Updated OECD Guidelines for Multinational Enterprises: implications for corporate disclosure and due diligence

Elise Edson

Shearman & Sterling, Paris

Elise.Edson@Shearman.com

Introduction

In June 2023, the Organisation for Economic Co-operation and Development (OECD) launched its updated and newly renamed Guidelines for Multinational Enterprises on Responsible Business Conduct^[1] (the ‘Guidelines’).

The Guidelines comprise recommendations for multinational enterprises to promote responsible business conduct (RBC) across key areas: including human rights; labour rights; the environment; bribery and corruption; consumer interests; science, technology and innovation; competition; and taxation.

Introduced in 1976, the Guidelines were last updated in 2011. The 2023 revision follows a stocktaking exercise, which included a public consultation open to stakeholders worldwide. The revised principles and standards reflect social, environmental and technological developments over the past decade, and have important implications for corporate disclosure and due diligence.

Key takeaways

• While the term ‘multinational enterprise’ remains undefined, the international nature of a company’s structure or activities is now given as a main identifying factor, so as to exclude companies with purely domestic operations exporting their products abroad.
• The term ‘business relationships’ is now expressly stated to go beyond first-tier relationships and to encompass entities across the enterprise’s supply chain, both upstream and downstream.
• The due diligence that an enterprise should conduct is clarified to be risk-based, meaning it should be commensurate to the severity and likelihood of the adverse impact and appropriate and proportionate to its context.
• The scope of an enterprise’s responsibility to carry out due diligence in relation to human rights, labour rights, the environment and anti-corruption is clarified and expanded, and for the first time extended to the enterprise’s risks and impacts in relation to science, technology and innovation.
• It is recognised that adverse impacts on the matters covered by the Guidelines are often interlinked, requiring a more holistic approach to due diligence.
• Updated recommendations are provided on the disclosure of RBC information, including sustainability-related information.
• Strengthened procedures have been introduced for the National Contact Points for Responsible Business Conduct (‘NCPs’), the Guidelines’ implementation mechanism, to further the effectiveness of the Guidelines.

What’s new?

Scope of application

Neither the existing nor the updated Guidelines define the term ‘multinational enterprise’, which is, however, stated to typically encompass ‘companies or other entities established in more than one country and so linked that they may co-ordinate their operations in various ways’.

The 2023 revision highlights as key indicia ‘the international nature of an enterprise’s structure or activities’, along with ‘its commercial form, purpose, or activities’.

The emphasis on the international nature of an enterprise’s structure or activities appears to respond to a number of grievances (known as ‘specific instances’) submitted before NCPs against enterprises with exclusively domestic operations. In one case, the Korean NCP rejected a specific instance against a company that had no overseas subsidiary or branch office but simply exported its products, on the basis that ‘the respondent is not engaged in the activities of a multinational enterprise’.^[2]

Due diligence

Importantly, the 2023 revision leaves intact the six-step due diligence framework under the existing Guidelines, requiring enterprises to (1) embed RBC into their policies and management systems; (2) identify and assess adverse impacts in their operations, supply chains and business relationships; (3) cease, prevent or mitigate adverse impacts; (4) track implementation and results; (5) communicate how impacts are addressed; and (6) provide for or cooperate in remediation.

However, certain key concepts are clarified, and the substantive scope of due diligence with respect to the matters covered by the Guidelines is significantly expanded.^[3]

Key concepts

‘Business relationships’

The 2023 revision explicitly expands the notion of ‘business relationships’ beyond ‘contractual, “first tier” or immediate relationships’ to include relationships with:

• sub-contractors, franchisees, investee companies, clients, and joint-venture partners; and
• entities in the supply chain that supply products or services contributing to the enterprise’s own operations, products or services or which receive, license, buy or use products or services from the enterprise.

The 2023 revision further clarifies that relationships with individual consumers do not generally qualify as business relationships under the Guidelines (although it is recognised that an enterprise can contribute to adverse impacts caused by such individuals).

‘Risk-based’ due diligence

The 2023 revision confirms that, in line with the 2018 OECD Due Diligence Guidance for Responsible Business Conduct,^[4] due diligence should be ‘risk-based’, meaning that it:

• identifies and prioritises the areas where the risk of adverse impacts is most significant; and
• is proportionate and tailored to the degree and nature of the risk.

It is further clarified that risk-based due diligence related to an enterprise’s products or services should take into account known or reasonably foreseeable circumstances concerning the use of the product or service in accordance with both its intended purpose as well as its improper use or misuse.

