The OECD Guidelines for MNEs: Suitable standards for businesses on climate?
The UK National Contact Point has accepted a complaint made by a group of NGOs that Drax Group PLC (Drax) failed to adhere to the OECD Guidelines for Multinational Enterprises by allegedly issuing misleading or inaccurate statements about its carbon emissions and environmental impacts, reflecting a growing trend to use the guidelines for climate-related complaints.
The Guidelines and the NCP Process
The OECD Guidelines for Multinational Enterprises (the Guidelines) are non-legally binding recommendations for multinational enterprises (MNEs) on responsible business conduct on topics including the environment and human rights. Governments adhering to the Guidelines are required to set up National Contact Points (NCP), agencies tasked with furthering the effectiveness of the Guidelines and contributing to the resolution of issues, including by offering a mediation and conciliation platform for parties interested in furthering the implementation of the Guidelines. Complaints are typically brought by civil society on behalf of those affected by non-observance of the Guidelines.
Complaint against Drax
Six NGOs filed a complaint against Drax with the UK NCP in October 2021. The complainants refer to the following public statements by Drax relating to the sustainability and environmental impacts of burning woody biomass to produce energy (which Drax does at its UK power plant):
- "Whole trees are not felled to produce wood pellets burnt by Drax and Drax's woody biomass energy does not damage forests";
- "Woody biomass is already effectively a carbon neutral energy generation technology";
- "Drax accounts for all supply chain emissions of woody biomass energy";
- "Woody biomass energy has resulted in Drax reducing its carbon emissions by 90% compared to when it burnt coal for energy"; and
- "Using bioenergy with carbon capture and storage, Drax can become "carbon negative" by 2030".
The complainants allege that the statements are misleading or inaccurate as to the true environmental impact of Drax's activities and those of its supply chain, and that they evidence non-adherence with the expectations in Chapter VI (Environment) and VIII (Consumer Protection) of the Guidelines.
Drax denies the allegations, claiming that its business activities follow industry best practice and science and meet, or exceed, applicable international standards. Drax also denies that it has misled consumers on the basis that it does not sell or market to retail and consumers, and that its primary consumer base of business customers is likely to have an existing knowledge of woody biomass fuels and carbon impact assessments.
In its initial assessment, the UK NCP accepted that four of the five statements merit further consideration. The UK NCP considered evidence from the complainants to demonstrate that Drax's sustainability-related claims were misleading on the basis that energy production using woody biomass is not as sustainable as Drax's statements would suggest. This included other public statements made by Drax, photographs of forestry sites in Drax's supply chain and academic publications on the carbon properties of woody biomass. As to whether Drax would be carbon neutral by 2030, insufficient evidence was presented to substantiate the allegation that Drax could not achieve carbon neutrality by 2030. Therefore the UK NCP declined to accept for consideration whether this statement was misleading.
The UK NCP will now offer mediation to the parties to seek to resolve the issues in the complaint. Following mediation, or failing a successful mediation, the UK NCP will issue a final statement, which includes the outcome of any mediation, a decision as to whether there was non-observance of the Guidelines and, where appropriate, recommendations to Drax on the implementation of the Guidelines.
Growth in climate-related complaints
Since 2017, almost 40% of the complaints that refer to the environmental provisions of the Guidelines also reference climate change. However, although the Guidelines include some general provisions about MNEs' environmental impacts, they do not specifically consider climate change-related issues or expect MNEs to reduce their emissions or those of their supply chain.
The only Guidelines which refer to greenhouse gas (GHG) emissions are found at paragraphs 6(b) and (c) of Chapter VI, which expect MNEs to improve performance and to encourage those in their supply chain to develop and provide products or services that reduce GHG emissions and to provide accurate information on their products (e.g. on GHG emissions). The remainder of Chapter VI provides steps which MNEs should take to protect the environment and to contribute to sustainable development. Whilst Chapter VI sets expectations for managing environmental risk and due diligence, it does not impose specific or target-based expectations on MNEs to seek to prevent or mitigate climate change. There is also reference to GHG emissions in the commentary to Chapter III (Disclosure) which encourages MNEs to report on their GHG emissions.
Given the limited climate-related provisions in the Guidelines, it is not surprising that the Drax complaint invokes the same provisions of the Guidelines as another complaint before the UK NCP relating to climate. In December 2019, ClientEarth alleged that BP's global corporate advertising misled the public in the way that it presented BP's low-carbon energy activities, including their scale relative to BP's fossil fuel extraction business. However, BP retracted the advert before the UK NCP rendered their initial assessment, so as yet, there is little guidance on how these provisions can be used in practice in the context of climate.
Calls for clarification
The lack of climate change-related provisions in the Guidelines has been flagged by NGOs, NCPs and the OECD as an omission, each noting the need to clarify the expectations in the Guidelines.
In a 2020 complaint brought against ANZ Bank, the complainants alleged that ANZ's investment and lending practices were inconsistent with the Guidelines, particularly in relation to its continued financing of coal and fossil fuel projects and its disclosures on the emissions from those projects. In its final statement, the Australian NCP found that as ANZ's actions relating to environmental impact were informed by due diligence and were gradually developing, there was no inconsistency with the Guidelines. The Australian NCP noted that the climate-specific provisions of the Guidelines are limited and ambiguous and found it necessary to distinguish between the consistency of ANZ's actions with the Guidelines, and the Guidelines' consistency with contemporary expectations regarding climate change. The Australian NCP requested in the final statement that this issue be considered by the OECD Investment Committee.
OECD Watch published its annual State of Remedy report in June, which focuses on whether the NCP process provides an effective pathway to remedy for those impacted by MNE's non-observance of the Guidelines. OECD Watch highlighted certain issues with the Guidelines which it considers hinders the effectiveness of the NCP process. On climate, the report notes that the Guidelines need updating such that MNEs should, under the Guidelines, be expected to set and achieve GHG emission targets to avoid adverse environment impacts. OECD Watch also called for the disclosure expectations to be updated, as current provisions are not much stronger than the minimum legal standards for financial reporting and are outdated regarding non-financial reporting on sustainability and ESG issues. Under its implementation procedures, the views of OECD Watch must be taken into account by the OECD's Investment Committee.
In its recent Stocktaking Report, the OECD Working Party on Responsible Business Conduct (the OECD Working Party) comes to similar conclusions, stating that the Guidelines do not contain clear expectations on climate change mitigation, adaptation or just transition principles, and the effectiveness of the Guidelines would be enhanced through alignment with the Paris Agreement. The OECD Working Party flags the need for greater clarity and effectiveness in relation to environmental impacts, including climate change and biodiversity. Again, a call for greater clarity on climate provisions is also coupled with specific recommendations in the report for better corporate sustainability disclosures. These have been bolstered by a report on climate change and corporate governance, in which the OECD recommends greater consistency and comparability on disclosures.
More clarity on climate in the future?
At the recent OECD Ministerial Council Meeting in June, Ministers stated that they were working towards an update of the Guidelines. The next iteration will likely include clearer expectations on MNEs regarding actions to mitigate, and prevent, climate change. Meanwhile, the UK NCP's determination on the Drax complaint will provide further guidance on if, and how, the existing climate-related provisions Guidelines can be used to address alleged exaggerated or inaccurate claims on MNEs' performance on climate and statements regarding their climate commitments.