Investment and responsible business conduct: two sides of the same coin

By Prof Roel Nieuwenkamp, Chair of the OECD Working Party on Responsible Business Conduct. 

©Thinkstock.Istockphoto/Gajus

©Thinkstock.Istockphoto/Gajus

 Investment and responsible business conduct belong hand in hand with one another. Investors possess great potential to positively influence the impacts of their investments. Furthermore, investments in projects linked to adverse impacts are increasingly losing support The OECD Guidelines for Multinational Enterprises recognise the obligation of multinational enterprises (MNEs) to conduct their business practices in a responsible manner along their entire supply chain and in every sector. The financial sector is no exclusion to this.

 

The OECD Guidelines for Multinational Enterprises

The OECD Guidelines for Multinational Enterprises (the Guidelines) are the most comprehensive set of guidelines for Responsible Business Conduct (RBC) covering all areas of corporate responsibility, from labour and human rights to environment and corruption. Currently, 46 countries adhere to the Guidelines and more non-OECD members are in the process of adherence.

 

Although the Guidelines are non-binding for MNEs, they are a binding commitment for the governments who have adopted them. Furthermore, they are endorsed by private industry, representatives of which were actively engaged in the negotiations on the Guidelines. The Guidelines have a unique grievance mechanism attached to them: National Contact Points (NCPs). These NCPs offer mediation services for the resolution of RBC issues of multinationals. They are also the de facto, unique grievance mechanism for the UN Guiding Principles on Human Rights & Business and the ILO Tripartite Declaration, as the Guidelines are completely aligned with these international instruments. This relationship has greatly improved the scope and impact of the Guidelines.

 

The importance of due diligence

The Guidelines do not only concern investments but also cover almost all global supply chains. Although production can be outsourced, corporate responsibility cannot be. This underlines the importance of risk-based due diligence: the process that companies should use to manage the risks of causing or contributing to negative impacts on human rights or labour rights, as well as other adverse impacts, along their entire supply chain. For financial institutions this implies that they should do a careful assessment of the projects they finance or invest in. Importantly, if a financial institution notices that it invests in a company that breaches human rights or other principles of the OECD guidelines, simply selling the shares of that company is nearly never the optimal solution. It might be the easy way out, but it is not helpful. More often, engagement with the company to try to change its behaviour is the appropriate way forward. If investors lack the leverage to do so, they should try to augment their influence, for example through cooperating with other companies, trade unions or NGOs. Disengagement should only be the last resort.

 

The responsibility of investors

As I wrote before, it is becoming more obvious that investments that are not responsible are enjoying less support. One way this is evidenced is by the increasing number of cases filed through the NCP mechanism that involve the financial sector. Recently, for instance, there was a NCP case between the Dutch pension Fund ABP and its pension administrator APG, and the Norwegian Bank Investment Management (NBIM) of the Norwegian Pension Fund. The NGOs that filed the complaint claimed that the concerned investors failed to take appropriate steps to prevent or mitigate negative human rights and environmental impacts in connection with their investment in POSCO (a company that was breaching the Guidelines through its activities in India). Both the Dutch NCP and the Norwegian NCP agreed with this claim. The case received significant attention and signalled the responsibility of investors – either private or institutional – to ensure a solid risk-based due diligence system to prevent or mitigate adverse impacts caused by companies they are investing in.

 

A pivotal year

The Guidelines are very clear: all MNEs should take into account their principles and standards, regardless of the type of sector they belong or their ownership structure (i.e. State, private, mixed). Nonetheless, the status of the financial sector is interesting in the context of the Guidelines due to the many complexities and outstanding questions around their implementation in this sector. How should minority shareholders engage with companies they own shares of, especially when they own only a small percentage the equity? To what extent does carrying out due diligence fit into the general principles of a passive investment strategy and what should a company should do if it is made aware of an adverse impact caused or contributed to by a company in which it invests through an index fund?

 

These types of questions will be tackled in the pro-active agenda project on the financial sector of the OECD Working Party on Responsible Business Conduct. The project will involve a multi-stakeholder process with close involvement from the financial sector as well as NCPs, governments, trade unions and NGOs. The expected outcome of the project is practical guidance for the financial sector on how to integrate RBC into their business models and management. The relevance and urgency of this project is significant: worldwide, attention to investment practices is growing, and cases at OECD NCPs on the practices of investment funds, stock exchanges and the like can only be expected to increase. Practical guidance is needed for investors to do well by doing good.

 Originally published by Responsible Investor, March 2014. 

 

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