Responsible business conduct

Due Diligence for Responsible
Corporate Lending and
Securities Underwriting
Key considerations for banks implementing theOECD Guidelines for Multinational Enterprises

Please cite this publication as:OECD (2019), Due Diligence for Responsible Corporate Lending and Securities Underwriting: Key considerations forbanks implementing the OECD Guidelines for Multinational Enterprises@ OECD 2019. This work is published on the responsibility of the Secretary-General of the OECD. The opinions
expressed and arguments employed herein do not necessarily reflect the official views of the OECD or of
the governments of its member countries or those of the European Union.
This document and any map included herein are without prejudice to the status or sovereignty over any territory,
to the delimitation of international frontiers and boundaries and to the name of any territory, city, or area.

FOREWORD  3

Foreword
Financial institutions have a key role to play in driving global sustainability throughdirecting financing towards measures to achieve the Sustainable Development Goals andthe Paris Climate Agreement and through seeking to avoid and address environmental andsocial risks associated with their activities.
This paper helps banks and other financial institutions implement the due diligence
recommendations of the OECD Guidelines for Multinational Enterprises in the context of
their corporate lending and underwriting activities. Currently no widely recognized
standard on responsible business conduct (RBC) exists for these type of transactions,although they represent a significant portion of client services of commercial banks.
Due diligence can help banks prevent or address adverse impacts related to human andlabour rights, the environment, and corruption associated with their clients as well as avoid
financial and reputational risks. This paper identifies key actions under each step of the due
diligence process and includes discussion of key considerations, such as challenges,
existing practices, or regulations specific to the corporate lending and securities
underwriting transactions which may impact due diligence approaches.
This paper has been developed with a multi-stakeholder advisory group of over 50
representatives from leading banks and other financial institutions, government, civilsociety, international organisations and other experts. It has also benefited from input
provided by banking practitioners during expert working sessions organised in March 2018
in New York City and in September 2018 in London. The OECD Working Party on
Responsible Business Conduct approved the paper on 6 September 2019 and the OECD
Investment Committee approved the paper on 7 October 2019.
This paper is part of the work the OECD undertakes to clarify expectations of responsible
business conduct in the context of enterprises operating in the financial sector. The OECD
has also developed tailored guidance to help enterprises carry out due diligence in othersectors, specifically: extractives, and particularly minerals from conflict affected and highrisk areas; garment and footwear; and agriculture.

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TABLE OF CONTENTS  5

Table of Contents
Foreword ................................................................................................................................................................ 3
Introduction ........................................................................................................................................................... 7
Purpose and Target Audience .............................................................................................................................. 7
Scope ................................................................................................................................................................... 8
Structure ............................................................................................................................................................ 12
Links to related processes and instruments ....................................................................................................... 12
Chapter 1. Overview of due diligence for responsible business conduct & implications for banks ............. 14
Adverse impacts and risk................................................................................................................................... 15
Why carry out due diligence? ............................................................................................................................ 16
Characteristics of due diligence – the essentials ................................................................................................ 16
Chapter 2. Key considerations for RBC due diligence in banking transactions ............................................ 27
Measure 1: Embed RBC into policies and management systems ...................................................................... 27
Measure 2: Identify and assess actual and potential adverse impacts................................................................ 35
Measure 3: Cease, prevent and mitigate adverse impacts.................................................................................. 47
Measure 4: Track implementation and results ................................................................................................... 54
Measure 5: Communicate how impacts are addressed ...................................................................................... 56
Measure 6: Provide for or cooperate in remediation when appropriate ............................................................. 58
Conclusion ............................................................................................................................................................ 64
Annex A. Terminology ........................................................................................................................................ 65
Annex B. Overview of Banking transactions: General purpose loans, and underwriting securities. .......... 69
A. General purpose loans .................................................................................................................................. 69
B. Securities underwriting (raising capital by selling securities to investors) ................................................... 71

TablesTable 1.1. Engagement with stakeholders to inform due diligence ....................................................................... 24
Table 2.1. Effectiveness criteria for non-judicial grievance mechanisms ............................................................. 61

FiguresFigure 1.1. Due diligence process & supporting measures.................................................................................... 14
Figure 1.2. Due diligence for RBC: An outward facing approach ........................................................................ 15
Figure 2.1. Type the title here ............................................................................................................................... 42

Boxes
Box 1.1. A Bank’s Duty of Client Confidentiality ................................................................................................ 21
Box 1.2. Collaboration in carrying out due diligence ............................................................................................ 26
Box 2.1. G20/OECD Principles for Corporate Governance .................................................................................. 33
Box 2.2. The role of banks when several institutions are involved ....................................................................... 41
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Box 2.3. Excerpt from OECD Due Diligence Guidance for Responsible Business Conduct on relationship to
Impact (page 70) ........................................................................................................................................... 43
Box 2.4. Hypothetical examples on contribution in general corporate lending transactions ................................ 45
Box 2.5. Considerations for Exclusionary Policies ............................................................................................... 52
Box 2.6. Examples of potential legitimate remediation mechanisms .................................................................... 59
Box 2.7. NCP specific instances processes: What to expect ................................................................................. 62
Box A B.1. Example of integration of due diligence into general purposes loan transactions .............................. 70
Box A B.2. Integration of due diligence in securities underwriting transactions ................................................. 72

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INTRODUCTION  7

Introduction
Financial institutions will play a key role in contributing to sustainable development
through promoting responsible business conduct amongst their clients and financing
projects that can have positive sustainability impacts. In 2015, the Paris Agreement and theSustainable Development Goals (SDGs) were adopted. Scaling up financial flows will be
critical to achieving the measures outlined under these agendas. For example, around USD
6.9 trillion of investment in infrastructure is required annually between 2016 and 2030 inorder to meet global development and climate needs.1 Governments are increasingly
inclined to exploit the scale of assets and leverage of financial institutions to support theseobjectives. G20 leaders have highlighted the need to align financial flows (from both public
and private institutions) to promote climate goals and achieve the objectives of the SDGs.2
To contribute to sustainability goals it is also important that financial institutions avoid andaddress environmental and social risks associated with their activities. In this respect, oneof the most powerful contributions business can make to sustainable development is toembed responsible business conduct in their activities and across their value chains throughstrong due diligence processes. By carrying out due diligence, banks can ensure that
financing flows to projects and companies that behave responsibly and ultimately benefit
people and the planet.

Purpose and Target Audience
This paper provides guidance for banks and other financial institutions (hereinafter“banks”) to implement the recommendations of the OECD Guidelines for Multinational
Enterprises (“MNE Guidelines”) in the context of their corporate lending and securities
underwriting activities. Specifically, this paper explains what due diligence for responsible
business conduct entails, and provides practical considerations for banks at each step of thedue diligence process. This paper may also be helpful to other stakeholders seeking tounderstand due diligence approaches of banks. The MNE Guidelines have a uniquepromotion and grievance mechanism – the National Contact Points (NCPs).3 The paper canalso be a useful resource for NCPs in understanding and promoting the MNE Guidelines.

1

Mariana Mirabile, Virginie Marchal and Richard Baron, OECD (2017) Technical note on estimatesof infrastructure investment needs Background document to the report Investing in Climate,
Investing in Growth. https://www.oecd.org/env/cc/g20-climate/Technical-note-estimates-ofinfrastructure-investment-needs.pdf
2

G20 (2017), G20 Hamburg Climate and Energy Action Plan
http://unepinquiry.org/wpcontent/uploads/2017/07/Climate_and_Energy_Action_Plan_for_Growth.pdf

forGrowth,3

In accordance with the Decision of the Council on the OECD Guidelines for Multinational
Enterprises, as amended in 2011, National Contact Points are set up to further the effectiveness of
the Guidelines by undertaking promotional activities, handling enquiries and contributing to theresolution of issues that arise relating to the implementation of the Guidelines in specific instances.
This paper may be used by National Contact Points to promote the MNE Guidelines but is not
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8  INTRODUCTION
The MNE Guidelines are non-binding recommendations addressed to multinational
enterprises by governments on responsible business conduct (“RBC”). They acknowledge
and encourage the positive contributions that business can make to economic,
environmental and social progress, but also recognise that business activities can result inadverse impacts related to workers, human rights, the environment, corruption, consumers
and corporate governance. The MNE Guidelines therefore recommend that businesses
carry out risk-based due diligence to avoid and address such adverse impacts associatedwith their operations, their supply chains and other business relationships.
This paper is part of the work the OECD undertakes to clarify expectations of responsible
business conduct in the context of enterprises operating in the financial sector. This paper
represents one outcome of this project. In 2017, the OECD also published a paper on
Responsible Business Conduct for Institutional Investors4.

Scope
This paper provides guidance on due diligence approaches for banks in the context ofcorporate lending and securities underwriting activities, the process of raising capital forclients, for companies,5 for both public and private placements (See Annex B). It does notconsider due diligence approaches for banks in the context of project-based or asset-based
finance (e.g. loans for corporate real estate) or other asset-based transactions. It likewise
does not consider due diligence approaches for derivative financial products (e.g.
securitized debt or credit derivatives) or outline specific approaches for entities that support
the banking sector (e.g. market research providers, credit risk agencies). However, therecommendations in this paper may be a useful reference for these entities since therecommendations of the MNE Guidelines are also applicable to them.
While banks may cause or contribute to adverse impacts in their own operations just likeany other enterprise (e.g. adverse labour impacts with respect to their own employees), thispaper focuses on carrying out due diligence with respect to adverse impacts associated witha bank’s client’s activities. Banks’ approaches to managing environmental and social risks
have traditionally focused on project finance transactions or involved screening of limited,
pre-defined, high-risk sectors. As such, banks have an opportunity to enhance and broaden
due diligence processes across their portfolios to better understand and respond to risks
associated with their corporate lending and underwriting activities. The standards and due
diligence approach recommended under the MNE Guidelines apply to all transactions.
They are not limited to specific types of transactions or those surpassing specific monetarythresholds, but follow a risk-based approach (See Characteristic of Due Diligence).
The MNE Guidelines include a range of substantive chapters subject to due diligence
expectations. Topics covered by the due diligence expectations under the MNE Guidelines

intended to serve as a basis for the submission of specific instances. See also OECD Guidelines,
Commentary on the Implementation Procedures of the OECD Guidelines for Multinational
Enterprises, paragraph 25. See also Box 2.7.
4

(OECD,
2017) Responsible
Business
Conductforhttps://mneguidelines.oecd.org/RBC-for-Institutional-Investors.pdf

Institutional

Investors,

5This paper does not consider lending transaction with sovereign clients, which may entail
additional due diligence considerations.

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INTRODUCTION  9

are: human rights; employment and industrial relations; environment; combating bribery,bribe solicitation and extortion; consumer interests and disclosure.
This paper focuses primarily on risks associated with the human rights, employment andenvironment chapters of the MNE Guidelines. Corruption issues are often subject torigorous national laws and are closely monitored by legal and/or compliance departmentsof banks. As such, although due diligence expectations extend to impacts under the chapter
on Combating Bribery, Bribe Solicitation and Extortion of the MNE Guidelines, therecommendations and key considerations of this paper do not focus on these risks on theassumption that they are already well defined under international and national laws andguidance.
Similarly, while a number of banking activities will have impacts on consumers in thecontext of the retail market, consumer interest issues are not the focus of this paper.
However, banks should seek to draw from the entire range of processes and systems
relevant for their own due diligence instead of using silo approaches. This paper therefore
highlights opportunities for collaboration among different departments within banks wheremost relevant.

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10  INTRODUCTION

Note: This page is a copy/paste of previously agreed text used to describe each chapter of the MNE Guidelines
from OECD Due Diligence Guidance for Responsible Business Conduct (2018).

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INTRODUCTION  11

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Structure
The introduction provides context on the basis, purpose, target audience and scope of thispaper.
Section 1 provides a high-level overview of the normative basis for due diligence under the
MNE Guidelines and its broad implications for banks. In 2018, the OECD published Due
Diligence Guidance for Responsible Business Conduct, which sets out a common
framework for due diligence processes across all sectors.6 Throughout this paper due
diligence approaches and characteristics as articulated in the OECD Due Diligence
Guidance are included in grey text boxes followed by more detailed recommendations
tailored to corporate lending and securities underwriting transactions.
Section 2, the main body of this paper, describes the core elements under each componentof the due diligence process. These are organised into distinct steps; though in practice theprocess of due diligence is ongoing, iterative and not necessarily sequential, as several steps
may be carried out simultaneously with results feeding into each other. This section
includes an overview of practical actions that illustrate how to implement or adapt asneeded supporting measures with respect to the due diligence process in the context ofcorporate lending and securities underwriting. Not every practical action will beappropriate for every situation. Likewise, enterprises may find additional actions orimplementation measures useful in some situations. This section also includes a discussionof key considerations and approaches to potential challenges banks may face when carryingout due diligence.
Finally, the paper includes several annexes to provide additional background on: 1)
terminology used in the MNE Guidelines such as “due diligence” which may be associatedwith different meanings 2) descriptions and diagrams to illustrate corporate lending andsecurities underwriting transactions.
The annexes illustrating corporate lending and securities underwriting transactions areintended to provide explanatory information for stakeholders such as NCPs, policy-makers,
multinational enterprises, workers, trade unions and civil society who are not banking
practitioners but may be interacting with issues of RBC in the context of corporate lending
and securities underwriting.

Links to related processes and instruments
Other OECD instruments: The MNE Guidelines are referenced in a range of other OECD
instruments that reinforce the interlinkages between RBC and other areas, including: theG20/OECD Principles of Corporate Governance; the Guidelines on Corporate Governanceof State-Owned Enterprises; the Common Approaches for Officially Supported Export
Credits and Environmental and Social Due Diligence; the Policy Framework for
Investment; the Recommendation of the Council on Public Procurement; and the
Recommendation of the Council for Further Combating Bribery of Foreign Public Officials
in International Business Transactions.

