BLOG - OECD Guidelines for Multinational Enterprises and the Financial Sector

Responsible Investor article: In my previous article I discussed the importance of Responsible Business Conduct (‘RBC’) in the context of investment and made reference to its application in the context of the financial sector. In this article I would like to explore these ideas further.

In my previous article I discussed the importance of Responsible Business Conduct (‘RBC’) in the context of investment and made reference to its application in the context of the financial sector. In this article I would like to explore these ideas further.

OECD Guidelines for Multinational Enterprises and the Financial Sector

The OECD Guidelines for Multinational Enterprises (‘the Guidelines’) represent a leading instrument of RBC. They cover a comprehensive set of expectations including guidance on employment relations, corruption and the environment and are the only multilaterally agreed instrument covering these themes that governments have committed to promoting in a global context. Additionally, they are the only government backed instrument on responsible business conduct with a built in grievance mechanism. National Contact Points (NCPs), agencies appointed by governments adhering to Guidelines (‘specific instances’) and are tasked with mediating claims of non-adherence to the Guidelines, as well as general promotion activities.  Since their update in 2011 the Guidelines are also fully aligned with the UN Guiding Principles for Business and Human Rights (UNGPs), making them the de facto implementation mechanism of these principles.

All multinational enterprises (MNEs) should take into account the principles and standards of the Guidelines regardless of the type of sector they belong to or their ownership structure. This is made clear in both comments to the Guidelines and by reference to guidance on the UNGPs. As such they are as applicable to the financial sector as they are to any other industry. Nonetheless, certain complexities inherent to the financial sector can make application of the Guidelines in this context challenging.

Causing, contributing and directly linked

At the risk of boring you with technical details allow me to explain how expectations of MNE’s under the Guidelines are formulated. Under the Guidelines enterprises are expected to exercise due diligence in order to: 

“Avoid causing or contributing to adverse impacts on matters covered by the Guidelines, through their own activities [...],[1], and;

“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[...].”[2]

As you can see the type of relationship an entity has to an adverse impact will have implications for how it should be addressed, therefore this distinction is important. In the context of the financial sector this issue is not always straight forward.  For instance, what sort of response is necessary for an investor who possesses majority or controlling holdings in an entity causing an adverse impact? 

On the one hand, it is clear that there is a direct link to the impact through a business relationship but on the other hand it can be argued that the investor may also be contributing to the adverse impact caused by an investee company themselves because its majority shareholding directly supports and maintains the activities of that company. This perspective is even more valid in cases where a majority holding financial institution also exercises control or managerial power through its holding.  What then is the correct response?

Often these issues will lie along a spectrum and not have a clear black and white answer. However, rather than pondering the nuances, financial institutions would do well to err on the side of caution. If they have agency over any part of the contribution they should work to cease or prevent the adverse impact. If they have any leverage over the entity actually causing or contributing to an adverse impact they should apply it as strongly as possible to encourage ceasing, preventing or mitigating the adverse impact.

Furthermore, minimal leverage as well as a lack of leverage is not a write off for responsibility under the Guidelines. In the context of the financial sector this issue comes up in the case of minority shareholdings, which can be insignificant relative to total holdings in an enterprise. What action should an entity take if they possess a minority holding in an entity causing or contributing to adverse impacts, over which they have no leverage? The path of least resistance would seem to be to simply sever the link to the adverse impacts by divesting from the entity. However I would like to stress here that this course of action should only be followed as a last resort. Instead the Guidelines emphasize the importance of staying engaged and attempting to increase leverage. This can be done for example by establishing contractual arrangements, voting trusts, and participation in collaborative efforts with other financial enterprises with common investments to collectively apply pressure to the investee entity causing the adverse impacts.

Risk-Based Due diligence  

Complexities also exist in terms of application of due diligence under the Guidelines in the context of the financial sector.  Financial institutions often possess hundreds to thousands of clients or other types of business relationships making conducting due diligence on all of them nearly impossible. However this is not the expectation of the Guidelines.  Instead, the Guidelines encourage enterprises to prioritise due diligence on their business relationships based on identification of general areas where the risk of adverse impacts is most significant.  Risk-based due diligence is already practiced in the financial sector to avoid financing of terrorism or criminal activity, therefore extending it to avoiding other types of negative impacts is not a huge leap to make.

The Guidelines in Practice

These issues recently came to the fore in a case at the Norwegian National Contact Point (NCP) involving Norwegian Bank Investment Management’s (NBIM) minority holding in an entity allegedly responsible for human rights violations. This Norwegian NCP found that the recommendations of the Guidelines should be applied by fund managers as well as minority shareholders, and that NBIM was not in adherence with the Guidelines because it did not have a strategy in place on how to respond to a finding that an investment is linked to human rights violations, apart from child labour violations. 

The idea that the Guidelines should likewise be applied by stock exchanges or investment management firms is not far-fetched.  If stock exchanges are considered to be MNEs, and indeed this is how they operate, they should apply the Guidelines in the same manner as other financial institutions.  We are likely to see NCP cases involving the responsibility of stock exchanges under the Guidelines in the near future.   Industry will need to approach these issues seriously as scrutiny regarding responsible business conduct standards in the financial sector continues to intensify.  Given the significant influence and pervasive presence of the financial sector within the international economy a clear understanding of these expectations is crucial both in terms of providing guidance to the various actors in the financial sector as well as in terms of providing direction to the NCPs on handling these issues as they arise more frequently.

[1]                  The OECD Guidelines for Multinational Enterprises, Chapter II, paragraph 11

[2]                  The OECD Guidelines for Multinational Enterprises, Chapter II, paragraph 12