For further guidance, the 2023 revision directs enterprises to the 2018 OECD Due Diligence Guidance for Responsible Business Conduct,^[5] the 2017 OECD Due Diligence Guidance on Meaningful Stakeholder Engagement in the Extractive Sector,^[6] and the 2016 OECD-FAO Guidance for Responsible Agricultural Supply Chains.^[7]

Engagement and responsible disengagement

The 2023 revision emphasises an enterprise’s responsibility to use its leverage over entities with which it has business relationships, with the aim of influencing those entities to prevent, mitigate or remediate their adverse impacts.

Where possible, enterprises should seek to enhance their leverage, including through, eg, direct engagement, training and capacity building, embedding RBC and due diligence requirements into commercial contracts and linking business incentives to RBC performance. The importance of engaging with and supporting small and medium-sized enterprises, in particular, is stressed.

Disengagement from a business relationship continues to be referred to as a measure of last resort (when faced with, eg, a particularly severe adverse impact).

‘Meaningful’ stakeholder engagement

Stakeholder engagement was encouraged under the 2011 Guidelines and is described in the 2023 revision as ‘a key component’ of due diligence.

The 2023 revision further emphasises that stakeholder engagement should be ‘meaningful,’ indicating that it:

• is two-way, conducted in good faith by all participants;
• is responsive to stakeholders’ views;
• is timely, accessible, appropriate and safe; and
• identifies and removes potential barriers to engagement for vulnerable or marginalised stakeholders.

The importance of meaningful stakeholder engagement in the planning stages of activities that could significantly affect local communities (such as, eg, projects involving intensive land or water use), is underscored.

Expanded scope

Human rights

The 2023 revision highlights the requirement for enterprises to pay special attention to at-risk individuals and groups, with express reference now made to human rights defenders.

With respect to adverse impacts on indigenous peoples, the 2023 revision refers to the need for enterprises to ensure free, prior and informed consent in relation to business activities affecting indigenous communities’ land, territories or other resources.

In addition, the 2023 revision stipulates that in cases of armed conflict or heightened risk of gross human rights abuses, enterprises should conduct enhanced due diligence, including an assessment of violations of international humanitarian law.

This requirement aligns with the 2011 United Nations Guiding Principles on Business and Human Rights^[8] (the ‘UNGPs’), which recognise that ‘the risk of gross human rights abuses is heightened in conflict-affected areas’,^[9] and that human rights due diligence should ‘vary in complexity’ depending on, among other factors, ‘the risk of severe human rights impacts’.^[10]

Labour rights

The 2023 revision clarifies that labour rights due diligence should extend across enterprises’ business relationships, even absent an employment relationship, especially ‘in sectors where informality, short-term working arrangements, decent work deficits and digital transformation may be more common’.

In particular, the 2023 revision recognises the right of all workers to freedom of association and collective bargaining (and not just the enterprise’s own employees, as under the existing Guidelines).

Other relevant updates include requiring enterprises to:

• provide a safe and healthy working environment, consistent with the ILO Declaration on Fundamental Principles and Rights at Work^[11];
• bolster transparency around actions taken to address the risk of forced labour, including human trafficking and debt bondage, in connection with the enterprise’s operations, products and services;
• anticipate future societal and environmental technological changes impacting workers’ livelihood, including changes linked to automation, digitalisation, the just transition and sustainable development; and
• make provision for up- or re-skilling, where appropriate.

Environment

The 2023 revision recommends that enterprises conduct a significantly expanded environmental due diligence. The non-exhaustive list of environmental matters that enterprises should consider includes their impacts on: climate change; biodiversity loss; land degradation; marine & freshwater ecosystems; deforestation; air, water & soil pollution; and waste management.

The update further explains that environmental impacts encompass effects not only on the environment or biota, but also on ‘the operation of socio-economic systems or on people’. As such, it is recognised that conducting environmental due diligence and managing adverse environmental impacts will often require enterprises to take into account ‘multiple environmental, social and development priorities.’

It is additionally clarified that, in assessing the extent to which an enterprise is contributing to an environmental impact, where the available science or data is uncertain, the enterprise should base its assessment on the extent to which its activities are consistent with widely recognised benchmarks and standards, including as established in applicable regulatory frameworks, and relevant international agreements.

Bribery and other forms of corruption

Notably, the 2023 revision extends the scope of the Guidelines beyond bribery (as under the 2011 Guidelines) to include other forms of corruption, such as trading in influence, embezzlement and misuse of sponsorship and charitable donations.

Further, it is clarified that this includes bribery and other forms of corruption involving both public officials and employees of persons or entities with which the enterprise has a business relationship.

The update additionally recognises that adverse impacts on matters covered by the Guidelines are often enabled by corruption and that anti-corruption due diligence therefore contributes to avoiding such impacts.