6

The OECD Due Diligence Guidance for Responsible Business Conduct was developed through amulti-stakeholder process and approved by the 48 adherent governments to the MNE Guidelines.
See OECD (2018) Due Diligence Guidance for Responsible Business Conduct
https://mneguidelines.oecd.org/OECD-Due-Diligence-Guidance-for-Responsible-BusinessConduct.pdf

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INTRODUCTION  13

Other multilateral processes and instruments: In relation to human rights issues,
including the human rights of workers, the recommendations in this paper seek to alignwith the UN Guiding Principles on Business and Human Rights (UNGPs), the ILO
Declaration on Fundamental Principles and Rights at Work, ILO conventions andrecommendations referenced within the MNE Guidelines, and the ILO Tripartite
Declaration of Principles concerning Multinational Enterprises and Social Policy.7

7

UN (2011), UN Guiding Principles on Business and Human Rights,
https://business-humanrights.org/en/un-guiding-principles; ILO (1998), ILO Declaration on
Fundamental Principles and Rights at Work, www.ilo.org/declaration/lang--en/index.htm; ILO(2017), ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social
Policy, 5th Edition, http://www.ilo.org/empent/areas/mne-declaration/lang--en/index.htm

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Chapter 1. Overview of due diligence for responsible business conduct &implications for banks
Due diligence is the process enterprises should carry out to identify, prevent, mitigate andaccount for how they address actual and potential adverse impacts in their own operations,
their supply chain and other business relationships, as recommended in the MNE
Guidelines. Effective due diligence should be supported by efforts to embed RBC into
policies and management systems, and aims to enable enterprises to remediate adverse
impacts that they cause or to which they contribute.8 (See Figure 1.1)

Figure 1.1. Due diligence process & supporting measures

Due diligence under the MNE Guidelines is an ongoing process and focuses on the
management of actual or potential adverse impacts on the environment and/or the labourand human rights of affected parties, with the objective of preventing and mitigating therisk of these impacts occurring (see Section below on Adverse impacts and risk). This
conception of due diligence for RBC is different from how due diligence is commonly
perceived in the context of banking. In the context of banking, due diligence is generally
thought of as a process conducted prior to providing financing or services to a client withthe aim of identifying and assessing reputational, legal and financial risks to the bank, rather
than with the aim of preventing or mitigating impacts of a client’s operations on theenvironment, workers and communities.
Readers should be aware of different meanings given to the same terms as these can leadto confusion and misunderstanding between banking professionals and stakeholders
discussing RBC issues. (See 2.1.2.Annex A Terminology).

8

Throughout this paper, passages of text in grey boxes are excerpts from the OECD Due Diligence
Guidance for Responsible Business Conduct. See Ibid note 5.

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Adverse impacts and risk
Due diligence addresses actual adverse impacts or potential adverse impacts related to thefollowing topics covered in the MNE Guidelines: human rights, including workers andindustrial relations, environment, bribery and corruption, disclosure, and consumer
interests (RBC issues). A risk of adverse impacts may exist when there is the potential forbehaviour that is inconsistent with the recommendations in the MNE Guidelines because
it involves impacts that may occur in the future.

Figure 1.2. Due diligence for RBC: An outward facing approach

In banking, the term “environmental and social risk (E&S risk)” is often used to describe
how RBC issues may impact clients and eventually the bank. “RBC” and “E&S” criteria
both relate to environmental and social considerations. However, for many banks, andenterprises more generally, the term “risk” means primarily risks to the enterprise – credit
risk, market risk, operational risk, reputational risk, etc. Banks are concerned about theirposition in the market, in relation to their competitors, their image and long-term existence,
so when they look at E&S risk, it is typically also through the lens of what risks
environmental and social impacts pose to the bank and its shareholders.
The MNE Guidelines however refer to adverse impacts on people, the environment andsociety that enterprises and banks may cause, contribute to, or to which they are directly
linked (“RBC risks”). In other words, it is an outward facing approach to risk.
Consideration of RBC risk independently of its financial or commercial impact may
represent a paradigm shift for some banks, although in many instances, there will be astrong correlation between the potential financial risk and RBC risk associated with a client
and/or transaction. Nonetheless, many RBC issues persist precisely because they are notseen to be financially material or because their financial impact is realised over longer timescales. (See 2.1.2.Annex A Terminology).

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Why carry out due diligence?
Due diligence for RBC should help enterprises anticipate and prevent or mitigate
adverse impacts. In some limited cases, due diligence may help them decide whether or
not to go ahead with or discontinue operations or business relationships as a last resort,because the risk of adverse RBC impacts is too high or because mitigation efforts havenot been successful.
Effectively preventing and mitigating adverse impacts may, in turn, help banks increase
their positive contributions to society, improve stakeholder relationships, and protect theirreputation. Due diligence can also help banks to create more value for their clients, as well
as for society, over the short and longer terms. In some cases, instituting due diligence canfacilitate identifying opportunities to reduce cost, improve understanding of markets,
strengthen management of company-specific business and operational risks, decrease theprobability of default, avoid incidents relating to matters covered by the MNE Guidelines,
and decrease exposure to systemic risks. Banks can also carry out due diligence to help it
meet legal requirements pertaining to specific RBC issues, such as local labour andenvironmental laws, reporting requirements and legal requirements mandating due
diligence for certain risks which are increasingly common.

Characteristics of due diligence – the essentials
Due diligence is preventative – The purpose of due diligence is first and foremost to
avoid causing or contributing to adverse impacts on people, the environment andsociety, and to seek to prevent adverse impacts directly linked to operations, products
or services through business relationships. When involvement in adverse impacts
cannot be avoided, due diligence should enable enterprises to mitigate them, prevent
their recurrence and, where relevant, remediate them.
In the context of corporate lending and securities underwriting, a preventative approach toadverse impacts may mean having strong ex-ante due diligence processes in place to avoid
providing financing or securities underwriting services to client activities that cause,
contribute to, or are linked to significant adverse RBC impacts. It may also mean getting
involved to support efforts at addressing systemic issues or root causes of impacts where
they are particularly significant.
This could entail, for example, providing innovative products to incentivise clients
operating in high-risk sectors or geographies to implement due diligence (e.g. sustainability
rating-linked loans with due diligence criteria may contribute towards preventing harm.)(See Measure 3: Cease, prevent and mitigate adverse impacts, Practical actions).
Due diligence will invariably involve a process of progressive improvement. While abank’s due diligence processes may not be able to prevent all adverse impacts associatedwith its activities and business relationships, they nonetheless should use reasonable goodfaith efforts, taking into account risk-based prioritisation to prevent impacts to the extent
possible.

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Due diligence involves multiple processes and objectives – The concept of due
diligence under the MNE Guidelines involves a bundle of interrelated processes to
identify adverse impacts, prevent and mitigate them, track implementation and results
and communicate on how adverse impacts are addressed with respect to the enterprises'
own operations, their supply chains, clients, and other business relationships.

Due diligence should be an integral part of banks' decision-making and risk management.
It should enable the bank to be vigilant throughout the entire life cycle of the client
relationship. In practice, this means various units of a bank may be involved in
implementing due diligence processes. For example, this may involve integrating RBC
approaches and concepts into traditional transactional or “know your customer” (“KYC”)
due diligence processes, or integrating RBC analysis into screening loan portfolios andperiodically reviewing individual client relationships, and credit processes although thismight necessitate a redesign of the credit processes as currently few banks integrate RBC
analysis into this process.
Due diligence is commensurate with risk (risk-based) – Due diligence is risk-based. The
measures that an enterprise takes to conduct due diligence should be commensurate to theseverity and likelihood of the adverse impact. When the likelihood and severity of an
adverse impact is high, then due diligence will be more extensive. Due diligence should
also be adapted to the nature of the adverse impact on RBC issues, such as on human rights
and the environment. This involves tailoring approaches for specific risks and taking into
account how these risks affect different groups, such as applying a gender perspective todue diligence.

Some types of client operations, products or services are more likely to be linked to RBC
risks. Similarly, some contexts or circumstances (e.g. rule of law issues, lack ofenforcement of standards, behaviour of business relationships) may heighten the risk ofadverse impacts. As such banks should devote more time and resources to enhanced due
diligence on clients associated with high-risk sectors, activities or contexts and may haveless extensive processes for low-risk clients.
Due diligence can involve prioritisation (risk-based) – Where it is not feasible to address
all identified impacts at once, an enterprise should prioritise the order in which it takes
action based on the severity and likelihood of the adverse impact, rather than oncommercial criteria. The significance, or severity, of an adverse impact is understood as afunction of its scale, scope and irremediable character.


Scale refers to the gravity of the adverse impact.



Scope concerns the reach of the impact, for example the number of individuals thatare or will be affected or the extent of environmental damage.



Irremediable character means any limits on the ability to restore the individuals or
environment affected to a situation equivalent to their situation before the adverse
impact.

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The MNE Guidelines themselves do not attempt to rank the severity of adverse impacts. It
is not necessary for an impact to have more than one of these characteristics to beconsidered ‘severe’, although it is often the case that the greater the scale or the scope of
an impact, the less it is ‘remediable’. Severe impacts may include hazardous working
conditions that are common in a certain sectors, or extensive environmental degradation
which threatens the livelihood and health of local communities.
The process of prioritisation is ongoing, and in some instances new or emerging adverse
impacts may arise and be prioritised before moving on to less significant impacts.
In the case of prioritising risks to human rights, the severity of a potential adverse impact,
such as where a delayed response would make the impact irremediable, is the predominantfactor in prioritising responses.
Once the most significant impacts are identified and dealt with, the enterprise should moveon to address less significant impacts. Where an enterprise is causing or contributing to an
adverse impact on RBC issues, it should always stop the activities that are causing orcontributing to the impact and provide for or cooperate in their remediation.
Banks will often have large numbers of clients and may be exposed to a diverse range ofactual or potential adverse impacts. As such, banks will find it helpful to identify generalareas where the risk of adverse impacts is most significant and prioritise accordingly. Thismay be done through the screening of clients based on risk factors, as is already common
practice for many banks. (See Measure 2: Identify and assess actual and potential adverse
impacts) RBC policies will be important in shaping and communicating a strategy andrationale for prioritising risks. Such prioritisation can also inform the bank's position on
specific RBC issues, particularly in high-risk sectors and geographies. Importantly,
prioritisation decisions should be based on the severity and likelihood of the RBC impact,
rather than driven by commercial considerations. This process will invariably involve
supposition and judgment calls by the bank on a variety of issues, such as the severity of apotential impact, or in evaluating the comparative significance of different impacts acrossclients, sectors or geographies. Consulting with stakeholders in prioritisation decisions andcommunicating on those judgment calls publicly will strengthen the credibility of, and trust
in, a bank’s due diligence. (See Measure 1: Embed RBC into policies and management
systems).
Due diligence is dynamic – The due diligence process is not static, but ongoing,
responsive and changing. It includes feedback loops so that the enterprise can learn fromwhat worked and what did not work. Enterprises should aim to progressively improve theirsystems and processes to avoid and address adverse impacts. Through the due diligenceprocess, an enterprise should be able to adequately respond to potential changes in its risk
profile as circumstances evolve (e.g. changes in a country’s regulatory framework,
emerging risks in the sector, the development of new products or new business
relationships).
In the context of corporate lending and securities underwriting, a dynamic approach to due
diligence may mean reviewing prioritisation approaches as new issues are identified,
updating company watch-lists (or “RBC [or E&S] monitoring lists”) based on identified
risks associated with (potential) clients, strengthening approaches for preventing impacts
such as including expectations around RBC into contracts or other written agreements withclients.
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Due diligence does not shift responsibilities – Each enterprise in a business
relationship has its own responsibilities to identify and address adverse impacts. The
due diligence recommendations of the MNE Guidelines are not intended to shift
responsibilities from governments to enterprises, or from enterprises causing orcontributing to adverse impacts to the enterprises that are directly linked to adverse
impacts through their business relationships. Instead, the MNE Guidelines recommendthat each enterprise addresses its own responsibility with respect to adverse impacts,
and in cases where impacts are directly linked to an enterprise’s operations, products orservices, seeks to use its leverage, to the extent possible, individually or in collaboration
with others to effect change.
A relationship between a bank and a client is considered a “business relationship” under
the MNE Guidelines. As a result, banks are expected to consider and act on RBC risks
throughout their corporate lending and securities underwriting activities and, where
relevant, to use their leverage with their clients to influence them to prevent or mitigate
adverse impacts. Banks are only responsible for addressing adverse impacts themselves
when they cause or contribute to those impacts (See Measure 2: Identify and assess actualand potential adverse impacts). Where the bank is directly linked to an adverse impact
through a client, but does not cause or contribute to it, the bank will not be responsible for
remedying the impact. However, it still has a responsibility to seek to prevent or mitigate
the impact, using its leverage, which may involve efforts to influence the client to provide
remediation. (See Measure 3: Cease, prevent and mitigate adverse impacts, Practicalactions).

