Canada: New Due Diligence Guidance For Responsible Business Conduct

After several months of consultation and deliberations, the Organisation for Economic Co-operation and Development (OECD) rendered public a revised draft Guidance on Due Diligence for Responsible Business Conduct (RBC Guide). Comments on the draft may be provided to the OECD by February 9, 2017. Draft revisions will be carried out over the next few months with the proposed adoption of the RBC Guide by the OECD Working Party on Responsible Business Conduct in early summer.

BACKGROUND

Over the past few years, the OECD has published several sectoral guidance documents on due diligence to manage and address corporate social responsibility risks in the extractive and agricultural industries and in relation to supply chains for minerals from conflict areas. Further sector-specific guidelines will be released shortly regarding due diligence for responsible business conduct in the garment industry and for financial institutions.

The RBC Guide will encompass all industry sectors and sit above the sector-specific due diligence guidelines. It is addressed to multinational enterprises in all sectors and sizes, including small and medium-sized enterprises, as well as affiliates and subsidiaries, operating or based in the countries that have adhered to the OECD Guidelines for Multinational Enterprises (MNE Guidelines).

All of these non-legally binding guidelines are adopted pursuant to the MNE Guidelines, which, similarly, provides a voluntary set of recommendations that the adhering parties (including Canada) have committed to promote. The MNE Guidelines are largely considered as the international reference document for comprehensive principles and standards covering responsible business conduct (RBC) including governance and ethics, human rights, information disclosure, employment and labor, environment and anti-corruption. It should be noted, however, that many of the MNE Guidelines principles and recommendations have been adopted into legally-binding domestic law in several countries, for example regarding corruption and bribery, modern slavery and disclosure obligations.

The series of guidance documents on due diligence are intended to facilitate the implementation of recommended practices and address the increasing demand for a more rigorous approach to mitigating adverse impacts caused by business activities. Due diligence for RBC is, thus, viewed as the process through which enterprises identify, prevent, and mitigate the actual and potentially adverse impacts of their operations.

In addition to the MNE Guidelines, a plethora of international instruments encourage or require companies to audit, investigate and address both their own adverse RBC impacts and those of their supply chain, including the UN Guiding Principles on Business and Human Rights, International Labour Organization Conventions and Instruments, the International Finance Corporation's Environmental and Social Performance Standards, as well as domestic law and policies in many countries.

RBC GUIDE

The RBC Guide is a condensed version of the sectoral-specific guidance documents. A Due Diligence Companion, described as a "living document" containing examples, tips and good practices is also provided and is to be used to further facilitate implementation of the RBC due diligence practices. Together, the documents provide a high-level description of why and how companies should put in place RBC risk due diligence procedures and, thereby, implement the relevant provisions regarding due diligence in the MNE Guidelines.

With respect to the core principles, adverse RBC impacts are categorized in six subject areas: disclosure, human rights, workers and industrial relations, environment, bribery and extortion and consumer interests.

RBC due diligence differs in several ways from commercial or compliance due diligence. The RBC process is intended to help companies meet their responsibilities to prevent and address their adverse RBC impacts. RBC due diligence is to not only identify RBC impacts, but also to prevent or mitigate impacts and report on how such impacts have been addressed by the company. Companies are expected to not only respect legally binding domestic law but to observe the MNE Guidelines. Where the MNE Guidelines exceed what is required under domestic law, companies are instructed to comply with the higher standards.

Importantly, the RBC Guide acknowledges that many MNEs have large numbers of business relationships and suppliers. Practically, it may not be possible to conduct a thorough review of all of these relationships to identify and address potential adverse RBC impacts. Companies are encouraged to take a risk-based approach and prioritize those areas where there are risks of severe RBC impacts, particularly where human rights abuses are at stake.

In terms of the practical steps to implement a RBC due diligence regime, the RBC Guide proposes six main actions: embed RBC in policy and management systems; identify and assess adverse RBC impacts; prevent and mitigate adverse RBC impacts; track performance; communicate and provide for, or cooperate in remediation, when appropriate.