Science, technology and innovation

Whereas under the existing Guidelines the provisions on science, technology and innovation were excluded from the scope of the due diligence requirement, with the 2023 revision, enterprises should now, in conducting risk-based due diligence, consider their impacts related to:

• the development, financing, sale, licensing, trade and use of both digital and non-digital technology, including the gathering and use of data;
• scientific research; and
• innovation, referring to the development of a new or improved product, service or process.

In so expanding enterprises’ responsibility of due diligence, the 2023 revision emphasises the impact of science, technology & innovation on the other matters covered by the Guidelines, including ‘sustainable development, human rights, economic participation, the quality of democracy, social cohesion, climate change, the global business and labour landscape and market dynamics’.

Disclosure

As under the 2011 Guidelines, the 2023 revision identifies two sets of disclosure recommendations: the first, relevant mainly to investors in publicly traded companies, concerning all material matters regarding an enterprise’s performance, and the second relating to topics of interest to a wider category of stakeholders (including civil society and local communities, among others). With the 2023 update, this second set of information is now referred to as ‘RBC information’.

Material information

The 2023 revision now defines ‘material information’ as ‘information whose omission or misstatement can reasonably be expected to influence an investor’s assessment of an enterprise’s value’, or ‘information that a reasonable investor would consider important in making an investment or voting decision’.

Other significant updates include adding to the list of material information that an enterprise should disclose:

• ‘sustainability-related information’, including as regards climate-related risks; and
• information on beneficial owners.

These changes align the Guidelines with the G20/OECD Principles of Corporate Governance,^[12] which in their recently launched 2023 revision notably include a new chapter on ‘Sustainability and resilience’, which promotes sustainability-related disclosure.

RBC information

The 2023 revision underscores that an enterprise’s due diligence also entails a responsibility to disclose RBC information, including the enterprise’s identified areas of significant impacts or risks, as well as related adverse impacts, prioritised (along with an explanation of the prioritisation criteria) and assessed.

It is further recognised that RBC information identified during an enterprise’s due diligence may be material information for the purposes of disclosure, and that ‘risks and impacts that may not seem to be financially material but that are relevant to people and the planet may be financially material for an enterprise at some point’.

The update moreover encourages enterprises to seek external assurance of RBC information in order to enhance its credibility.

Other relevant updates

The 2023 version emphasises that any environmental or social claims made by an enterprise about its products or services should be based on adequate evidence and properly tested and verified, as applicable.

Additional guidance is also given in respect of environmental reporting. In particular, it is emphasised that, in reporting on the enterprise’s reduction targets, enterprises should:

• use short, medium and long-term targets;
• include absolute as well as, where relevant, intensity-based targets; and
• take into account their Scope 1 (direct emissions), Scope 2 (indirect emissions) and, to the extent possible based on best-available information, Scope 3 (end-user) emissions.

Reliance on carbon credits or offsets should be of high environmental integrity and reported on separately from an enterprise’s other emissions reduction efforts.

Enterprises are also now encouraged to disclose misconduct related to bribery and other forms of corruption, as well as measures adopted to address suspected cases of such misconduct.

Consequences of non-observance

In case of non-compliance with the Guidelines, any individual or organisation with a legitimate interest in the matter may submit a specific instance to an NCP in which the relevant enterprise is based or operates. NCPs have handled over 650 such cases since 2000, when the mechanism was established, spanning different sectors.

The role of the NCP is to facilitate an agreement between the parties through consensual methods such as mediation or conciliation. At the conclusion of the proceedings, the NCP issues a final statement recording the relevant outcome and making any recommendations. The NCP may also, at its discretion and if permitted by the applicable national law and case-handling procedures, include in the statement its views on whether the enterprise has observed the Guidelines.

The 2023 revision makes various revisions to the NCP mechanism, covering, inter alia, the criteria to be considered in deciding whether the case warrants further examination, the publication of case-handling procedures, the course of action to be followed in the event of parallel proceedings, and the confidentiality and transparency of the proceedings.

Specific instances can have significant reputational impacts for companies, encouraging both compliance with the Guidelines and participation in the process. Additionally, the 2023 revision states that the NCP may inform relevant government agencies of the good-faith engagement (or lack thereof) of the enterprise.

Comment

The expanded scope of the 2023 version of the Guidelines reflects the growing expectation on companies to consider and disclose their impact on sustainability matters. Further, while the Guidelines continue to be structured around thematic chapters – addressing human rights, labour rights, the environment, bribery and other forms of corruption, and science, technology & innovation – the interlinkages between these different areas are now expressly recognised, encouraging enterprises to take a more holistic approach to due diligence.