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Due diligence concerns internationally-recognised standards of RBC – The MNE
Guidelines provide principles and standards of RBC consistent with applicable laws andinternationally-recognised standards. They state that obeying domestic laws in thejurisdictions in which the enterprise operates and/or where they are domiciled is the firstobligation of enterprises. Due diligence can help enterprises observe their legal
obligations on matters pertaining to the MNE Guidelines. In countries where domestic
laws and regulations conflict with the principles and standards of the OECD Guidelines,
due diligence can also help enterprises honour the MNE Guidelines to the fullest extent
which does not place them in violation of domestic law. Domestic law may also in someinstances require an enterprise to take action on a specific RBC issue (e.g. laws
pertaining to specific RBC issues such as foreign bribery, modern slavery or minerals
from conflict-affected and high-risk areas).
The approaches in this paper are without prejudice to legal obligations. The Guidelines
extend beyond domestic law in many cases, but are not intended to conflict with legal
obligations of banks. In case of a conflict between national laws and the MNE Guidelines,banks “should seek ways to honour [MNE Guidelines] principles and standards to thefullest extent which does not place them in violation of domestic law”.9 To the extent thatdomestic laws truly contradict the principles and standards promoted in the MNE
Guidelines, the banks may have to reconsider operating in that jurisdiction, or reconsider
providing general corporate loans or underwriting securities to clients operating in thatjurisdiction.
Banks should first and foremost respect the laws of the jurisdiction they operate in,including in the context of corporate governance obligations and duties to their clients andshareholders. For example, banks in certain jurisdictions must respect duties of client
confidentiality. However, banks can still take steps to promote greater transparency withrespect to client relationships without being in breach of this duty (see Box 1.1).
Additionally, in some jurisdictions, banks may interpret laws or regulations as setting
limitations on how they can influence client conduct. All recommendations in this guidance
related to the use of leverage should be considered within the parameters of what is legallypermissible, which may include, where relevant, seeking consent from clients. Finally,
competition law issues should be understood and taken into account with respect tocollaborative due diligence approaches.10

9OECD Guidelines for Multinational Enterprises (2011), Chapter I, para 2

10

For further guidance on the intersection of RBC and Competition Law issues see Capobianco,
Gillard and Bijelic (2015), “Competition law and responsible business conduct”, Background Note
for the 2015 Global Forum on Responsible Business Conduct, OECD, Paris,
https://mneguidelines.oecd.org/global-forum/2015GFRBC-Competition-background-note.pdf

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Box 1.1. A Bank’s Duty of Client Confidentiality

Many jurisdictions have legal frameworks, which recognise that a bank has a legal duty tokeep its clients’ affairs confidential. The scope of the duty may differ considerably fromone country to another, and will vary depending on the law governing the relationshipbetween banks and their clients. For example, while this duty does not exist in the UnitedStates, it is recognised in the UK and most other European countries under civil law.
Moreover, in Switzerland and Singapore, violating obligations of client confidentiality canbe a criminal offence. Where it exists, a bank’s duty of client confidentiality generally
covers more than just financial information (for example, the state of the client’s account)and extends to all information received in the course of the relationship. It may also require
the bank to keep confidential the existence of the client relationship itself. The duty usuallyapplies to information received about prospective clients and can continue after a client
relationship has ended.
Most jurisdictions also recognise specific circumstances where a bank may be permitted todisclose confidential information about a client. For example, in the UK thesecircumstances include where:the bank is compelled by law to disclose the information (for example, where abank representative is required to give evidence relating to the client in court
proceedings).

the bank has a public duty to disclose the information (for example, wheredisclosure is necessary to prevent fraud or other crimes);

the interests of the bank require disclosure (for example, where the bank sues theclient for payment of an overdraft); or

disclosure is made in accordance with the express or implied consent of thecustomer (for example, where the customer asks the bank to give information to athird party).

How these exceptions apply in practice will depend on the specific jurisdiction and the factsof each particular case. Over the years, an increasing a number of statutory exceptions toa bank’s duty of confidentiality have been introduced in most jurisdictions, for example toprevent money laundering, terrorist financing, and tax evasion).
In the context of due diligence, client confidentiality duties can be a challenge for banks
when collaborating with one another in identifying real and potential adverse impacts
associated with clients and applying leverage (see Box 1.2 and Measure 3: Cease, preventand mitigate adverse impacts), engaging with stakeholders (see Characteristics of due
diligence and Measure 5: Communicate how impacts are addressed), communicating on
their due diligence activities (see Measure 5: Communicate how impacts are addressed),and cooperating in processes to enable remediation (see Measure 5: Communicate how
impacts are addressed).
The duty of confidentiality is owed by the bank to the client and is intended to protect theclient’s interests. This means that generally the client can waive the right to confidentiality
with respect to their information. Accordingly, one way to respond to client confidentiality
restrictions is to obtain (ideally at the outset of the relationship) the consent of the client todisclose specific information; for example, the existence of the client relationship with thebank. In cases where a bank has identified an adverse impact associated with one of its

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22  1. OVERVIEW OF DUE DILIGENCE FOR RESPONSIBLE BUSINESS CONDUCT & IMPLICATIONS FOR BANKS
client’s business activities during the course of the relationship, a bank may seek theclient’s consent to disclose further specific information as relevant.
These approaches have already been successfully applied by some banks in the context ofreporting on environmental and social risks (see Measure 5: Communicate how impacts are
addressed).
When seeking consent from a client it will be important for the bank to be clear about
exactly what information it is permitted to disclose, to whom and in what circumstances. It
is also important to know exactly which legal entity is giving consent and whether it has
the authority to give consent on behalf of other legal entities in a group. It may be useful tostandardise the process for requesting client consent on these issues; for example, throughthe inclusion of a provision in the standard language of loan covenants or having client
relationship managers raise it with prospective clients as a matter of practice during theclient on-boarding process (and then ensuring that any agreement is recorded in writing).
Currently broadly used template covenant agreements, such as that of the Loan Markets
Association, do not include such provisions; modifying such template agreements toinclude client consent to disclose the existence of the client relationship would be very
useful to standardising this practice.

Due diligence is appropriate to an enterprise’s circumstances – The nature and extent
of due diligence can be affected by factors such as the size of the enterprise, the context of
its operations, its business model, its position in supply chains, and the nature of its
products or services. Large enterprises with expansive operations and many products orservices may need more formalised and extensive systems than smaller enterprises with alimited range of products or services to effectively identify and manage risks.
In the context of corporate lending and securities underwriting, the nature and extent of due
diligence may also depend on the nature of the bank and the structure of its portfolio as
well as the nature of its clients (e.g. whether clients are government or private entities). It
may also depend on the characteristics of a transaction. For example, the longevity of a
relationship with a client and whether the bank is participating in a syndicated transaction(as a lead or member) or involved in a bilateral transaction may both influence how thebank will identify RBC risks and impacts associated with the client and how the bank can
exercise meaningful influence on the client. (See Box 4).
Due diligence can be adapted to deal with the limitations of working with business
relationships – Enterprises may face practical and legal limitations to how they can
influence or affect business relationships to cease, prevent or mitigate adverse impacts
on RBC issues or remedy them. Enterprises, in particular SMEs, may not have themarket power to influence their business relationships by themselves. Enterprises canseek to overcome these challenges to influence business relationships throughcontractual arrangements pre-qualification requirements, voting trusts, license or
franchise agreements, and also through collaborative efforts to pool leverage in industry
associations or cross-sectoral initiatives.

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Banks, like all enterprises, may face practical limitations to how they can influence theirclient to cease, prevent or mitigate adverse impacts on RBC issues or remedy them. For
example, in competitive markets, banks face limitations on their ability to influence clientsor prospective clients, and may stand to lose clients as a result of requiring certain
information or standards of conduct, which may extend the timeline of the transaction,
where other banks have lower requirements in place. Additionally, in some jurisdictions,
there may be legal issues concerning the influence of banks on the conduct of the boards
or management of their clients. However, even in these cases, banks can still promote RBC
through engagement with their clients, raising points and concerns regarding RBC issues
with them and, in some cases, discontinue relationships with clients that continue to cause
or contribute to adverse impacts. (See Measure 3: Cease, prevent and mitigate adverse
impacts). Banks can also seek to overcome leverage limitations through contractual
arrangements, collaborative efforts to pool leverage with other banks or other units within
a bank, or contribute to cross-sectoral initiatives. (See Measure 3: Cease, prevent andmitigate adverse impacts).
The approaches banks can employ to use their leverage to influence clients are broad inscope. They are not limited to direct engagement with clients but can also involve, as
appropriate and subject to resources, involvement in industry initiatives targeting certain
RBC issues, collective action on specific geographic or company-specific issues, directing
capital towards responsible companies over time, etc. Banks may also engage in advocacy
in the context of public policy or industry initiatives which seek to raise minimum standardsof conduct expected of clients or banks’ due diligence processes.
What is appropriate will vary according to the characteristics of the bank, its client and its
client’s operating context, the risk or impact in question, the lending or securities
underwriting arrangement and relevant regulatory obligations.
Due diligence is informed by engagement with stakeholders – Stakeholders are persons
or groups who have interests that could be affected by an enterprise’s activities.
Stakeholder engagement is characterised by two-way communication. It involves thetimely sharing of the relevant information needed for stakeholders to make informed
decisions in a format that they can understand and access. To be meaningful, engagement
involves the good faith of all parties. Meaningful engagement with relevant stakeholders
is important throughout the due diligence process. In particular, when the enterprise may
cause or contribute, or has caused or contributed, to an adverse impact, engagement with
impacted or potentially impacted stakeholders and rights holders will be important. For
example, depending on the nature of the adverse impact being addressed, this could include
participating in and sharing results of on-site assessments, development of risk mitigation
measures, ongoing monitoring and the design of grievance mechanisms.
Stakeholders of banks may include a wide range of actors including their employees,
clients, shareholders, as well as regulators, industry peers, and civil society and rightsholders11 where they operate and where impacts are felt.

The OECD Guidelines refer to the term ‘rights-holder’ in the context of human rights. Therefore,
this Guidance uses the term rights-holder in the context of stakeholders subject to real or potential
human rights impacts. This is without prejudice to other ‘rights’ such as land rights etc. See OECD
Guidelines for Multinational Enterprises, Chapter IV Paragraph 45. There may be several groups of11

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24  1. OVERVIEW OF DUE DILIGENCE FOR RESPONSIBLE BUSINESS CONDUCT & IMPLICATIONS FOR BANKS
Seeking and integrating input or feedback from stakeholders can help banks ensure that
their due diligence processes are effective. For example, see Table 1.1. Engagement withall stakeholder groups will not be relevant in all circumstances.
Table 1.1. Engagement with stakeholders to inform due diligenceDue diligence actions

Suggested stakeholders to engage

Developing RBC polic(ies) and making decisions about
which impacts to prioritise across portfolios.

Contractual stakeholders (i.e. employees, clients andshareholders)Regulators
Experts (e.g. environmental, social and human rights
consultants, academia, civil society organisations andglobal trade unions)
Experts (e.g. environmental, social and human rights
consultants, academia, specialised ESG rating
agencies), industry associations, civil society
organisations or global trade unions)12 and legitimate
representatives of impacted rights-holders, whereappropriate.
Impacted rightsholders
Legitimate representatives of impacted rights-holders (e.g.
trade unions, or community leaders) or credible
proxies (e.g. civil society organisations or independent
experts).

Identifying and assessing actual and potential impacts
associated with clients, developing general prevention
and mitigation strategies (not linked to a specific client,and designing remediation mechanisms.

In cases where a bank has contributed to an adverse
impact:Identifying appropriate forms of remedy or incommunicating back on how actual humanrights impacts are being addressed.
Devising prevention and mitigation strategies withrespect to ongoing impacts linked to a
specific client.

As a starting point, banks should encourage their clients to engage in meaningful
stakeholder engagement with rightsholders that are or may be impacted by their operations.
For high-risk clients or activities, banks can go further and assess the quality of a client’s
stakeholder engagement in line with international standards.13 Specifically, this may
include a review of the records of engagement for a specific asset as well as stakeholder
mapping and strategy to improve the quality of their client’s stakeholder engagement
activities. In circumstances where the bank deems the client’s engagement withrightsholders to be unsatisfactory, the bank may determine, for example with the help of an
independent consultant, whether or not engagement has been appropriate and, where
engagement is deemed unsatisfactory, identify actions that the client should take to address
any shortcomings.
Banks may face constraints in engaging directly with rightsholders impacted by the
behaviour of their clients due to concerns about client confidentiality, logistical constraints
as well as other perceived legal risks associated with their interference in management
activities. However, situations have arisen where banks have engaged directly withrightsholders impacted by the behaviour of client companies to better understand how
clients can seek to prevent or mitigate risks or remediate adverse impacts. In these‘rights-holders’ associated with the activities of a company e.g. employees, people to be resettled,
local communities etc.

13

See for example OECD (2016c), OECD Due Diligence Guidance for Meaningful Stakeholder
Engagement in the Extractive Sector, http://mneguidelines.oecd.org/stakeholder-engagementextractiveindustries.htm; and further guidance in OECD (2018) Due Diligence Guidance for
Responsible Business Conduct, Annex q. 8-11

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1. OVERVIEW OF DUE DILIGENCE FOR RESPONSIBLE BUSINESS CONDUCT & IMPLICATIONS FOR BANKS  25

situations, the bank will generally have an existing relationship with a client and theengagement would be undertaken in collaboration with the relevant client.
Banks can also participate in multi-stakeholder platforms to have access to complaints
submitted by impacted stakeholders or rightsholders14 and establish mechanisms at a
headquarters level to allow stakeholders or rightsholders to raise issues with the bank about
impacts associated with their clients. (See Measure 6: Provide for or cooperate inremediation when appropriate).
Due diligence involves ongoing communication – Communicating information on due
diligence processes, findings and plans is part of the due diligence process itself. It
enables the enterprise to build trust in its actions and decision-making, and demonstrate
good faith. Enterprises should account for how they identify and address actual or
potential adverse impacts and should communicate accordingly. Information should beaccessible to its intended audiences (e.g. stakeholders, investors, consumers etc.) andbe sufficient to demonstrate the adequacy of an enterprise’s response to impacts.
Communication should be carried out with due regard for commercial confidentiality
and other competitive15 or security concerns. Various strategies may be useful incommunicating to the extent possible while respecting confidentiality concerns.
Banks can communicate on due diligence approaches for corporate lending and securities
underwriting through annual reporting, sustainability reports, their website or other means.
This reporting may be done on an aggregate or anonymous basis where client
confidentiality requirements cannot be overcome through securing client consent tocommunicate on activities or issues specific to the client. In cases where a bank is causing
or contributing to a human rights impact, they should be prepared to communicate relevant
information to impacted rightsholders in a timely, culturally sensitive and accessible
manner while respecting client confidentiality. (See Measure 5: Communicate how impacts
are addressed).

