Institutional investors should use their leverage to influence investee companies to help prevent or address adverse impacts on human rights or the environment, according to a new paper from the OECD.

The expectation is one of several set out in a paper from the OECD explaining how guidelines for responsible business conduct apply to institutional investors.

Released yesterday, the paper is intended to help investors implement due diligence recommendations in the OECD Guidelines for Multinational Enterprises “in order to prevent or address adverse impacts related to human and labour rights, the environment, and corruption in their investment portfolios”.

The report comes after some investors have been accused of violating the OECD’s guidelines. In 2012 and 2013 Norges Bank Investment Management (NBIM), which manages the Norwegian sovereign wealth fund, and Dutch pension fund ABP and its administrator APG, were accused of breaching the guidelines in relation to their investment in a South Korean steel company, whose plans for a large steel plant triggered allegations of human rights violations.

NBIM had argued that the OECD guidelines did not apply to minority shareholders.

The  OECD’s guidelines are voluntary principles and standards for responsible business conduct in line with applicable laws and internationally recognised standards. Nearly 50 governments are signed up, making a binding commitment to implement them.

The new paper identifies key actions for asset managers and asset owners. It argues that carrying out due diligence in line with the OECD guidelines will help investors fulfil their fiduciary duty, and bring benefits such as avoiding financial and reputational risks and being more able to meet expectations of clients and pension fund beneficiaries.

The OECD said its paper was not intended to create new standards of conduct, but outline practical considerations for institutional investors seeking to carry out its due diligence recommendations.

The Principles for Responsible Investment (PRI) said it was encouraging its signatories to consult the paper and use it as a resource to apply responsible investment standards that conform to international standards.

According to the PRI, key expectations for international investors included:

  • using their “leverage” to influence companies;
  • tracking performance of the investor’s management of risks and impacts;
  • communicating the results of investments;
  • enabling remediation when an investor has caused or contributed to an adverse impact.

The PRI said the new guidance suggested that, in most cases, minority shareholders can be directly linked to an adverse impact, but are unlikely to cause or contribute to one. However, it said that although the OECD guidance makes clear it is the responsibility of investee companies to prevent or mitigate adverse impacts, “investors are nevertheless responsible to show that they have adopted sufficient due diligence practices”.

The OECD said: “The characteristics of investors and their respective portfolios will impact how an investor goes about carrying out due diligence under the OECD guidelines, but not whether they are expected to carry out due diligence. Investors play an important role in promoting [responsible business conduct] amongst the companies they invest in. Indeed this is an expectation of enterprises under the recommendations of the OECD guidelines.”

In tandem with the release of the OECD report, the PRI has launched a collaboration initiative with Aviva Investors to engage with companies that have been linked to some of the most severe instances of social and environmental impacts.

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