriate to achieve this,” Pot adds.

Lawyers may be tempted to look for a quick fix to this problem, to allay fears that the Dutch NCP decision could open up the floodgates. But institutional investors must also consider their fiduciary duties to ensure long-term sustainable returns, as John Ruggie stresses in the conclusion to his new book, Just Business.

Ed Waitzer, of Canadian lawfirm Stikeman Elliott explains: “Institutional investors have a responsibility as shareholders which flows from their investment and they have a responsibility to beneficiaries. If they don’t think long-term and have long-term liabilities, there is a mismatch.”

This means that lawyers need to look beyond the letter of the law and should try and work out the trajectory of the law. “The question is, what reasonable expectations are out there? You need to frame it in terms of new social norms,” Waitzer suggests. The UN Guiding Principles provide a framework to define reasonable expectations and this is being articulated by the OECD. “Lawyers have a responsibility to advise clients in this dynamic situation. The question for pension funds is, how do you start doing your duty on intergenerational impartiality? They need to start coming up with answers.”

Further information:

Investing the Rights Way: A guide to investors on business and human rights, published by the Institute of Human Rights and Business

Just Business: Multinational corporations and human rights, John Ruggie

Adrienne Margolis is the Founder of Lawyers for Better Business