14

One example of this is Roundtable on Sustainable Palm Oil (RSPO)

15

Competitive concerns should be interpreted in light of applicable competition law.

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Box 1.2. Collaboration in carrying out due diligence

Enterprises can collaborate across various departments at an industry or multi-industry
level as well as with relevant stakeholders throughout the due diligence process, although
they always remain responsible for ensuring that their due diligence is effectively carriedout. For example, collaboration may be pursued in order to pool knowledge, increase
leverage and scale-up effective measures. Cost sharing and savings are often benefits ofcollaboration and can be particularly useful for SMEs. While in many cases, enterprises
can collaborate on due diligence without breaching competition law, enterprises, and thecollaborative initiatives in which they are involved, are encouraged to take proactive steps
to understand competition law issues in their jurisdiction and avoid activities which could
be seen as breaches of competition law.
In the context of banks, where clients, or other counterparts, are carrying out due diligence,
it may be sufficient for the bank to assess the quality and reliability of those efforts andthen determine whether supplementary action is needed, as part of its own due diligence,
rather than replicating the efforts of others. For example:
In the context of syndicated lending transactions, when a syndicate has agents andlead arrangers with their own robust due diligence practices, the overall group will
benefit from smoother due diligence as relevant RBC documentation will likely bealready prepared and available to the syndicate.



If a bank has clients that can demonstrate they are adequately carrying out due
diligence and identifying RBC risks, the bank may not need to further identify risks
with regard to those companies. Instead, the bank might focus on engaging with theclient to track how real or potential impacts are being appropriately responded to.

Banks can also collaborate with relevant teams in the bank to promote efficiency
with respect to due diligence and to increase leverage. For example, in situations
where a bank identifies a significant impact in the context of a general corporate
lending transaction it may check to see whether the bank is also providing othertypes of banking services to the company (i.e. advisory, project or asset based
finance etc.). It can then seek to build off or combine with the due diligence
activities of teams in the banking department, subject to restrictions on internal
information sharing, including in applying leverage where options with respect toa specific transaction may be limited.

Where banks collaborate on due diligence, they should ensure they undertake their own
independent assessment of the adequacy of due diligence taken by others rather than relying
solely on assurances provided by others.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  27

Chapter 2. Key considerations for RBC due diligence in banking
transactions

This section is divided into six parts, each of which corresponds to a step of the due
diligence process:

Embedding RBC into policies and management systems;

Identifying actual and potential adverse RBC impacts;

The cessation, prevention, and mitigation of such impacts;Tracking implementation and results;Communicating how impacts are addressed; andProviding for or cooperating in remediation when appropriate.

Each section begins with a box that outlines the core elements of the due diligence process
as articulated in the OECD Due Diligence Guidance for Responsible Business Conduct.
Each section also includes an overview of practical actions, which illustrate how to
implement or adapt as needed supporting measures for due diligence as well as a discussionof key considerations, which may be relevant to applying specific due diligence steps inthe context of corporate lending and securities underwriting.

Measure 1: Embed RBC into policies and management systems
1.1. Devise, adopt and disseminate a combination of policies on RBC issues that articulate
the enterprise’s commitments to the principles and standards contained in the MNE
Guidelines and its plans for implementing due diligence, which will be relevant for theenterprise’s own operations, its supply chain and other business relationships.
1.2. Seek to embed the enterprise’s policies on RBC issues into the enterprise’s oversightbodies. Embed the enterprise’s policies on RBC issues into management systems so thatthey are implemented as part of the regular business processes, taking into account thepotential independence, autonomy and legal structure of these bodies that may be foreseen
in domestic law and regulations.
1.3. Incorporate RBC expectations and policies into engagement with suppliers and otherbusiness relationships.

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28  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONSPractical
actions
for banks

Adopting a policy which includes commitment by the bank to observe relevant
principles and standards on RBC issues (e.g. the MNE Guidelines, the UN
Guiding Principles on Business and Human Rights) and:‒ describes the bank’s approach to due diligence and lays down
principles and criteria informing risk identification, prevention andmitigation, and explains how the bank prioritizes RBC issues (i.e.
why some RBC issues are considered more significant than others);‒ ensures a consistent approach to due diligence and decision making
across the entire bank (i.e. in the context of different transactions anddepartments);‒ clearly communicates the bank’s expectations towards its clients (i.e.
through policies or engagement on specific identified risks)‒ describes the bank’s approach to stakeholder engagement; and‒ covers all types of client relationships within the scope of this paper,
across different business areas as well as across different
geographies and industry sectors.16
Identifying and assigning roles to relevant business units for carrying out stepsof the due diligence process (e.g. boards and senior level management, risk orcompliance teams, business development officers and client relationshipmanagers, marketing leads for shares and bonds [for underwriting]).
Allocating sufficient resources to effectively carry out due diligence.
Maintaining management systems which enable banks to consider RBC risks(as defined in this paper) in business strategies and daily operations (e.g. tools
to enable risk identification and assessment, knowledge management systems,
processes for internal reporting, integration of RBC objectives into performanceassessments of deal teams, etc.).
Communicating RBC expectations to clients, specifically:‒ an expectation that clients should operate in accordance with relevantinternational RBC frameworks (e.g. MNE Guidelines), including the
expectation that remedy is provided where a client causes orcontributes to adverse impacts;‒ conditions for the provision of finance (e.g. requiring a commitment tocomply with relevant international standards);‒ circumstances related to RBC in which a business relationship with aclient may be terminated; and‒ seeking consent from a client to disclose the client’s relationship tothe bank where practicable in the context of the due diligenceprocess (see Box 1.1)

What is the purpose of policies on RBC?
Policies on RBC issues (“RBC policies”, also referred to as “ESG policies” or “CSR
policies”) are used to clearly articulate what the bank expects from clients and staff inrelation to RBC issues and to inform the design of RBC processes.
This may include due diligence processes as well other processes of a bank (e.g. client onboarding, audit functions, etc.). Policies on RBC also serve to inform the broader public
about what the bank’s position on RBC issues is.
16

Recognising that within the scope of this paper only general corporate lending and securities
underwriting transactions are considered.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  29

What should the scope of applicability be for RBC policies?
Sometimes RBC policies of banks include applicability thresholds. For example, theEquator Principles, an environmental and social risk management framework used for
asset-specific corporate loans, only apply when a series of conditions are fulfilled,
including monetary thresholds. However, the due diligence approach recommended under
the MNE Guidelines is not triggered by monetary thresholds, but applies to all transactions,using a risk-based approach. The size of a loan may affect a bank’s risk exposure and how
aspects of the due diligence process are carried out in practice, but RBC policies should, inprinciple, apply to all transactions regardless of their monetary value or duration.

Which format can RBC policies have?
An RBC policy does not need to be a standalone or single document. It can be a collectionof policies and can be integrated into existing documents, such as policies, statements orcommitments of a bank, due diligence forms, contract templates or other forms ofagreements used in the course of managing client relationships. Banks will normally
integrate RBC issues into overarching policies (e.g. a credit risk policy or a reputationalrisk management policy).
Banks normally also establish industry and issue specific policies or policy statements inwhich they explain how they address RBC issues at the levels of client, transaction, andportfolio. For example, banks often have stand-alone policies that address RBC issues in
the context of specific industry sectors, such as mining and agriculture, in addition to
general policies regarding corporate social responsibility.
To ensure that clients, prospective clients and other stakeholders can easily understand andaccess RBC policies, it is important that they be clearly worded, available in the mostimportant languages spoken in the key markets the bank operates in and in formats that areaccessible to a wide audience.
Owing to the broadness and complexity of RBC issues that the bank might be involved
with, banks can use their policy-making and revision processes to communicate therationale or approach they use to prioritise high-risk issues (i.e. the considerations the banktook into account in assessing which impacts are most significant). For example, a bank
may flag in their policies that forced labour risks are a priority for them, given thesignificant scale and scope of these impacts, as well as signals from regulators that this isa priority issue.17

How can RBC polices be developed and revised?
Model policies already exist for management of RBC risks, including with respect tospecific issues or sectors.18 Banks may wish to build on or adapt existing policies to ensure
they are appropriate to their context and risk profile.

17

For examples of approaches to risk prioritization see OECD Due Diligence Guidance, Ibid note
2, Q 3-5 and Shift (2014) Business and Human Rights Impacts: Identifying and Prioritizing
Human Rights Risks, https://shiftproject.org/wpcontent/uploads/2014/01/Shift_SERworkshop_identifyHRrisks_2014.pdf
For example, see “Model Supply Chain Policy for a Responsible Global Supply Chain of Minerals
from Conflict-Affected and High-Risk Areas”, OECD Due Diligence Guidance for Minerals
Sourced from Conflict Affected and High Risk Areas; See also “Model Enterprise Policy for18

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30  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
Consultation with stakeholders, such as bank’s employees, clients, regulators,
shareholders, industry peers and civil society organisations is also useful in developing
RBC policies and particularly in developing a rationale for prioritisation. Some of thesestakeholders may have expertise or broader understanding of the various impacts a bank
may be linked to through its clients’ activities and operations and thus be well placed toprovide informed views on how to prioritise amongst them. Consulting external
stakeholders (such as civil society organisations) also helps to establish credibility withrespect to a bank’s prioritisation decisions.
Additionally, consulting with relevant units of the bank (see Measure 1: Embed RBC into
policies and management systems) in the context of policy development can help identify
realistic RBC objectives and policy implementation approaches that both are effective andcan be easily integrated into a bank’s regular operations.
Banks may also wish to set the frequency for periodic updates to make sure that the policies
reflect changes in the risk and business landscape, shifting societal expectations, regulatory
obligations and lessons learned.

Which teams or business units will be relevant to consider when developing andaligning objectives with the banks’ RBC policies?
In order to implement an effective due diligence process and ensure alignment with respect
to RBC policies and due diligence processes, banks should identify which business units
will be relevant to carrying out the steps of a due diligence approach (such as developing
RBC policies and management systems for implementing them, including for theidentification, prevention and mitigation of impacts). It is important to then assign roles,
responsibilities and adequate resources across all relevant units and departments.
Relevant staff or business units of banks include:

Those making high-level decisions (e.g. boards and senior-level management).



Those in charge of risk or compliance (e.g. legal, compliance, due diligence
officers, credit officers, risk units, Environmental and Social Risk units).



Those developing and managing client relationships (e.g. business development
officers, client relationship managers).

In the context of underwriting, those in charge of marketing the shares and bondsthat the bank is underwriting.

It will also include units from different business areas, such as commercial and investmentbanking. Due diligence processes are also relevant for non-traditional financial products
and services, which are designed to include environmental and social objectives.

Responsible Agriculture Supply Chains”, OECD-FAO (2018) Guidance on Responsible
Agricultural Supply Chains.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  31

What management systems can banks establish to facilitate carrying out due
diligence?
It is important to establish and maintain appropriate and sound management systems thatenable banks to consider RBC issues in their business strategies and daily operations.19
As an initial consideration, sufficient financial resources should be allocated or available
to ensure the establishment of management systems and due diligence activities (e.g.
budget for the development and use of in-house impact identification tools on a permanent
basis, allowance for field travel when necessary, to budget for staff responsible forresponding to and tracking real and potential impacts, etc.).
Some due diligence activities may be integrated into existing processes and tools, provided
that they go beyond simply identifying and managing material risks to the company itself,
to include risks of adverse impacts as understood under the MNE Guidelines. As discussed
above, for some banks this may represent a significant change in current thinking andapproaches for banks.
For example, where relevant and useful, the identification and assessment of actual or
potential adverse RBC impacts can be integrated into processes such as client on-boarding,transactional due diligence, and periodic reviews, led by relationship managers, due
diligence officers, credit officers and other functions. However, it is important to note thatenvironmental and social issues often require nuanced assessment of qualitative
information and therefore may not be adequately considered in processes designed toprocess large amounts of quantitative information.
Additionally, building on existing due diligence processes which address corruption risks
can contribute to identifying other issues under the MNE Guidelines in an efficient way.
This is especially relevant as there is increasing recognition of the linkages between
corruption risks and environmental and social issues – corruption can undermine
environmental protection or represent a red flag with regard to workplace health and safety
risks. This may involve including basic questions on human rights and environmental
issues in KYC processes or client screening activities and using this information to provide
an initial indication of the degree of due diligence needed moving forward in that client
relationship.
Specific processes and tools may also need to be established to facilitate carrying out due
diligence. For example:
Banks should provide staff in charge of identification of RBC risks with relevant
tools to enable identification and assessment of impacts. This might include accessto market research services which identify RBC issues, training for or hiring ofinternal staff to ensure in-house expertise to identify, assess and manage RBC
issues appropriately.

