In a world propelled by global value chains, 80% of global trade is linked to the production networks of multinational corporations. This has accelerated the growth of emerging markets and enabled better lives for millions of people. But as the world begins to re-build and re-design in the wake of the pandemic, the vulnerabilities of our current model are clear to see. On the occasion of the 2021 Global Forum on Responsible Business Conduct, OECD’s Greg Medcraft and Allan Jørgensen look at what OECD instruments on responsible business conduct will mean in driving responsible climate action.
During the lock-downs, social media has been awash with pictures of clean air in major cities and news of subsiding emissions. With economies now on the rebound, energy-related CO2 emissions are on course to surge by 1.5 billion tonnes in 2021, the second largest increase in history, reversing the decline we witnessed in 2020 due to the dramatic halt in economic activity, according to a new IEA report.
The tools for building back better
Many talk about building back better so let us use the tools at our disposal. Responsible Business Conduct is one such tool, which is increasingly being put to work.
In a recent landmark ruling a district court in the Netherlands ordered Royal Dutch Shell to reduce its scope 1, 2, and 3 CO2 emissions by 45 percent compared to 2019 levels by the end of 2030. The ruling leans heavily on the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights.
These instruments establish that all companies have the responsibility to avoid and address adverse impacts of their activities, including through their products and in their supply chains, while making a positive contribution to the economic, environmental and social progress of the countries in which they operate. It has long been held that responsible business practices enhance company performance and reputation. This latest development also suggests that the legal license to operate is catching up to the social one.
A standard of care for people and planet
In requiring the above emissions reduction obligation, the Court found that Royal Dutch Shell owed an unwritten standard of care to society, in line with the Dutch Civil Code and human rights obligations including the right to life.
The court directly cites and draws on the OECD Guidelines in understanding this duty of care, concluding that companies should address adverse impacts on the climate in a manner that is consistent with the scientific and technical understanding of the risks. In the context of CO2 emissions, the court effectively translates this into a responsibility for the company to align its CO2 emissions with the goals of the Paris Agreement and associated science-based targets and emissions reduction pathways
But is it fair and indeed constructive to task one company with such a responsibility in the face of a global collective action problem that even governments are struggling to tackle? Yes, argues the court, because the business responsibility to respect human rights and avoid adverse environmental impacts is considered a universal and individual responsibility – a standard of care that exists independently of national requirements meaning that the law is a floor and not a ceiling. The fact that decarbonisation is not (yet) the industry norm or required by national laws, does not remove the corporate responsibility of individual companies to address their climate related impacts in keeping with science. Whether you are behind or ahead of the pack, getting to zero is the relevant benchmark.
But what are the implications? To be clear, one appealable ruling in one district court in one country does not equate to global application. Whatever the case may be, the questions raised are many:
Niche or new normal? Attempts at legal climate action against carbon majors is not a novelty. What is new here is the rigorous application of internationally agreed standards for responsible business conduct in the judicial process. These standards apply to all types of companies. Also state-owned ones, which is important bearing in mind that state-owned companies control the majority of global oil reserves. And they apply to all sectors, indicating that this type of action might not be confined to fossil fuel producers, but could also create liabilities for high emitting sectors such as transport, construction, manufacturing or agriculture. The recent decision is in many ways similar to a 2019 statement by the Dutch National Contact Point for Responsible Business Conduct, which led institutional investor ING to align its portfolio with the goals of the Paris Agreement.
Transition risk revisited? How could this in turn affect the way in which companies and investors in these sectors think about the materiality of climate-related risk? Recent shareholder activism at Exxon demonstrates the evolving nature of climate-related risk. If climate action is increasingly judged by standards of Responsible Business Conduct, then due diligence will also become increasingly important in climate-related disclosures.
The right tools for the job? But is legal action really the right tool to drive the race to zero? Decarbonisation by decree may seem like using a hammer to do the job of a screwdriver. The stakes for companies are enormous and for as long as the playing field remains uneven, the scope for carbon arbitrage by companies is a real prospect. Concerns have also been raised that divestments from carbon heavy assets could ultimately will slow the transition. Surely, to get the incentives right, we need greater alignment between legal and market-based measures.
Operational complexity? The recent ruling relies heavily on science-based targets as the benchmark for responsible business conduct on climate action. This is logical but it is not plug and play. This underlines the urgency of making sure that all businesses have access to science-based targets and reduction pathways for their industries, and to robust methods to account for scope 3 emissions accounting.
Chilling effect? The court goes out of its way to say that the fact that Royal Dutch Shell has itself endorsed international standards for responsible business conduct, is not a deciding factor in the equation. It would have a duty to act regardless of those commitments. The average CEO might be forgiven for thinking that the price of such commitments has just gone up. However, the opposite is true. The essence of due diligence for Responsible Business Conduct is being able to know and show that you are addressing your adverse impacts. Failure to do so carries more risk than not trying.
The RBC opportunity
For the many companies and investors that are already committed on the road to zero, this will be welcome news – as will efforts to help to level up the playing field. Making Responsible Business Conduct the new normal in a connected rules based system is a necessary step on the road to a sustainable, inclusive and resilient tomorrow.
Follow the discussion on what OECD instruments on responsible business conduct will mean in driving responsible climate action in the dedicated session Translating climate ambition into a just transition: what should we expect from business? at the 2021 OECD Global Forum on Responsible Business Conduct.