If you’re an investor, you may have followed the complaints brought by stakeholders in 2013 against the Dutch pension fund APG and Norway’s Norges Bank Investment Management (NBIM) under the remit of the OECD Guidelines for Multinational Enterprises. What’s special about this case is that the complaints related to human rights concerns in a minority shareholding. And you may be asking yourself, “What does this mean for me?”

The OECD Guidelines for Multinational Enterprises (the OECD Guidelines) are non-binding principles and expectations that define how companies should conduct business responsibly. The OECD Guidelines were negotiated by 46 governments and endorsed by companies, trade unions, and NGOs, and they are aligned with the UN Guiding Principles for Business and Human Rights. Although the guidelines are voluntary, they have a built-in grievance mechanism: Stakeholders can submit a complaint to a National Contact Point if they believe a company is not adhering to the OECD Guidelines.

Last June, the OECD published a series of working papers to clarify how the guidelines apply to the financial services sector. They confirmed that, under the OECD Guidelines, investors can be held accountable for violations caused by the companies they invest in, including minority shareholdings.

I met with Roel Nieuwenkamp, the chair of OECD Working Party on Responsible Business Conduct, to understand the implications of the guidelines for the financial sector and what is expected of investors.

How do the OECD Guidelines apply to the financial sector?

The financial sector, like any other sector, is covered by the OECD Guidelines. However, the financial sector has inherent specificities that make the application of the OECD Guidelines more difficult to grasp.

To make it simple, there are three layers to think about. The OECD Guidelines ask multinationals to avoid causing adverse impacts on matters covered by the guidelines, through their own activities—that’s the first layer. They also ask multinationals to avoid contributing to these impacts—that’s the second layer. In the third layer, they ask multinationals to prevent or mitigate an adverse impact when the impact is “directly linked” to their business by a “business relationship.”

What does “directly linked” and “business relationship” mean for a financial institution? In a study we commissioned, we found that investors were confused about these terms. The OECD and the United Nations clarified that financial services and products constitute a business relationship, and that the OECD Guidelines apply to financial institutions where they have minority shareholdings.

How can the OECD Guidelines hold financial institutions responsible for violations caused by companies in which they have a minority shareholding, when they have so little leverage?

The lack of leverage is no excuse to do nothing. This is similarly clarified in the interpretive guide on the UN Guiding Principles. Companies are expected to increase their leverage by working with their peers and stakeholders. Investors should not underestimate the leverage they have. For example, through coalitions such as the International Corporate Governance Network or the Principles for Responsible Investment's Clearinghouse, investors can think about how to pull their resources together to have more leverage.

Also, it’s important to underline that companies should act based on the severity of the adverse impact, rather than the amount of leverage they have. For example, if they have a large shareholding in a company that has had a minor impact, and a very small shareholding in a company that has been linked to a large impact, such as genocide, they should focus their efforts on the latter.

The OECD Guidelines also say that companies should undertake due diligence to avoid being involved in adverse impacts and to address such impacts when they occur. How can financial institutions apply due diligence when they have thousands of clients and investments?

Large consumer product companies are expected to undertake due diligence along their supply chains, while they have hundreds of thousands of suppliers. So it’s the same thing for financial institutions.

The OECD Guidelines expect investors to conduct risk-based due diligence. Investors do not need to carry out impact assessments of all of their investments. There is a margin of tolerance, and it’s not realistic to manage everything.

Investors should look at their portfolio, identify the risks, and prioritize those investments to dig deeper. In the financial sector, there are already some initiatives that provide tools to undertake due diligence of investments, such as the Equator Principles, in project finance.

As an investor, if you open the paper one morning and find that a company in which you invest is the object of an environmental or human rights allegation, what should you do?

First of all, hopefully you are not caught by surprise, as you already have a due diligence system in place. But it is possible to miss something even when you have put in place a due diligence system. So you need to check the type of investment you have in the company and gather facts on the allegation. Then there is a whole range of things you can do to act: You can engage and start a dialogue with the company by asking relevant questions, you can use shareholder voting, or you can submit resolutions at the annual general meeting.

Investors should not think about selling their shares as the first step, but rather as the last step. They should only disengage as a last resort, once all other options of engagement have been exhausted.

I would also suggest that investors take a look at how NGOs pressured investors in the UK National Contact Point complaint by the World Wildlife Fund against the oil and gas firm SOCO for its exploration plans in Virunga National Park, which is  a World Heritage Site in the Democratic Republic of the Congo.

What’s next for the OECD on this topic?

We would like to look at what the OECD Guidelines mean to specific financial institutions, for example, pension funds, investors in passive index funds, or stock exchanges.