To aid efficient identification of impacts, banks can develop simple questionnaires
regarding RBC issues with binary answers that can be completed quickly byrelationship managers, or compliance/credit managers to gather initial, preliminary
information (e.g. does the company have staff responsible for environmental and

19OECD Guidelines, Chapter IV, paragraph 4, and Commentary, paragraph 44; OECD Guidelines,
Chapter VI, Commentary, paragraph 63.

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32  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
human rights risk management? etc.) The responses can be used to flag where
additional assessment may be needed.
In order to further facilitate identification and to track the effectiveness of due
diligence processes, banks may establish a knowledge management system or“RBC monitoring lists” (e.g. for record-keeping on RBC issues, activities, anddecision-making). This may include: a) a register of RBC risks identified in relation
to individual companies and projects (including RBC risks or incidents reported
through grievance mechanisms); b) assessments of clients’ RBC performance; andc) documentation of decisions to form or end a business relationship with a client
including conditions which may have been stipulated; and records of engagementwith prospects, clients, and other relevant stakeholders on RBC issues.

In order to ensure that RBC issues are adequately responded to, banks can establish
criteria for decision making with respect to RBC issues as well as processes forinternal reporting and escalation of issues up to senior management to ensure they
are taken into account and responded to.



To ensure alignment with RBC policies across different functions, it will be
important to align incentives and develop systems to prevent conflict of interest, so
a bank’s due diligence teams are shielded from any internal pressures to overlook
RBC risks in favour of commercial outcomes. Measures may include, establishinginternal risk controls and internal audits and strengthening internal whistle-blower
protections where such controls are not successful and the integration of RBC
objectives into performance assessments, and compensation incentives for relevant
teams and final decision making bodies. (See Measure 1: Embed RBC into policies
and management systems).

What is the role of senior management20 in the context of RBC policies?
Senior management plays a crucial role in ensuring that policies on RBC issues are
implemented coherently across the organisation. 21 Senior management will also ensure thatthe appropriate management systems, processes, and organisational structure to enable thebank to implement and maintain its RBC policy commitments effectively are in place.
The duty of senior management in overseeing issues relevant to RBC and stakeholders
consultation is also recognised in the G20/OECD Principles for Corporate Governance(see Box 2.1).

Some banks deal with such issues at the executive board level, others at the board of director’slevel, others, again, have specific committees which may include members from the executive board
and/or board of directors.
20

The Thun Group of Banks first discussion paper highlights that the “[t]one from the top’ isimportant in gaining buy-in from other parts of the organisation, especially when making explicit
reference to human rights in a range of policies and integrating a human rights “perspective” ondecisions and processes. Thun Group of Banks, Discussion Paper for Banks on Implication of theUnited Nations Guiding Principles on Business and Human Rights 16–21, October 2013, page 7.
21

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  33

Box 2.1. G20/OECD Principles for Corporate GovernanceAccording to the G20/OECD Principles for Corporate Governance, the senior management
body, such as a committee, ideally including members from the executive board and/or theboard of directors should:

oversee the risk management system and systems designed to ensure that thecorporation obeys applicable laws, including tax, competition, labour,
environmental, equal opportunity, health and safety laws;take due regard of, and deal fairly with, other stakeholder interests including thoseof employees, creditors, customers, suppliers and local communities. Observanceof environmental and social standards is relevant in this context;have a key role in setting the ethical tone of a company, not only by its own actions,but also in appointing and overseeing key executives, and consequently, themanagement in general;establish and ensure the effectiveness of internal controls, ethics, and complianceprogrammes or measures to comply with applicable laws, regulations, andstandards. […] Moreover, compliance must also relate to other laws and regulations
such as those covering securities, competition and work and safety conditions.
Other laws that may be applicable include those relating to taxation, human rights,
the environment, fraud, and money laundering.

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34  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS

How can RBC expectations be communicated to clients?
A first step in communicating RBC expectations is to ensure that the bank’s RBC policies
are publicly available and actively communicated to the client. Banks should articulate their
RBC expectations in a way that can be communicated to and understood by the companies
the bank engages with.
In addition to communicating about general expectations on RBC (see practical actions
under Measure 1: Embed RBC into policies and management systems), banks may also
tailor their communication based on specific risks associated with the client. For example,
in cases of securities underwriting, if a company in a carbon intensive industry does notconsider climate change to be a risk because there is no foreseeable short-term impact on
the company, the bank can play a role in explaining to the client the significant
environmental and social risks that climate change poses and how it may also have amaterial impact on the client, for example due to changing investor sentiment andincreasing regulation.
Communicating RBC expectations and requesting consent with respect to disclosing theclient’s relationship to the bank (see Box 1.1) should ideally initially take place prior toforming a business relationship, during the client on-boarding process, where practicable.
In order to ensure the bank and client company share an agreed common understanding of
RBC expectations, they may be included where possible in financing contracts orunderwriting agreements. This may be particularly important for high-risk clients (e.g.
clients with a bad track-record on RBC, or clients operating in high risk sectors or
geographies). To date, RBC expectations have not been included in template loan
covenants developed by recognised market associations like the Loan Market Association,
which has limited their inclusion in contractual agreements.
Tools (e.g. checklists and a set of RBC-related questions integrated into assessment tools),
documentation (e.g. fact sheets, policy statements), and training on RBC issues can also
support engagement on RBC expectations.
Additionally, RBC expectations should be predictable and not subject to factors such as theplace of incorporation and ownership structure of a client. Under the MNE Guidelines,
state-owned enterprises are subject to the same recommendations as privately-owned
enterprises22 and the recommendations of the Guidelines are relevant to enterprises
irrespective of the country or specific context of enterprises’ operations.23 However, how abank goes about checking and ensuring expectations are met, and the degree of leverage toprevent or mitigate impacts, will vary considerably according to various factors. (SeeMeasure 1: Embed RBC into policies and management systems).

22OECD Guidelines, Chapter II, Commentary, paragraph 10.

23

Particularly, the expectation of the OECD Guidelines for Multinational Enterprises thatenterprises “[s]eek to prevent or mitigate an adverse impact […] directly linked to their operations,products or services by a business relationship” is not limited to business relationships based or
operating in OECD countries. Therefore, the expectation that clients should operate in accordancewith relevant international RBC frameworks (e.g. MNE Guidelines) should apply regardless ofwhether the client is based in or operating in an OECD country. OECD Guidelines, Chapter IV,
Commentary, paragraph 39.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  35

Measure 2: Identify and assess actual and potential adverse impacts
2.1. Carry out a broad scoping exercise to identify all areas of the business, across its
operations and relationships, including in its supply chains, where RBC risks are most
likely to be present and most significant. Relevant elements include, among others,
information about sectoral, geographic, product and enterprise risk factors, including
known risks the enterprise has faced or is likely to face. The scoping exercise should enable
the enterprise to carry out an initial prioritisation of the most significant risk areas forfurther assessment. For enterprises with less diverse operations, in particular smaller
enterprises, a scoping exercise may not be necessary before moving to the stage ofidentifying and prioritising specific impacts.
2.2. Starting with the significant areas of risk identified above, carry out iterative andincreasingly in-depth assessments of prioritised operations, suppliers and other business
relationships in order to identify and assess specific actual and potential adverse RBC
impacts.
2.3. Assess the enterprise’s involvement with the actual or potential adverse impacts
identified in order to determine the appropriate responses. Specifically, assess whether theenterprise: (a) caused (or would cause) the adverse impact; or (b) contributed (or would
contribute) to the adverse impact; or whether (c) the adverse impact is (or would be)
directly linked to its operations, products or services by a business relationship.
2.4. Drawing from the information obtained on actual and potential adverse impacts, where
necessary, prioritise the most significant RBC risks and impacts for action, based on
severity and likelihood. Prioritisation will be relevant where it is not possible to address all
potential and actual adverse impacts immediately. Once the most significant impacts are
identified and dealt with, the enterprise should move on to address less significant impacts.

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36  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONSPractical
actions
for banksFirst screen: Identifying and assessing the most significant areas of RBC risk
across client portfolios based on information provided by clients andindependent research.
Second screen: Engaging in enhanced identification by consulting additionalsources and engaging with clients to assess actual and potential impacts.
This may also include identification based on a more narrow unit of analysis(i.e. on a high-risk project or asset triggered by identification of severe risks
or actual severe impacts, known use of proceeds, or where a client has
limited assets or operations).
Developing RBC monitoring lists to accelerate identification
processes.
Developing a process for assessing the bank’s involvement with anadverse impact, e.g. whether it may have contributed to the impact
via its actions or omissions, and determining the appropriate
response.
Ensuring that adequate early warning systems are in place to identify RBC
risks outside of the screening process and periodic review.

What are appropriate approaches to identify and assess actual and potential
adverse impacts with respect to corporate lending and securities underwritingtransactions?
Identification of potential and actual adverse impacts is an ongoing, iterative process.
Commonly, banks adopt a two-tiered process (first and second screen) for the identification
and assessment of actual and potential adverse RBC impacts, alongside monitoring issues
and complaints that may arise outside of this process.

First screen
This initial screening will be broad and identify high-level risks of adverse impacts related
to sectors, geography or enterprise-specific risk factors (e.g. known instances of
misconduct related to a specific company) across a client portfolio. This may be different
from current practices of some large commercial banks where such screening may only beundertaken for a limited number of sectors that are subject to particular policies. A bankthat provides multiple products and services and maintains very large portfolios of clientsin different markets can take a risk-based approach to identification and concentrate initialefforts on where the risk of adverse RBC impacts are assessed to be the most significant.24
However, this should be based on an assessment of risk associated with the client sectors(e.g. products services and other activities), geographies (e.g. governance and rule-of-law,conflict, pervasive human rights or environmental adverse impacts) or client specific risk
24

See for example: OHCHR, Response to request from BankTrack for advice regarding theapplication of the UN Guiding Principles on Business and Human Rights in the context of thebanking sector, page 4 – “where possible a bank would be expected to first develop an understandingof its overall risk picture, including areas which (e.g. activities/sectors/relationships/clients,
countries) are likely to pose the most severe risk, and them to prioritize those areas for more detailed
analysis”.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  37

factors (e.g. known instances of corruption, misconduct, poor implementation of standards
for RBC).
Banks often base their assessment on information provided by their clients. Banks may also
complement the information with their own research to enhance the quality ofidentification. Consulting additional sources such as market research services, reports fromnational authorities, international organisations, NGOs, other civil society organisations,
independent experts, academia and media can be useful to supplement information
provided by clients and provide more robust indications of risk areas. Where a bank is
acting on information provided by clients or other third parties, it should assess the qualityof the information provided. For example, if publically available information contradicts
information provided by the client it may be useful to look further into the reasons for thediscrepancy.
Additionally, banks can also prepare risk-based RBC monitoring lists of companies basedon information already available or gathered about RBC risks associated with certain
companies. Such lists can help to accelerate the due diligence process, as they can build on
pre-assessments of the company, its sector or jurisdiction. Such lists may need to berevisited and modified periodically or in reaction to specific events.

Second screen (Enhanced identification)
Based on the risk identified through the “first screen”, banks should prioritize clients whose
operations entail the most significant risk for more detailed assessment, which may also
sometimes involve assessing risks on a project or asset specific basis. (See Measure 2:
Identify and assess actual and potential adverse impacts).
Enhanced identification processes can entail, as appropriate:Engaging with the client by asking them to clarify certain issues, provide additional
documentation, and investigate certain instances.



Conducting in-depth reviews of client’s operations based on documents provided
by clients including, as relevant, existing Environmental and Social Risk andImpact Assessment, Human Rights Risk and Impact Assessment, as well as reports
and assessments from independent third parties.



Gathering information from additional sources including independent research
providers, civil society organisations – such as NGOs, potentially affected groups,
and other relevant stakeholders (noting that legal restraints relating to client
confidentiality may need to be taken into account when consulting third parties
regarding specific clients. (See Box 1.1).

Assessing the likelihood that the provision of finance will be connected to activities
that cause, contribute or are linked to adverse RBC impacts.

Enhanced identification in practice often involves the bank’s Environmental and Social
Risk (“ESR”) unit. After conducting its own research, the ESR unit will reach out (asnecessary) to the relationship manager, the compliance officer, or to the deal team to further
investigate the situation. Banks may also seek to appoint specialists to support them inenhanced identification or expand internal ESR teams as necessary.
Certain banks have also sought to integrate this responsibility within deal teams. A RBC
risk profile of the client and or transaction will be established through compiling the

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38  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
findings and conclusions, and by putting forward, where relevant, recommendations on
how to address identified RBC issues.

What is the scope of identification and assessment?
General purpose loans and securities underwriting transactions usually take place at thecorporate level, i.e. the bank provides finance or underwriting services which support thegeneral operations or the expansion of a company, not to a specific project or asset (suchas a power plant or an infrastructure project). Therefore, the primary unit of analysis forundertaking due diligence for corporate loans and securities underwriting in the first
instance is usually the corporate entity (i.e. the entire client company), as opposed to a
project or asset. Examples of information banks can look at during the identification
process include:

The client's corporate structure (e.g. subsidiaries, joint ventures) and strategy (e.g.
expansion plans) and how this may impact RBC issues;The geographies in which the client is active and, if possible, those in which it will
be active (e.g. sensitivity of the surrounding area and/or the likelihood that
regulation pertaining to RBC issues is reliably enforced by governmental
authorities).



The industry sector in which the client is active (e.g. the likelihood that a specificindustry sector causes, contributes to or is linked to adverse RBC impacts).



The client's RBC policy and governance structure, including the clients’ RBC
polic(ies) and management systems;



The client's RBC track-record and their ability and willingness to address RBC
issues appropriately including with respect to clients due diligence over their own
suppliers (e.g. controversies related to the company discussed in the media or raisedby civil society);

If relevant, the client's high-risk joint venture partners in subsidiaries.

