OECD guidelines

Subscribe to OECD guidelines via RSS

By Paul Davies and Michael Green

The Organisation for Economic Co-operation and Development (OECD) published a report (OECD Report) on investment governance and integration of environmental, social and governance (ESG) factors on 2 May 2017. The OECD Report develops work already carried out by the organisation on the regulation of investment companies and pension fund investments. It is also linked to certain OECD instruments, including (i) the OECD principles of private pension regulation (adopted in 2016) and (ii) the G20/OECD high level principles of long term financing by institutional investors (last published in September 2013).

The OECD Report looks into how pension funds, insurance companies and asset managers approach ESG risks and opportunities in portfolio investments. Specifically, it presents the findings of an international “stock taking exercise” of the legal and regulatory frameworks that applies to institutional investment in different jurisdictions. It focuses on how these are interpreted by institutional investors in terms of their ability and/or responsibility to integrate ESG factors into their governance processes. The interesting point here is whether these existing frameworks encourage or discourage the integration of ESG factors into decision making processes.

By Paul Davies

Environmental issues are global issues. To navigate the environmental aspects of international business operations, companies must look at the entire lifecycle of a product – the global supply chain – and the legal issues and reputational risk associated with compliance.

For example, a business looking to acquire a target with operations in different jurisdictions could trigger the need for environmental investigations, and an acquirer will need to consider:

  • Which jurisdictions the assets or shares are in and how the business is structured.
  • Where component parts are sourced and whether those components are legal in all jurisdictions in which the business is located.
  • The scope of due diligence required for the transaction.
  • How to assess liabilities based on former, current and future operations by understanding product life-related issues, such as where materials in the manufacturing process are sourced from and how the business disposes of such materials.

By proactively identifying environmental issues and leveraging high quality environmental advice, an acquirer may be able to negotiate reps and warranties and determine whether there will be any indemnities or price chips.  Similarly, a business engaged in the financing of a large-scale project may also be impacted by environmental issues should the Equator Principles come into play (or other provisions such as OECD guidelines).