by Palle Ellemann, Lead Emerging Market Engagement at GES
In March 2017, OECD published a new set of guidelines for institutional investors: “Responsible business conduct for institutional investors: Key considerations for due diligence under the OECD Guidelines for Multinational Enterprises.” These guidelines are intended to help institutional investors implementing policies and processes to prevent and address adverse impacts in the areas stipulated in the Guidelines for Multinational Enterprises – human and labour rights, environment and corruption. It is furthermore stressed that they are fully aligned with the recommendations of the UN Guiding Principles for Business and Human Rights (UNGPs). The new guidelines have been necessary to clarify the role for investors, who have a different business relationship with investee companies compared with a supplier-buyer relationship. In most cases, institutional investors are minority shareholders in the companies they invest in, but the guidelines nonetheless confirm that this can be considered a business relationship under the OECD guidelines.
The OECD Guidelines expect enterprises to carry out due diligence to avoid and address their involvement with adverse impacts related to ESG issues. The due diligence involves:
1) identifying actual and potential adverse impacts;
2) preventing or mitigating adverse impacts; and 3) accounting for how adverse impacts are addressed, by
(a) tracking performance and
(b) communicating results.
Carrying out due diligence is, therefore, an on-going, proactive and reactive, and process-oriented activity.
Institutional investors often have a large number of investee companies in their portfolios, so the OECD Guidelines stress the importance of using a risk-based approach to prioritise resources for due diligence taking into account severity and significance of adverse impacts. There is no expectation that all potential investments are going through a full due diligence, but the investor should have a policy and strategy that sets the parameters for priorities and due diligence. There can be many different ways of putting this into practice.
The GES Global Ethical Standard screening and Business Conduct Engagement cover the actual adverse impacts that are identified. The Global Ethical Standard screening tracks more than 20,000 companies worldwide and all incidents considered a violation of international norms and conventions are consistently followed up with engagement to mitigate the adverse impact. This is a very established process that GES successfully has conducted for more than 10 years.
For the more proactive part of the OECD guidelines concerning identifying and preventing potential adverse impacts, GES has over the years developed a range of Stewardship and Risk services that address high-risk themes and specific markets. These thematic programmes include Carbon Risks, Water, Taxation and Palm Oil amongst others. The market specific programmes include Burma and the Emerging Markets Engagement (EME). The latter is by far the largest Stewardship and Risk programme at GES with more than 130 active engagement cases in 13 emerging markets.
More on GES Emerging Markets Engagement in the next post.