In some limited instances, where enhanced (“second screen”) identification has been
deemed to be appropriate, due diligence may also involve examining in detail the actual or
potential adverse impacts associated with a specific asset or project. These may beappropriate in the following situations:

Severe risks: where a bank identifies potentially severe adverse RBC impacts
related to a specific asset, subsidiaries, or projects, based on geographic, sectoral,
or company risk profile, a more detailed project level assessment for that specificasset or project may be triggered. For example, this may include identified risks ofadverse impacts on indigenous peoples, critical habitats, significant cultural
heritage, or large-scale resettlement at a significant asset of a client that is currently
under development or proposed.



Actual impacts: where a bank determines that actual severe impacts (such as serious
human rights abuses) are present in respect of a specific asset.

Use of proceeds: by definition, general corporate purpose finance has anunspecified use of proceeds, however in some circumstances a client may indicate
how proceeds will be used, or information undertaken at corporate level may show

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  39

that proceeds will be used to fund primarily specific assets or projects (such as in
the case of a single-asset company).
Limited assets or operations: where the corporate entity only has a small number ofprojects or operations or where one asset or project represents a dominant
proportion of production or revenues.

At what stage should banks identify and assess actual and potential adverse
impacts of corporate clients?
The client on-boarding process is often the ideal moment for the bank to identify actual or
potential adverse RBC impacts that the company may be causing or contributing to. It may
be easier for the bank to identify and act upon risks before committing to a client
relationship.
As due diligence is an ongoing process, banks should find ways to ensure that they becomeaware of new actual or potential RBC issues related to their lending portfolios. In thisrespect, banks may find it helpful to define the frequency and extent of its periodic reviewsof existing client’s activities. Banks can also rely on third party services providing alerts
on significant controversies against companies.
Putting effective early warning systems in place will help the bank identify RBC risks
outside of the screening process and periodic reviews. Such early warning mechanism can
include establishing and/or participating in grievance mechanisms, such as OECD National
Contact Points (NCPs) and communication channels through which affected rightsholders
and their representatives and others can raise concerns. Such mechanisms would not be
specific to individual clients or operations but generally be established at the level of abank’s offices or headquarters or in collaboration with other actors. (See Measure 6:
Provide for or cooperate in remediation when appropriate). Obtaining the client’s consent
for disclosing their business relationship with the bank would enable stakeholders to raise
any concerns regarding client activities through such a mechanism.

How to address challenges while gathering information?
Banks may face challenges in collecting comprehensive and credible information regarding
actual and potential impacts associated with their clients. This can be due to practicallimitations, such as time constraints or challenges accessing information due to lack oftransparency of clients, different methodological approaches applied by data and research
providers, and the fact that news, campaigns, and reports addressing RBC issues often focus
on large and/or listed companies. Furthermore, certain circumstances may limit a bank’s
ability engage in enhanced risk identification, for example, when closer engagement and/or
assessment may create market signals which may harm the company, pose issues underclient confidentiality obligations, or when the prospective client does not cooperate inproviding information.
Where information deficits exist, banks are encouraged to embrace complementary
approaches, i.e. to combine quantitative and qualitative means, such as checklists,
assessment tools, algorithm-based tools, indexes, reports, and regular consultation withclients and stakeholders in order to identify actual and potential RBC risks linked to specificcompanies or to industry sectors as a whole.
Furthermore, banks are encouraged to request additional information from clients asnecessary. For example, private companies may not disclose a list of their assets unless thebank specifically requests them. Although often such lists may not be required for
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40  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
credit/compliance checks, they may be requested by banks to facilitate risk identification.
The leverage the bank has in the client relationship will influence the bank's ability to raisequestions and request further information. For example, in business areas where clients
receive access to substantial funds (relative to the market capitalisation of client) or insecurities underwriting transactions in which a bank will raise a significant amount of
capital for companies, the bank will generally have a greater level of engagement with theclient. Therefore, it will be able to ask more questions and require additional documentation
as necessary. Approaches to responding to leverage limitations are discussed further in
Measure 3: Cease, prevent and mitigate adverse impacts.
The increasing rapidity of transactions can limit the time banks have to identify risks. To
respond to this challenge, banks can source information from market research services
which track certain aspects of RBC performance of companies or which catalogue ongoing
campaigns against companies. Banks can also establish internal RBC monitoring lists
which collect information related to RBC performance of companies.
Additionally, to address information deficits, banks can consider engaging in or initiating
collaborative efforts, e.g. industry-wide and/or cross-sectorial initiatives, to obtain
additional information from companies, and push for more and better disclosure on RBC
risk. Many collaborative initiatives exist on a sectoral level to improve collection andmonitoring of information related to real and potential adverse impacts.25
Although the above techniques can be helpful to responding to certain challenges, existing
tools may still not be adequate to allow banks to adequately identify risks and impacts
across their portfolios under the time constraints inherent in certain transactions. In thisrespect, banks can also be active in raising the need for development of better tools andprocesses to respond to this challenge.
Where client confidentiality issues are a concern, it may be possible to engage withstakeholders, such as impacted stakeholders or civil society organisations to better
understand risks without mentioning a specific company or transaction. This may be thecase where RBC issues are linked to risk factors that are not company-specific, but are
rather of a sectoral, geographic, or product-specific nature, and where such engagement
would not reveal the identity of the (prospective) client. Additionally, requesting client
consent to disclose the relationship with the bank, for example as part of an on-boarding
processes would enable the bank to reveal its business relationship with a client without
breaching the client’s confidence. (See Box 1.1).

What role can stakeholders play in the identification and assessment of adverse
RBC impacts?
In the context of identification and assessment of RBC impacts a bank may:

Engage with expert stakeholders to better understand and assess risks in a particularsector.

25

See for example for the extractives sector: Responsible Minerals Initiative,
http://www.responsiblemineralsinitiative.org/
Responsible
MiningIndex
https://responsibleminingindex.org/; garment sector: the Fair Factories Clearing House,
https://www.fairfactories.org/,Social&LabourConvergence
Project(SLCP)
https://slconvergence.org/;
agriculture
sector:Fair
Foodprogramme,
https://www.fairfoodprogram.org, Trase Earth https://trase.earth/.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  41

Engage with contractual stakeholders (i.e. employees, clients and shareholders) andwell as regulators and expert stakeholders (e.g. global unions, NGOs) whendeveloping a rationale for prioritisation.

Encourage clients to undertake engagement with actually or potentially impacted
stakeholders to contribute to the identification and assessment of impacts. In thiscontext, it is important that a bank considers the quality of engagement rather thantreating it as a tick-the-box exercise. (See Characteristics of due diligence).

Banks can also establish mechanisms through which stakeholders including rightsholders
and other experts can raise potential issues related to a client’s activities and provide
feedback (e.g. early warning mechanism such as grievance mechanisms or hotlines, etc.).
(See above and Measure 6: Provide for or cooperate in remediation when appropriate).
Box 2.2. The role of banks when several institutions are involved

In transactions involving several banks, such as in a syndicated loan or a securities
underwriting transaction, banks have different roles. This leads to a situation in which allparticipants may not have the same amount of information and time to assess RBC risks.
Banks leading the transaction (often referred as lead arranger or lead manager) will
normally have more time and better access to information while the transaction is beingorganised than banks which have a smaller role in the transaction. Agent banks will usually
have more opportunities to interface with a client once financing has been provided. Whena syndicate has agents and leading banks with robust due diligence, the participants will
benefit from smoother due diligence, as relevant RBC documentation is likely to beprepared and available.
Banks can integrate RBC considerations in decision-making processes related to theparticipation in transaction with other banks (e.g. syndicated loans or securities
underwriting transactions).
During the transaction, the agent bank may periodically review the client and whether or
not it meets any stipulated conditions with respect to RBC. The agent bank may also takethe lead in addressing actual or potential adverse RBC impacts they identify. In these
instances the agent bank may inform the other members of the syndicate of such incidents
and the steps the agent bank is proposing to address them, pending the approval of the
syndicate banks as per the provisions contained in the financing documentation.
Banks in a syndicated transaction may also wish to collaborate on respect to due diligence.
For example, they can collaborate in communicating the same expectations on RBC toclient’s accordance with relevant international RBC frameworks (e.g. MNE Guidelines).
They can also collaborate in putting in place mechanisms to identify risk and actions whichseek to cease, prevent and mitigate adverse RBC impacts.
For example, should any member of the syndicate become aware of RBC issues, it should
inform the agent bank or other members so that they can be investigated..
Cooperation on due diligence amongst banks in a syndicated transaction will necessitate acertain level of transparency amongst the banks. Competition law issues should be taken
into account with respect to collaborative activities and obtaining client consent may benecessary to share the information amongst banks in syndicated transactions.

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42  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS

2.1.2. How can a bank assess its involvement with an adverse impact?
A bank may be involved with adverse impacts in three different ways: (a) the bank causes
adverse impacts itself; (b) it contributes to adverse impacts caused by another entity or in
combination with the activities of other entities or (c) adverse impacts are directly linked
to the bank’s services by a business relationship.
It is important to assess involvement with an adverse impact as it will inform how a bankshould address it. See Figure 2.1 below.
Figure 2.1. Type the title here

The issue of a bank causing adverse impacts is beyond the scope of this analysis as thispaper focuses on adverse impacts associated with a bank’s clients – or the client’s
subsidiary – and not solely by the bank itself (see Section on Scope).
Adverse impacts caused by a client of the bank would, in the majority of cases, be “directly
linked” to the financing or underwriting services of the bank, which has a business
relationship with the client. In some instances, however, a bank may also contribute toadverse impacts if the activities of the bank somehow cause, facilitate or incentivise theclient to cause harm. Assessment of whether a bank is contributing to an actual or potential
adverse caused by a client is a complex exercise. Where an adverse impact has occurred,
this assessment is relevant to considering whether a bank should play a role in providing
for or cooperating in remedy for adverse impacts caused by a client that have materialised– or not. If a bank is not considered to be contributing to an impact, its response to that
impact can be more limited to using its leverage with the client because it is only considereddirectly linked.
Where a bank is contributing to an adverse impact, it is expected to provide for or cooperate
in its remediation. In this regard, remedy can take a variety of forms. What is appropriate

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  43

will depend on the nature and extent of the impact. (See Measure 6: Provide for or cooperate
in remediation when appropriate).
General guidance on this issue from the OECD Due Diligence Guidance on this issue isreproduced in Box 2.3. A discussion of its application in the context of general corporate
lending and underwriting transactions is below.
Box 2.3. Excerpt from OECD Due Diligence Guidance for Responsible Business Conduct on
relationship to Impact (page 70)

Contribute: An enterprise “contributes to” an impact if its activities, in combination withthe activities of other entities cause the impact, or if the activities of the enterprise cause,facilitate or incentivise another entity to cause an adverse impact. Contribution must be
substantial, meaning that it does not include minor or trivial contributions.
The substantial nature of the contribution and understanding when the actions of theenterprise may have caused, facilitated or incentivised another entity to cause an adverse
impact may involve the consideration of multiple factors. The following factors can betaken into account:The extent to which an enterprise may encourage or motivate an adverse impact byanother entity, i.e. the degree to which the activity increased the risk of the impact
occurring.

The extent to which an enterprise could or should have known about the adverse
impact or potential for adverse impact, i.e. the degree of foreseeability.



The degree to which any of enterprise’s activities actually mitigated the adverse
impact or decreased the risk of the impact occurring.

The mere existence of a business relationship or activities which create the generalconditions in which it is possible for adverse impacts to occur does not necessarily represent
a relationship of contribution. The activity in question should substantially increase the riskof adverse impact.
For example, consider a retailer that sets a very short lead time for delivery of productdespite knowing from similar products in the past that the production time is not feasible,
and restricting the use of pre-approved sub-contracting.


The action of setting a shorter than feasible lead time and restricting the use of subcontracting increased the risk of excessive overtime at the level of the manufacturer.



The degree of foreseeability of the impact may be high because the retailer knewthat lead times for similar past products were not feasible and that short lead times
commonly result in excessive overtime in the sector.



If no mitigating steps were taken to decrease the risk of the impact occurring, theretailer may be contributing to excessive overtime at the level of the manufacturer.

For example, consider a private equity investor which invests in a steel plant. The investor
sits on the board of the steel plant and regularly interacts with its management. The investor
votes against installing costly equipment which treats run-off from the plant.
As a result of the lack of run-off treatment, the drinking water of a local community ispolluted by the run-off.

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44  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS

Encouraging management of the project to avoid installing technology which may
prevent or mitigate environmental impacts on water sources increases the risk ofadverse impacts.

The degree of foreseeability may be high if it is commonly known among
environmental management professionals in the steel industry that water treatment
equipment is required to avoid pollution of drinking water.



If the investor undertook due diligence and supported an alternative treatment planfor the run off, the risk of pollution of the water supply and the foreseeability ofthat impact would have been lower, moving the investor away from a relationshipof contribution.

[…] An enterprise’s relationship to adverse impact is not static. It may change, for example
as situations evolve and depending upon the degree to which due diligence and steps taken
to address identified risks and impacts decrease the risk of the impacts occurring.
Where an impact has occurred, a determination of whether a bank substantially contributed
to that impact (i.e. not a minor or trivial contribution) can be based on an analysis of the
below highly interrelated factors:
The degree to which the bank’s activities increased the risk of the impact occurring
by facilitating or incentivising a client to cause an adverse impact;The degree of foreseeability of the impact;The degree to which actions taken by the bank actually mitigated or decreased therisk of that impact.

