Clifford Chance

Updated on 8 June 2023, the Guidelines contain recommendations on responsible business conduct for multinational enterprises. Although not themselves legally binding, the Guidelines do underpin some elements of EU corporate sustainability regulation.

Prior to the recent targeted update, the Guidelines had last been updated in 2011 to incorporate a new human rights chapter and due diligence provisions, reflecting the UN Guiding Principles on Business and Human Rights (the UNGPs). The 2023 revisions expand the scope of the recommendations in the Guidelines, both in terms of topics addressed and the standard of conduct expected from businesses in certain areas.

Substantial updates in relation to the environment

Stakeholder feedback prior to the update noted the time lapse since prior revisions and the developments in the interim in important areas, including the environment.
Notable revisions include recommendations that businesses:

• Ensure that their greenhouse gas emissions and impact on carbon sinks are consistent with internationally agreed goals on climate change;
• Implement science-based policies, strategies on climate change mitigation and adaptation, which include short-, medium- and long-term mitigation targets that take into account Scope 1, Scope 2 and, where possible, Scope 3 emissions;
• Prioritise reducing emissions over carbon offsetting, and keep any carbon offsetting distinct from disclosures on emissions reductions when disclosing sustainability-related information;
• Recognise and properly address the potential complexity of cumulative causes of environmental impacts and those environmental impacts that that are not yet fully understood; and
• Ensure that other priorities such as health and safety, just transition and access to work are taken into account in identifying and managing environmental impacts.

The revisions also make clear that enterprises are expected to carry out risk-based due diligence to identify adverse environmental impacts (i.e. going beyond the operation of environmental management systems), whereas the due diligence recommendations under the 2011 Guidelines were primarily focused on adverse impacts on people, guided by the human rights due diligence principles set out in the UNGP.

The revisions therefore provide complainants to National Contact Points (NCPs) – the complaints mechanism established by the Guidelines – with increased potential bases on which to scrutinise possible non-compliance with the Guidelines in relation to environmental harm.

Clarity on due diligence expectations

More broadly, the revised Guidelines now contain more guidance for businesses to whom the Guidelines apply as to the scope and manner of due diligence expected of them.

• The Guidelines now expressly refer to and integrate the OECD Due Diligence Guidance for Responsible Business Conduct, clarifying the key elements of effective due diligence and thereby raising the standard and scope of due diligence. For example, in the human rights chapter, the Guidelines now expressly state that enterprises should conduct enhanced due diligence in the context of armed conflict, where there are heightened risks of gross human rights abuses or violations of international humanitarian law.
• They now also refer to sector-specific due diligence guidance published by the OECD, such as the OECD Guidance on Meaningful Stakeholder Engagement in the Extractive Sector. Additionally, the human rights chapter specifies that businesses should "pay special attention" to adverse impacts on individuals who may be at heightened risk, and points to a plethora of OECD guidance relevant to engagement with marginalised or vulnerable communities.

The role of the Guidelines in existing and forthcoming EU sustainability legislation

The revisions to the Guidelines demonstrate the heightened expectations on business to conduct themselves responsibly. This expectation is increasingly reflected in EU regulation, some of which expressly draws on the Guidelines.

Three examples are discussed below.

The EU taxonomy for sustainable activities (the Taxonomy Regulation)

The Taxonomy Regulation aims to create a common definition of economic activity that can be labelled as "sustainable" for the purpose of investment. To qualify as sustainable under the Taxonomy Regulation, investments in economic activities must meet four mandatory criteria. These include compliance with the 'Minimum Safeguards' which are defined as "procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the Guidelines and the UN Guiding Principles on Business and Human Rights".

Though there is little guidance on compliance with the Minimum Safeguards, the Platform on Sustainable Finance (PSF) suggested in its October 2022 report on the Minimum Safeguards, that two criteria of non-compliance with the Minimum Safeguards could be:

• A failure on the part of the relevant undertaking to establish adequate human rights due diligence processes, as per the Guidelines and the UNGP; and
• The presence of clear indicators that the undertaking does not adequately implement human rights due diligence, resulting in "human rights abuses". The PSF suggested that a refusal to engage with an NCP or the conclusion by an NCP that an undertaking is in breach of the Guidelines are both "clear indicators".

Therefore, for its economic activities to be classified as sustainable, a company must be cognisant of and align its business with the Guidelines – and, in the event of a complaint being submitted to an NCP, engage substantively with the NCP's process. See further our briefing here.

Notably, in at least one respect, the environmental recommendations in the Guidelines are more specific than the Taxonomy Regulation. The latter requires undertakings to have climate change prevention and mitigation targets in order for investments in those activities to be labelled as sustainable, whereas the Guidelines expect undertakings to align their emissions or targets with internationally agreed goals.

The Sustainable Finance Disclosure Regulation (SFDR)

Where financial market participants within the scope of the SFDR claim that a product either promotes environmental or social characteristics or has sustainable investment (as per the definition under the Taxonomy Regulation) as its objective, they are required to disclose, amongst other things, how the investment is aligned with the Guidelines and the UNGP.

Moreover, certain participants must consider the principal adverse impacts of their investment decisions and disclose the proportion of investments in companies which have either been involved in "violations" (a term that is not defined in either the SFDR, the Guidelines or the UN Global Compact) of the Guidelines or the UN Global Compact, and also disclose the proportion of investments in companies that do not have policies to monitor compliance with the UN Global Compact or the Guidelines, or grievance / complaints handling to address violations.

Corporate Sustainability Reporting Directive (CSRD)

Entities within the scope of the CSRD will also be required, from as early as 1 January 2024, to disclose a variety of information regarding their social impacts, including in relation to their alignment with the Guidelines. The content and form of reporting under the CSRD is prescribed by the European Sustainability Reporting Standards (ESRS), and is intended to provide financial investors with the information they need to assess an investee company's Taxonomy alignment and determine the principal adverse impacts of investee companies for reporting under SFDR. The ESRS therefore refer extensively to the Guidelines and the UNGP.

Proposed EU Corporate Sustainability Due Diligence Directive (CS3D)

The European Parliament, Commission and Council are presently negotiating the final text of the CS3D. If the CS3D is passed, certain businesses will be required, for the first time, to carry out due diligence not only on their adverse human rights impacts but also on their adverse environmental impacts. The Guidelines, as updated, are the only widely accepted instrument that provide for both human rights and environmental due diligence.

The texts adopted by the three institutions reflect the due diligence expectations in the Guidelines to differing extents, with the Parliament's draft text most closely reflecting elements of the framework for effective due diligence set out in the Guidelines. Differences remain, however, between the due diligence framework under CS3D in the three institutions' adopted positions and the due diligence recommendations in the Guidelines. The Dutch NCP recently noted its concern that these areas of divergence could dilute the principles and standards under the Guidelines and/or result in a lack of clarity regarding what is expected from businesses in terms of responsible business conduct and due diligence.

Regardless, all three institutions' adopted positions on CS3D refer businesses to the OECD Due Diligence Guidance for Responsible Business Conduct, which is now incorporated into the Guidelines – their relevance will grow if the CS3D is passed. For further information on the CS3D process see our latest briefing here.

Many businesses affected by emerging EU legislation will need to take the Guidelines into account.

The recent updates to the Guidelines embody increased expectations of how businesses should act responsibly in respect of a wide range of topics, in particular in relation to the environment, climate and biodiversity. Central to the updates is further guidance on due diligence which will play a significant role in forthcoming legislation in the EU.

Although the Guidelines are non-binding, it is increasingly important that businesses align their policies and processes with the recommendations in the Guidelines so that they can meet expectations and comply with regulatory demands.