05 december 2024

How to understand due diligence according to OECD guidelines?

How to understand due diligence according to OECD guidelines?

Activities are considered environmentally sustainable in terms of adhering to minimum safeguards if conducted in accordance with the following guidelines:

  • OECD Guidelines for Multinational Enterprises,
  • UN Guiding Principles on Business and Human Rights,
  • International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work,
  • Eight core conventions outlined in the ILO Declaration,
  • International Bill of Human Rights.

The above is referenced in Article 18 of the regulation establishing a framework to facilitate sustainable investments.

In today's article, a few words about the OECD Guidelines.

What are the OECD Guidelines?

The OECD Guidelines for Multinational Enterprises are non-binding recommendations addressed by governments to multinational enterprises, focusing on responsible business conduct (RBC). They recognize and encourage the positive contributions businesses can make to economic, environmental, and social progress while acknowledging that business activities can also have adverse impacts on employees, human rights, the environment, corruption, consumers, and corporate governance.

The OECD Guidelines for Multinational Enterprises therefore recommend that companies conduct risk-based due diligence to avoid negative impacts related to their operations, supply chains, and other business relationships.

A Foundation for Responsible Business

The OECD Guidelines for Multinational Enterprises represent one of the most important international standards for responsible business conduct, addressing issues such as:

  • Environmental (E),
  • Social (S),
  • Governance (G).

These guidelines provide recommendations for responsible practices, including:

  • Managing environmental impacts,
  • Respecting human rights,
  • Ensuring integrity in management.

A Framework for Sustainable Development

The OECD Guidelines promote the inclusion of ESG factors in decision-making processes, especially regarding:

  • Reporting on the impact of activities on climate change,
  • Respecting diversity and workers’ rights,
  • Combating corruption and abuse.

This enables businesses to better identify, manage, and report risks and opportunities related to ESG.

Harmonizing Standards

The OECD Guidelines align with other international regulations and standards, such as:

  • Global Reporting Initiative (GRI) Guidelines,
  • Task Force on Climate-related Financial Disclosures (TCFD),
  • EU Corporate Sustainability Reporting Directive (CSRD).

OECD supports consistency in ESG reporting, facilitating investors in comparing information and making informed decisions.

The Due Diligence Principle

The OECD places particular emphasis on the importance of due diligence in ESG reporting. This involves:

  • Identifying ESG risks throughout the supply chain,
  • Taking actions to mitigate negative impacts,
  • Transparently reporting on those actions.

An example is the OECD Due Diligence Guidance for Responsible Business Conduct, which provides practical advice for companies.

Support for Policymakers and Investors

The OECD Guidelines offer essential insights for investors, regulators, and stakeholders looking to assess ESG risks and impacts in business operations. This facilitates decision-making based on sustainable criteria.

Sample Q&A from the OECD Guidelines

What are some examples of negative impacts addressed by the OECD Guidelines?

In terms of information disclosure:

  • Failure to disclose relevant information about a company’s financial and operational performance, objectives, major shareholders and voting rights, remuneration policies for board members and senior management, or governance structures and policies.
  • Failure to provide the public and employees with adequate, measurable, verifiable, and timely information on the potential environmental, health, and safety impacts of the company’s activities.

In terms of human rights:

  • Forced labor,
  • Discrimination in pay for equal work or work of equal value,
  • Gender-based violence or harassment, including sexual harassment,
  • Lack of proper engagement with indigenous communities affected by business activities,
  • Retaliatory actions against civil society representatives or human rights defenders documenting the impacts of projects,
  • Restricting access to clean water.

This is just one example from the Q&A section of the OECD Guidelines. The full guidelines can be downloaded from the Ministry of Funds and Regional Policy.

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