For a bank to incentivize an adverse impact through a corporate lending or securities underwriting transaction, in addition to the provision of the lending or underwriting service, thebank needs to have taken a specific action or omission that motivated or encouraged a client
to cause harm (See example A in Box 6).26 It has been challenging to identify examples inpractice where a bank has taken actions to incentivise its client to cause harm in the context
of a general corporate lending and securities underwriting transaction.
For a bank to facilitate an adverse impact through a corporate lending or securities underwriting transaction, in addition to the provision of the service itself, there would have to besome action or omission by the bank that enabled or made easier for a client to cause harm.
In this regard, “providing a financial product or service, is not inherently problematic — itis in fact an important service to commerce.”27
For example, taking into consideration all the interrelated factors above, a bank may havecontributed to an adverse impact by facilitating where all of the following elements occur
together:

The adverse impact caused or contributed to by a client’s activities or projects wasforeseeable;

26

See also OHCHR response to request from BankTrack for advice regarding the application of the
UN Guiding Principles on Business and Human Rights in the context of the banking sector (2017)https://www.ohchr.org/Documents/Issues/Business/InterpretationGuidingPrinciples.pdf
27

Ibid.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  45

The use of proceeds was known (or likely) to be for those client’s high-risk
activities or projects (see example B in Box 6)); or almost all the client’s activities
were high risk of causing or contributing to the type of adverse impact being
considered28 (See example C in Box 6); andThe provision of the finance or underwriting service occurred without adequate due
diligence (see paragraphs below). In this respect, the due diligence processes thebank had in place, and how they were implemented should be considered.

Importantly, in considering the adequacy of due diligence, this paper should provide areference on good practice for banks. The quality of a bank’s systems and its due diligenceprocesses can influence whether a bank contributes to adverse impacts. With regards tohuman rights impacts, for example, the OHCHR has explained that, “[c]arrying out due
diligence appropriate to the scope and complexity of a bank’s portfolio and risk picture
should help it effectively identify risks and prevent them from occurring.”29
Due diligence can involve risk-based prioritisation. As has been discussed in the section on
Characteristics of Due Diligence, where it is not possible to address all actual or potential
adverse impacts identified, banks can prioritise risks based on their severity and likelihood(relative to other risks in their portfolios).
In these cases, banks should be prepared to communicate their reasons for prioritising thoserisks before others (see Measure 1: Embed RBC into policies and management systems andMeasure 5: Communicate how impacts are addressed). If a bank takes no action to preventor mitigate adverse impacts associated with clients, its prioritisation criteria and the othercharacteristics of due diligence will be particularly important when considering theadequacy of due diligence (See example C in Box 2.4). The decision to provide additional
finance to a client where an adverse impact caused by the client continues or reoccurs will
also be relevant in assessing the adequacy of the bank’s due diligence.
Additionally, due diligence measures can be adapted to deal with the limitations of working
with business relationships, for example when banks face practical and legal limitations to
how they can influence or affect their clients. A bank can seek to prevent impacts througha broad range of measures that can include, for example, collaborative efforts to poolleverage, including engaging in initiatives to target systemic issues, improving the bank’s
due diligence processes, as well as engagement with specific high-risk clients. (SeeMeasure 3: Cease, prevent and mitigate adverse impacts, Practical actions).
Box 2.4. Hypothetical examples on contribution in general corporate lending transactions

Example A: A bank advises its client, a commercial manufacturer of chemicals, to cut
costs with respect to its future operating expenditures as a condition of a financing
agreement. As a result, the client does not invest in upgrading technologies to treat run off
from some of its chemical production plants and the water supply of one local community
is contaminated. In such a situation, the bank may have motivated or encouraged the client
to take an action which led to an adverse impact, and therefore may have incentivised the28

For adverse impacts that are collective, diffuse and transboundary in nature such as climatechange, a more nuanced analysis may be needed to understand the relationship between financing
and the specific activities of the client causing harm.
29

OHCHR (2017)

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adverse impact. The degree of foreseeability of the impact and degree to which actions
taken by the bank actually mitigated or decreased the risk of that impact would also be
relevant to consider. While demonstrative, in practice, such a situation would not normallyarise in the context of corporate lending transactions, as banks generally do not provide
advisory services in the context of these transactions or condition the provision of lending
on cost-cutting measures.
Example B: A bank is engaging with a potential client, a private security company which
is widely reported to be perpetuating serious human rights abuses in the context of severalof its largest operations which are situated in conflict-affected areas. The bank extends thefinancing without making appropriate attempts to use its leverage to influence the client toprevent or mitigate human rights violations associated with its operations. In this example,
the impacts were foreseeable and should have been prioritised on the basis of likelihoodand severity of the impact. The bank extended the financing without making due efforts toprevent or mitigate the harm. This, coupled with the bank’s decision to extend the financing(with proceeds likely used to support the client’s high-risk activities), and failure to carryout adequate due diligence, may have made it easier for the client to perpetrate humanrights abuses, and therefore may have facilitated the adverse impacts. However if the banksought to prevent or mitigate the impacts by requiring the client to demonstrate that
adequate safeguards were being implemented by the client to prevent future abuses, thebank could demonstrate it made reasonable efforts to prevent or mitigate the adverse
impacts.
Example C: A bank provides general corporate financing to a client for which the use ofproceeds is known – an infrastructure project associated with potential social andenvironmental impacts. The client undertakes and provides to the bank an environmental
and social impact assessment (ESIA) which does not conform to industry standards anddoes not accurately estimate the scale of impacts associated with the project. If the bankproceeds with provision of the financing without requiring a credible environmental andsocial impact assessment as a condition of financing, and an adverse impact occurs because
it wasn’t sufficiently identified in the ESIA, the bank may have facilitated the impact.
However, if the bank can demonstrate its decision not to prioritise the client for moredetailed due diligence was based on a valid assessment of the likelihood and severity ofrisk, it may demonstrate that its level of due diligence was adequate. However, such an
occurrence should trigger a bank to reassess its prioritisation decisions with respect to theclient in future transactions. In addition, the bank should use whatever leverage it has overthe client to seek to prevent and mitigate the impact, including by seeking to ensure thatthe client remediates the impact. If the bank continues to maintain a business relationshipwith the client (e.g. by providing new financing) in the absence of the impact being
remediated, then the bank may be considered to be facilitating an ongoing (unremediated)
impact due to inadequate due diligence.
Note: While technically a general corporate loan some banks may classify this as a project finance transaction
and for signatories to the Equator Principles (EPs) such a transaction may trigger an enhanced due diligenceprocess as outlined under the EPs.

A bank may assess its relationship to impacts through its own due diligence processes, inconsultation with stakeholders, or, where appropriate, through an operational-level

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  47

grievance mechanism.30 (See Measure 6: Provide for or cooperate in remediation whenappropriate).

Measure 3: Cease, prevent and mitigate adverse impacts
3.1. Stop activities that are causing or contributing to adverse impacts on RBC issues,
based on the enterprise’s assessment of its involvement with adverse impacts as per 2.3
above. Develop and implement plans that are fit-for-purpose to prevent and mitigate
potential (future) adverse impacts;
3.2. Based on the enterprise’s prioritisation in 2.4 above, develop and implement plansto seek to prevent or mitigate actual or potential adverse impacts on RBC issues which
are directly linked to the enterprise’s operations, products or services by business
relationships. The plan should detail what actions the enterprise will take, as well as its
expectations of its suppliers, buyers and other business relationships. Appropriate
responses to risks associated with business relationships may include, at times:(a) continuation of the relationship throughout the course of risk mitigation efforts;(b) temporary suspension of the relationship while pursuing ongoing risk mitigation; or,(c) disengagement with the business relationship either after failed attempts at
mitigation, or where the enterprise deems mitigation not feasible, or because of theseverity of the adverse impact. A decision to disengage should take into accountpotential social and economic adverse impacts.

Practical
actions
for banks

General approaches to prevention may include: Drawing from the findings of risk identification to strengthen
management systems to better track information and flag risks,
including those associated with specific clients, geographies,
products or sectors, before adverse impacts occur.
 Building up sectoral expertise that includes understanding what
preventive measures can be put in place and working with clients on
implementing those.
 Defining exclusionary criteria that prohibit the provision of afinancial service to companies under specific circumstances
or for specific clients.
Defining conditions for the provision of financial services tocompanies based on their adherence to well-established andrecognized standards and/or good practice related to RBC issues.
 Providing training that is fit-for purpose for the bank’s relevant staff
and management.
 Assigning relevant senior responsibility to oversee implementation of
preventive measures.
 Seeking to influence a client to develop stronger RBC risk
management systems.
For corporate lending activities:

30

Ibid.

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48  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS

Incorporating RBC expectations into contractual documents or otherwritten statements/commitments with prospective clients. For
example, requiring clients to put RBC management systems in placeor meet specified international standards or conditioning
disbursements on a verification of specified environmental and social
conditions.
 Requesting client consent for waivers of confidentiality of the client’s
relationship to the bank where relevant.
 Providing prospective clients with incentives to meet certain RBC
related targets (e.g. coupling the interest rate of the loan with thecompany’s sustainability performance).
For underwriting securities activities:
 Where relevant requiring a deep level of due diligence e.g. anenvironmental impact assessment and encouraging the client toreport on RBC risks in investor information disclosures (prospectus).
Appropriate responses once actual or potential adverse impacts have been
identified may include: Assigning responsibility for ensuring that bank activities that cause orcontribute to adverse impacts cease.
 Encouraging clients to create a roadmap for how the client can cease
the activities that are causing or contributing to adverse impacts,
involving impacted or potentially impacted rightsholders and otherstakeholders as relevant. If need be, banks can recommend theclient to hire an external environmental and social consultant tosupport mitigation activities.
 Engaging with prospective and existing clients through face-to-facemeetings with its representatives from operations, senior
management, and/or board level to discuss on how their clients areapproaching the key RBC matters relevant to their business and torequest time-bound action to address or mitigate a particular impact.
 Collaborating with other banks involved in the transaction or otherstakeholders to exert leverage on RBC matters, subject to legal
obligations.
 Connecting clients with needed resources to address impacts andmanage risks.
 Terminating or suspending the provision of financial services,in accordance with contract clauses, or raising the credible
prospect of doing so. (See Measure 3: Cease, prevent andmitigate adverse impacts).
Considering not engaging in future business opportunities with theclient (as an additional measure or as an alternative to terminating theclient relationship when an immediate termination is not possible orwould cause severe adverse impacts to impacted stakeholders).
For underwriting securities:
 Advising clients to include RBC issues in disclosure documents (e.g.
the prospectus or brochure in a securities underwriting transaction)and requesting the client to explain how it is planning to address the
key RBC issues that are likely to affect its future performance.
 Challenging a client’s perception of material risk issues (with RBC risks
often being seen as not financially material, or not relevant toinvestors).
Appropriate responses for addressing systemic issues may include:

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Joining geographic or issue-specific initiatives that seek to preventand mitigate adverse impacts in the areas identified (e.g. country,commodity, or sector roundtables or multi-stakeholder initiatives),
which may also include engagement with governments.

How should a bank respond to actual or potential impacts?
In cases where a bank is contributing to adverse impacts or risks that are caused by its
client, it should take necessary steps to cease or prevent its own contribution, provide foror cooperate in remediation of the impact through legitimate processes, and use its leverage
to seek to prevent and mitigate any remaining impacts (see Measure 2: Identify and assess
actual and potential adverse impacts).
Where the adverse impacts are directly linked to a bank’s lending or securities underwriting
through a client, it should also use its leverage to seek to prevent and mitigate those impacts.
This is not intended to shift responsibility from the client who is causing or contributing anadverse impact to the bank.31 The responsibility for ceasing, mitigating and remedying theimpact remains with the client who is causing or contributing to the impacts.32
However, while the bank may not be able to address the impact itself, it should seek toinfluence its client to prevent or mitigate and remediate the adverse impacts.33 Impacts
caused by a client may also pose reputational risks for banks. Various potential approaches
for responding to impacts are included in the practical actions above.

How can contractual agreements be used to help cease, prevent or mitigate
adverse impacts associated with client relationships?
To some extent, contractual agreements and other written documents often already address
RBC provisions via general clauses, such as clauses requiring the client to comply with allapplicable laws and regulations, including rules and regulations that intend to preventmoney laundering or the financing of terrorism. However, due to the lack of laws
specifically addressing a client’s performance on human rights and environmental issues
in the context of banking transactions, the inclusion of such RBC issues into contractual
agreements for general corporate lending transactions is not common.
Banks can go beyond legal minimum requirements when drafting contract clauses.
Including a clear articulation of the bank’s RBC policies and expectations of clients incontractual agreements may facilitate the engagement with the client in relation to RBC
issues and help the bank increase and use leverage to address any impacts that may arise.
(See Measure 3: Cease, prevent and mitigate adverse impacts). The bank’s legal counsel(either internal or external) responsible for developing the contract would benefit fromhaving a strong awareness of RBC issues and how they should be integrated into theagreement. Promotion of RBC clauses by recognized initiatives such as the Loan Market
Association, would be useful to overcoming potential difficulties to including suchlanguage in contractual agreements. Banks may also articulate its RBC expectations, inparticular those related to environmental and human rights issues, in other written

31OECD Guidelines, Chapter II, paragraph 12.

32

Ibid.

OECD Due Diligence Guidance, Section I, Characteristics of Due Diligence – Duediligence does not shift responsibilities.
33

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50  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
documents. In both cases it is important that the bank monitors that clients comply withsuch provisions.

How can a bank overcome leverage limitations?
Where an RBC risk is identified, a bank’s ability to exercise influence over the company
concerned – to use its leverage to mitigate the RBC risk – may be affected by a number offactors. For example:


The nature of the transaction and the duration of the relationship between a bankand a company.

