The Organisation for Economic Co-operation and Development (“OECD”) has published the first common global framework for environmental and social risk management for corporate lending and underwriting activity (the “CLU Guidance”). The CLU Guidance elaborates on the OECD Guidelines for Multinational Enterprises (the “MNE Guidelines”), a government backed process which contains a unique non-judicial compliant mechanism for non-observance, with public findings. This article will provide an overview of the CLU Guidance and comment on why this paper has consequences for banks and their clients.
Where does the CLU guidance come from?
The CLU Guidance is based and elaborates on the MNE Guidelines and the OECD’s Due Diligence Guidance for Responsible Business Conduct (the “Due Diligence Guidance”), which further elaborates on how to implement the MNE Guidelines in the context of conducting due diligence. These papers are framed by the United Nations’ Guiding Principles on Business and Human Rights (“UNGPs”).
The MNE Guidelines are a set of standards intended to promote responsible business conduct1 by enterprises based in 48 adhering states. The Guidelines are non-binding but do contain a unique non-judicial grievance mechanism – the National Contact Point (“NCP”) – in each of the 48 adhering states. The NCPs are responsible for promoting a general awareness of the NME guidelines and implementing the complaints mechanism set out in them. That complaints mechanism allows any individual or organisation with a legitimate interest to submit a case to an NCP regarding a company (or bank), operating in or from the country of the NCP, which has not observed the NME Guidelines.
Between 2000 and 2018, over 400 complaints were submitted to NCPs.2 A record of all cases handled by NCPs is made public online. This represents a clear reputational risk for non-compliant banks and demonstrates the importance of banks paying close attention to this new CLU Guidance.
What recommendations does the CLU Guidance include?
The OECD consider that banks “have a key role to play in driving global sustainability3. The CLU Guidance provides a series of practical recommendations on how to implement the core elements of the Due Diligence Guidelines and by extension adhere to the MNE Guidelines.
For example, in cases where a bank is contributing to adverse impacts or risks4 that are caused by its client, it should “seek to influence its client” to prevent and remediate those adverse impacts5. The paper notes that, “in situations where banks lack leverage… they can individually and collectively engage with regulators, policymakers and civil society organisations to promote prevention and mitigation of certain risks more broadly.6 Furthermore, instead of disengaging with clients who are causing adverse impacts, banks are “encouraged to engage with clients to ensure that these risks can be/are responded to effectively”.7
Other practical recommendations include identifying and assessing the most significant areas of risk across client portfolios, and establishing grievance mechanisms through which stakeholders can raise potential issues related to a client’s activities.
Financial institutions are increasingly being asked to engage with environmental, social and governance (“ESG”) factors: the CLU guidance follows the launch of the United Nations’ Principles for Responsible Banking on 23 September 2019, and precedes the adoption of an updated version of the Equator Principles8 – the benchmarks for managing environmental and social risks in Project Financing – on 18 November 2019. The CLU Guidance is the OECD’s second guidance paper on responsible business conduct in the financial sector, following the 2017 Guidance on Responsible Business Conduct for Institutional Investors. As such, the CLU Guidance represents a further development in the international framework that serves to encourage responsible lending.
Carrying out due diligence in accordance with the CLU Guidance will ultimately put pressure on the corporate clients of banks to avoid and address environmental and social risks in their activities. Accordingly, although the CLU Guidance is addressed to financial institutions, the broader impact will be felt by their clients. This signifies the importance of all organisations establishing and ensuring effective internal policies and procedures.