The RBC Guide indicates that RBC policies and management systems should be commensurate with the nature and context of a company's operations. Where the risk of adverse RBC impacts is higher, the company should be adopting more in-depth controls. Once in place, such policies and management systems should be kept under regular reviews and be updated, as appropriate.

When identifying, assessing and addressing potential adverse RBC risks, companies are instructed to prioritize their actions and resources on "severe" adverse RBC impacts, which should be the driving consideration. According to the draft RBC Guide, a company should focus on identifying and responding to potential severe impacts, even if unlikely, over more probable but less severe adverse impacts.

This approach to prioritizing severe risks over more likely risks moves away from the traditional "heat map" or "risk matrix" approach to assessing risks, which seek to strike a balance between severity and probability — the red zone being in the quadrant where risk events are determined to be both more likely and more severe. This departure is no doubt intended to counter cases where the probability of high-impact risk events could be underestimated. Severe adverse RBC impacts would include "serious damage to the environment, to human health and safety, to public health and the human rights of groups at risk of further marginalization."

The identification and assessment process should allow companies to determine whether they have caused or contributed to potential or actual adverse impacts, or whether adverse impacts are directly linked to their operations products or services. The response to such risks differs in each case. According to the RBC Guide, when a company has caused, or contributed to, an adverse impact, it has the responsibility to cease or prevent such impact and provide for, or cooperate in, remediating such impact if it does occur. If an adverse impact is directly linked through the products, operations or services in the context of a business relationship (supply chain), the company is instructed to use its leverage to influence the entity causing the adverse impact to prevent or mitigate the impact.

The RBC Guide takes a pragmatic and realistic approach to addressing impacts deep in a supply chain. In certain cases there may be practical limitations and a company may have little or no leverage to influence change. Where a company has identified an actual or the potential for severe impacts caused by an entity within that company's supply chain and does not have any influence, the RBC Guide calls for disengagement "as a last resort". Responsible disengagement from a problematic business relationship is complex and involves a review of legal and social implications.

Step 4 and 5 of the RBC due diligence regime is to, respectively, track and report on performance. Increasingly, companies are putting into place internal and supply chain audits to assist in identifying risks of adverse impacts and tracking the effectiveness of the response plans. The three key disclosure actions expected under the RBC Guide include:

  1. Timely disclosure of accurate information on all material matters regarding a company's activities, structure, financial situation, performance, ownership and governance
  2. Providing additional information to improve understanding of a company's operations
  3. Communicating with stakeholders on how the company has addressed actual and potential adverse RBC impacts

While the objective of due diligence for RBC is to avoid adverse impacts, if they do occur, the RBC Guide indicates that remediation is expected if a company has caused or contributed to such impacts. Remediation is defined as both the "processes of providing remedy for an adverse impact and to the substantive outcomes that can counteract, or make good, the adverse impact including: apologies, restitution, rehabilitation, financial or non-financial compensation, punitive sanctions, as well as prevention of harm through, for example, injunctions or guarantees of non-repetition." Remedies will vary depending on the nature of the harm. For example, environmental harms may require restoration of the damages environment and administrative sanctions. Remedies for anti-bribery and corruption typically result in fines to the state.

CONCLUSION

The RBC Guide is intended to facilitate the implementation of, and provide a common approach to, due diligence across business operations and thereby will help avoid a multiplication of varying expectations. It is a useful tool although it remains cast at a high-level. The sectoral-specific guides provide greater detail on each step in the due diligence and clarify expectations.

Through due diligence, companies can assess and address potential adverse RBC impacts (namely, those related to human rights, the environment, labor relations, bribery and corruption, stakeholder engagement and disclosure) by evaluating their activities and business relationships in light of the obligations and expectations they have under the growing body of domestic law, international law and voluntary standards regarding responsible business conduct. In so doing, companies are placed in a better position to anticipate and address reputational risks and can better avoid and defend against legal actions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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