Applying Business and Human Rights International Standards to Investor Due Diligence

The OECD Guidelines for Multinational Enterprises and UN Guiding Principles for Business and Human Rights

The Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises (MNE) and UN Guiding Principles on Business and Human Rights (UNGPs) have played an increasingly important role in the compliance landscape for both companies and investors in recent years. Socially conscious ESG investors are interested in how to implement international norms in their portfolios and understand the potential impacts of applying additional screening criteria within their strategy.

How are Human Rights defined?

The Universal Declaration of Human Rights (UDHR), adopted in 1948, together with two international human rights treaties, the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR), are usually considered to be international human rights law’s foundational instruments and are binding all states. Together they are often referred to as the “International Bill of Human Rights” and have extensive reach in international human rights law. Judicial bodies invoke these principles when making decisions, and many laws and constitutions are based on these norms.

Historically, human rights were usually viewed as guaranteeing the freedoms of the individual against the power of states rather than private actors. Yet, appreciation of the role of non-state actors such as companies and their influence on human rights has steadily grown. Consequently, states, multinational organizations and international human rights bodies have defined the duties of states over time to control non-state actors’ conduct to avoid interference with human rights, giving rise to the notion of responsibility to respect other indirect obligations.

The influence of human rights standards on businesses

International norms and standards, such as the OECD MNE Guidelines and UNGPs, have played a progressively important role in the compliance landscape for both companies and investors. Since the UN Human Rights Council unanimously endorsed the UNGPs in 2011 and governments adhering to the OECD MNE Guidelines adopted the updated guidelines, the consensus around the responsibility of businesses to respect human rights has solidified. The OECD Guidelines – and related here to the OECD Guidelines for Responsible Business Conduct¹ (RBC Guide) have been gaining traction as the basis for investors and companies to conduct their due diligence for sustainable and/or responsible business conduct.

In the Netherlands, for example, the Dutch Pension Funds Agreement on Responsible Investment,² a covenant between pension funds, NGOs and the government, came into effect in 2019. It embraces an approach in which the OECD Guidelines and the UNGPs are taken as the basis for identifying, prioritizing, and addressing ESG risk mitigation. A similar covenant has been adopted for the insurance sector.³

At a broader level, the European Commission has proposed a directive on Corporate Sustainability Due Diligence⁴ for corporates – complementing the recent EU Taxonomy⁵ – which contains due diligence expectations for businesses that the OECD Guidelines and UNGPs have shaped as a baseline. Although there are some initial concerns that this newest directive proposal could be leaning towards a box-ticking compliance approach with overreliance on contractual assurance,⁶ an implementation by the EU will generate significant additional attention for OECD Guidelines and the UNGPs. This applies to businesses with this proposed directive,⁷ but – consequently – also to their supply chain and to investors (if not already covered by article 4 of the SFDR).

As a starting point, there are a few primary considerations for the implementation of these standards into investment policies. For this, we will also have a first look at the investor due diligence process as outlined in the RBC Guide.

Business relationships for influence

While investors might not directly cause adverse impacts, they have a responsibility to prevent or mitigate actual and potential adverse impacts caused by companies due to their business relationship with these entities. In turn, the company’s adverse impacts could take place beyond its own operations and be situated in its supply chain and other business relationships.

Due diligence in the investment process

Investors should identify, prevent, mitigate and account for how they address the actual and potential adverse impacts caused by investee companies in their portfolios. The due diligence process outlined in the RBC Guide is a cyclical process, including clear steps that are suitable for implementation in institutional investors’ policy and management systems.

However, as also confirmed in the OECD Guidelines, the nature and extent of due diligence, such as the specific steps to be taken, should be appropriate to a particular situation and will be affected by factors such as the size of the enterprise, context of its operations, the specific recommendations in the OECD Guidelines, and the severity of its adverse impacts.⁸

The importance of prioritization

As it might not always be possible to identify and respond to all adverse impacts, investors can apply their due diligence based on a prioritization of the severity of adverse impacts. The due diligence cycles allow for prioritization and the monitoring of results and implementation of a ‘first priority’, before expanding the focus to a next priority. This allows investors to periodically (re)identify actual and potential adverse impacts and to (re)prioritize these.

Communicate your strategy, report on your progress

To the extent possible, investors should engage with their stakeholders when developing a responsible investment policy or when determining prioritization for due diligence. Especially when mapping and prioritizing actual and potential adverse impacts for the first time, it could be a very useful exercise to assess with stakeholders the ‘what’ and ‘why’ around adverse impacts, and work together to determine which topics should be prioritized.

Influencing remediation

The focus of the due diligence process is to avoid adverse impacts. But companies can still cause or contribute to adverse impacts. In these instances, remedies should be provided. However, in the context of adverse impacts caused by companies, investors would typically ‘only’ be indirectly linked to the adverse impact. As a result, investors would not be expected to provide remedy themselves, but could apply their influence to encourage the company to do so.

As these normative standards play an increasingly important role for investors, our team will further discuss the UNGPs, OECD Guidelines and the RBC Guide in more detail in future articles to provide further insight into how investors could implement human rights considerations in their due diligence processes.

Leveraging Morningstar Sustainalytics’ research and data, our team supports investors seeking guidance for aligning portfolios with human rights global standards. Please reach out to our Client Advisory team to request more information about applications of The OECD Guidelines for Multinational Enterprises and UN Guiding Principles for Business and Human Rights.

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