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What business should know about the OECD Guidelines

OECD Watch article in Ethical Corporation

Aug 30, 2011

There are a few core changes to the OECD Guidelines for Multinational Enterprises that companies must take heed of. OECD Watch elaborates on the opportunities to hold companies to account for their misconduct via the new due diligence, supply chain and human rights provisions in the new Guidelines.

At the OECD ministerial meeting earlier this year when the new Guidelines for Multinational Enterprises were adopted, governments, trade unions and civil society clearly laid out their expectations of business.

Their message is simple: in order for enterprises to act in accordance with society’s wishes and promote sustainable development, they must do all that is necessary to prevent harmful social and environmental impacts.

The opportunity presented by the newly updated guidelines is profound, but depends in part on a firm grasp by business of the major changes to the instrument.

At 86 pages, business has a lot to process in the revised guidelines. For example, there is an entirely new chapter dedicated to human rights. The environment chapter now encourages companies to reduce and report on greenhouse gas emissions. And the employment chapter has been aligned with the ILO Tripartite Declaration Concerning Multinational Enterprises and Social Policy.

There is clarification that the guidelines apply to all sectors of the economy, including the financial sector. And there is a new recommendation that enterprises promote a free and open internet. These changes alone are a major step forward.

Due diligence 

Perhaps the biggest improvement though is the requirement that business conduct risk-based due diligence for almost all aspects of their operations, including their supply chains and other business relationships.

It is difficult to overstate the importance of this new language. In the general policies chapter, some newly added paragraphs (10-12) state that enterprises should:  

  • Carry out risk-based due diligence, for example by incorporating it into their enterprise risk management systems, to identify, prevent and mitigate actual and potential adverse impacts.

  • Avoid causing or contributing to adverse impacts on matters covered by the guidelines, through their own activities, and address such impacts when they occur.

  •  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.

The change here is not that companies maintain a system of environmental management that evaluates environmental, health and safety impacts, as this was already part of the guidelines. Rather, it is that companies will have to substantially increase their efforts to identify, prevent and mitigate all harmful impacts, including in their supply chains.

For example, under the new guidelines, an apparel company will be in breach if it sources from a supplier that uses child labour to produce its merchandise. In this scenario, the apparel company is directly facilitating the use of child labour, or at a minimum making it possible, and will need to correct this clear breach of the employment chapter.

Supply chain commitments

It is worth noting that over the past decade, there has been much debate as to whether a company should be held responsible if its suppliers were breaching the guidelines. Governments faced with these types of complaints would often look at whether the company had an investment-like relationship with the supplier before they would consider the guidelines applicable.

However, under the new guidelines, this is no longer a question: companies’ activities should avoid causing or contributing to negative impacts and correct them when they occur, including in their supply chains.

In addition, the new guidelines go a step further by calling on companies to prevent or mitigate breaches that are associated with their operations.

The new general policies paragraph 12 is particularly relevant to companies’ supply chains and the financial sector. For example, this provision would apply to a bank that provides services to a logging company that sources from suppliers engaged in illegal logging.

Conflict minerals 

Similarly, many companies have come under fire over the past decade for sourcing conflict minerals from the Democratic Republic of the Congo. Even though the companies and banks themselves are not engaging in illegal logging or perpetrating human rights abuses, they are nevertheless associated with these harmful practices.

Another important change companies will need to adapt to is newly-added paragraph 14 in the general policies chapter. This states that enterprises should: “Engage with relevant stakeholders in order to provide meaningful opportunities for their views to be taken into account in relation to planning and decision making for projects or other activities that may significantly impact local communities.”

In other words, business will need to engage in meaningful consultation with local communities, workers and other stakeholders and demonstrate how stakeholder’s views have (or have not) been taken into account in project planning and decision making.

Indeed, the absence of such consultation means enterprises could not possibly be adhering to the guidelines’ due diligence provision, as it would be impossible for a company to have a complete picture of potential and actual impacts arising from their activities.

In OECD Watch’s view, meaningful stakeholder consultation involves engaging with affected and potentially affected stakeholders in decision-making processes throughout the entire cycle of the enterprise’s activities. It also means companies should provide the public and stakeholders with adequate, measureable, verifiable and timely information translated into local languages on its actual and potential impacts.

Human rights 

Business will also need to adhere to the new chapter on human rights, and take particular care to have meaningful stakeholder consultation with rights-holders when carrying out their due diligence.

This new chapter has a dedicated due diligence provision that states enterprises should “carry out human rights due diligence as appropriate to their size, the nature and context of operations and the severity of the risks of adverse human rights impacts”.

The inclusion of a human rights chapter is a major advancement that aligns the Guidelines with the recently adopted United Nations’ “Protect, Respect and Remedy” Framework.

OECD governments have agreed to a six-month transition period to give companies the time they need to adapt to the updated guidelines. In that time, enterprises should have done the necessary due diligence to align their operations with them. Those that do so have the opportunity to meet global society’s expectations when it comes to corporate responsibility.

OECD Watch will continue to monitor implementation by business, and if necessary, will make use of the Guidelines’ complaint procedure when it is clear companies are not fulfilling these important corporate responsibility obligations.



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