The nature of the relationship and point in time of a particular transaction e.g.
whether it is a client relationship or a prospective client relationship.

The competitive situation in the market, e.g. how easy it is for the company toaccess financing with comparable conditions from other sources.



The role the bank has in the transaction, whether it is a leading bank or a memberof a larger syndicate.

The reputation and “attractiveness” of the bank for the client.

The time and capacity available for the bank to actually exercise leverage.

The MNE Guidelines recognise that “there are practical limitations on the ability ofenterprises to effect change in the behaviour of their suppliers.”34 Likewise, banks may
face practical limitations in effecting change amongst their clients. The degree of leveragea bank has over the client causing an adverse impact is useful in considering what it can doto persuade that entity to take action. However, it is not relevant to considering whether thebank should carry out due diligence and effectively exercise any leverage it may have, orseek to build additional leverage.35 Under the MNE Guidelines, banks have a
responsibility to exercise their leverage to prevent or mitigate adverse impacts even when
they may not have much of it. Leverage can be employed in a number of ways, and efforts
can be made to increase leverage where a bank does not have enough.
For example:

A bank’s ability to exercise leverage is generally higher before the actual provisionof a financial service. Therefore, banks can work to build leverage by including
RBC expectations into contractual agreements and other written documents as acondition of receiving financing or specific disbursements, particularly for highrisk clients. Once the transaction has been concluded, a bank’s leverage may besignificantly reduced. In these situations banks may seek to engage directly withclients to communicate concerns, relying on expectations around RBC alreadycommunicated to clients or included in commitments. In certain circumstances they
may also consider disengagement from the client if possible based on contracting
terms or communicating to the client that failure to prevent and mitigate impacts

34

See OECD Guidelines for Multinational Enterprises (2011), Chapter II, Commentary,
paragraph 21.
35

Ibid., see also Commentary, paragraph 20 and OECD (2014) Due diligence in the financial sector:
adverse impacts directly linked to financial sector operations, products or services by a business
relationship, https://mneguidelines.oecd.org/rbc-financial-sector.htm

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  51

may prevent them from accessing financing or securities underwriting services
from the bank in the future. (See Measure 3: Cease, prevent and mitigate adverse
impacts).


Capital market transactions, such as debt or equity capital market transactions,do not provide long-term opportunities to maintain some degree of leverageover a client. For this reason, risks need to be identified upfront and potential
mitigation actions agreed to before an underwriting transaction is launched. For
example, where a risk is identified, further assessment and development ofrecommendations may be needed; the client can commit to implementation of
the recommendations and disclosing RBC issues in the IPO Prospectus orbrochures as relevant.

In situations where a client with a general corporate loan has separate asset-specificfinancing for an asset that is associated with adverse impacts, the bank’s access to
information and leverage with respect to the separately-financed asset will belimited if it is not a participant in the asset specific financing. However, the bankcould still seek to use its leverage with the client to address any severe adverse
impacts, including those that are separately financed.



In case of long-standing and stable relationships a bank’s leverage towards theclient persists and increases the ability of the bank to address challenging issues
with the client whereas it may be more challenging to do so for new clients. In thesecases banks may consider providing incentives to new clients to meet RBC targets.
For example, some banks have offered favourable financing terms linked to RBC
conditions to prospective clients. However, currently, such types of arrangements,
often referred to as positive impact loans, are not very common and are often basedon a limited set of auditable KPIs.



A non-leading bank in a syndicate may have limited leverage over a client
independently; however, they can seek to collaborate with other banks in a
syndicated transaction to increase leverage (See Box 2 and Box 4).

A bank’s leverage may be curtailed by competition and market conditions, which,in many instances, remain favourable to clients. In this respect banks can work
together to set an example and establish common industry practice to promote
systematic engagement with clients on RBC. Banks can also communicate thebenefits of due diligence to clients to encourage their participation in the process
and promote RBC through incentives.

In situations where banks lack leverage with respect to specific transactions or clients, they
can individually and collectively engage with regulators, policymakers and civil society
organisations to promote prevention and mitigation of certain risks more broadly.

When should a bank disengage from a client?
Disengagement may be an appropriate response to identified adverse impacts where
attempts at prevention or mitigation have been unsuccessful after an escalating period ofengagement; where mitigation is unfeasible; where there is no reasonable prospect ofchange; or where severe risks are identified and the entity causing the impact does not take
immediate action to address these.36 Because banks cannot unilaterally stop disbursements
36OECD Guidelines for Multinational Enterprises, Chapter II, Paragraph 22.

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or request an early prepayment of a loan unless this is expressly provided for in thefinancing documentation, disengagement in certain circumstances may involve avoiding
additional provision of services to clients in the future.
Importantly, the MNE Guidelines do not recommend categorical “de-risking”. Generally,rather than completely avoiding contexts that raise potential risks, banks are encouraged toengage with clients to ensure that these risks can be/are responded to effectively. Under the
MNE Guidelines, disengagement will often be a last resort.37 However, in some cases, it
may be a first response to adverse impacts, if such impacts are very severe. In this respect,some banks have exclusion policies for highly damaging industries or products, or
blacklists for companies with a history of irresponsible behaviour.
Box 2.5. Considerations for Exclusionary Policies

Exclusionary policies refer to the phenomenon of financial institutions terminating or
restricting business relationships with clients or categories of clients which are deemed tobe high-risk (in this case, high risk of adverse impacts on people, the environment orsociety).
There can be various drivers to a bank’s decision not to provide services to a particularsector, including: concerns about profitability; lack of specialist expertise in the sector;
reputational risk; lower risk appetites of financial institutions; the costs related to theimplementation of anti-money laundering and counter-terrorist financing laws; theincreasing number of sanctions regimes; and increased capital requirements.
In some circumstances exclusion can be appropriate, for example where risks are very
severe or irremediable. However, the potential impacts of exclusionary practices should
also be taken into account when making such a decision. For example, exclusion can limit
access to the global financial system for companies operating in high-risk sectors, including
companies applying adequate due diligence. This may increase financial exclusion and leadto alternative, less regulated, forms of financing and reduce transparency, thereby
increasing these companies’ exposure to a whole range of risks – including financial crime.
Blanket bans may also miss opportunities for potentially raising standards in high-risk
sectors. Banks are encouraged to engage with prospective or existing clients, and otherrelevant stakeholders related to high-risk contexts, in order to understand whether the client
can address risks before deciding to exclude.
In the case of corporate lending transactions, a bank’s termination of an ongoing
relationship with a client will in many cases only be possible in the event of a material
breach of a contract. In some corporate lending transactions, banks may also be able to sell
their stake on the secondary loan market, however in certain circumstances such a salemight require approval from the client. In cases where the impact is severe and/or the bankhas contributed to it, further steps may be needed to mitigate or remedy the impact for
example through encouraging the client to provide remedy to impacted stakeholders or
rightsholders.
Some additional factors to consider when deciding if disengagement is an appropriate
response are: the bank’s leverage over its client; the severity of the impact; and whether
37

OECD Guidelines for Multinational Enterprises (2011), Commentary to General Policies,
paragraph 22.

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2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS  53

terminating the relationship with the client would result in adverse impacts; and how cruciala client relationship is to the bank.
Disengagement from a client may be facilitated by establishing a policy and process whena client does not meet its commitments or is unwilling to further engage on RBC issues.
Such policy and process can envisage the following:

Principles guiding the evaluation and assessment of the situation including criteriathat trigger the assessment of potential termination or suspension in a relationship;Considerations when terminating a relationship, namely regarding the impact thismight have, i.e. the priority being to avoid creating greater harm;Management and operational processes to be followed internally, such as escalationof the issue to a committee;Timelines to be observed when suspending or ending the relationship as well as forre-entry into a business relationship; and

Criteria and principles informing the assessment of re-entry into a business
relationship.

In some instances, termination may not be possible due to contractual clauses or the natureof the transaction. In this respect it is important banks consider circumstances under which
they could terminate a relationship with a client that is causing adverse impacts at the stage
when contractual terms are being established with the client.
Continuing a business relationship with a client which has been identified as causing orcontributing to adverse impacts by way of providing additional financial product andservices may also pose reputational risks or potential financial risks to the bank.38 In cases
where banks decide to continue a business relationship with a client that is causing orcontributing to adverse impacts, they should report the situation internally as part of theirefforts to track their due diligence processes. (See Measure 4: Track implementation andresults). They should also continue to monitor the client, for example, through maintaining
a knowledge database, and revisit their decision where circumstances change or as part ofthe bank’s long term strategy to systemically respond to all of the recommendations of the
MNE Guidelines. In these instances, and where legal obligations with respect to client
confidentiality allow, it may be in the banks interest to publicly explain their decision tomaintain the business relationship, how this decision aligns with their RBC policy andpriorities, what actions are being taken to attempt to apply leverage to mitigate the impacts,and how the client will continue to be monitored in the future.

United Nations Guiding Principles, Guiding Principle 19, Commentary. “For as long as theadverse impact continues and the enterprise remains in the relationship, it should be able todemonstrate its own ongoing efforts to mitigate the impact and be prepared to accept any
consequences – reputational, financial or legal – of continuing the connection.”38

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Measure 4: Track implementation and results
4.1. Track the implementation and effectiveness of the enterprise’s due diligence activities,
i.e. its measures to identify, prevent, mitigate and, where appropriate, support remediationof impacts, including with business relationships. In turn, use the lessons learned fromtracking to improve these processes in the future.

Practical
actions
for banks

Tracking clients’ implementation of RBC commitments:
 Requesting clients to report periodically on certain issues based on
their RBC risk profile or to explain how they comply with their RBC
commitments or policies and assessing these reports.
 In certain high risk cases, requiring third party review of compliancewith RBC policies and/or requirements for high-risk clients on behalfof the bank.
 Building on existing processes such as annual credit reviews or KYC
reviews to track RBC performance of clients.
Tracking own performance against policies on RBC or other commitments thebank has made on RBC issues.
Responding to findings to improve due diligence processes (e.g. integrating
overlooked real or potential impacts in identification activities, modifying
engagement strategies based on outcomes etc.).

How can a bank track client's implementation of RBC commitments?
Tracking involves first and foremost assessing whether identified adverse impacts havebeen responded to effectively. Where clients are associated with impacts and prioritised forprevention and mitigation the bank should also track client responses to ensure that those
impacts are addressed.39
For general corporate lending transactions, banks can request clients to report periodicallyon certain issues based on their RBC risk profile according to parameters and timeline
previously set, or to explain how they comply with their RBC commitments or policies. It
can also check client reports against own insights and third-party information, e.g. reports
produced by independent third parties, such as specialised consultancies and rating
agencies, civil society organisations or monitoring services provided by specialised data
providers.
Additionally, for general corporate lending transactions banks can build on existingprocesses. These include annual credit reviews or KYC reviews which may also be
conducted annually by compliance departments. For both processes, there may be an
opportunity for tracking of RBC commitments of clients.
The duration of the bank’s relationship with the client may impact tracking activities, since
it may be difficult to collect information about a client once a business relationship isformally terminated. If the client is involved in recurring transactions with a bank, a bank

39

See OECD (2018) Due Diligence Guidance for Responsible Business Conduct, Annex Q 4

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can review a client’s progress in developing their RBC commitments/ management systems
over time.
Establishing appropriate qualitative and quantitative indicators can be helpful to tracking
activities. Potential indicators to assess whether identified adverse impacts have been
responded to effectively may include:Percentage/number of agreed action points that have been implemented by theclient according to planned timelines.

Percentage/number of issues raised by stakeholders and through grievancemechanisms that have been responded to by the client.

Actual changes with regard to adverse impacts (e.g. changes in carbon emissions
rates of clients over time).

How can a bank track the implementation and effectiveness of its due diligence
activities?
A bank can track its own performance with respect to how it has responded to identified
adverse impacts as well as the effectiveness of its due diligence process.
Potential indicators to measure due diligence performance may include:Percentage/number of clients in a portfolio assessed on RBC risks.

Percentage/number of clients in a portfolio that have trigged enhanced
identification which underwent enhanced identification.



Percentage of clients associated with real or potential impacts with which the banksought to apply leverage to prevent and /or mitigate, and rate of successful
outcomes with respect to leverage activities.



Rate of reoccurrence of identified adverse impacts based on a bank’s RBC
monitoring of clients in its portfolio.



Where the bank itself has established, or participates in, grievance mechanisms, thenumber and type of issues raised through grievance mechanisms, and theeffectiveness of its response (noting that increases in number of complaints is notnecessarily an indicator of a higher number of impacts, but may be due to increased
accessibility of the mechanism).



Actual changes with regard to adverse impacts (see above).

Additionally, measuring changes in practices or behaviours that are more likely to result inbetter outcomes with respect to RBC risk management can also be useful. For example,
tracking the means by which RBC risks are taken into account in financing decisions ofdeal teams through the number of times deal teams proactively request the ESR team’s
advice.

How should banks respond to the results of tracking activities?
Lessons learned should be reflected in the bank’s due diligence processes in order toimprove the process and outcomes in the future. For example, adverse impacts or risks that
may have been overlooked in past due diligence processes and can be identified andincluded in future risk identification and mitigation processes.

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Tracking provides the bank with an understanding of whether the systems it has put into
place are effectively enabling the enterprise to avoid and address adverse impacts in its own
activities and across its portfolio or whether systems could be modified to be made more
effective. Where a bank’s due diligence processes or approach are not effective, an internal
assessment to understand why may be useful. Consulting staff involved in the due diligenceprocesses and relevant external stakeholders in this process may be helpful.
Establishing senior oversight of tracking also helps to ensure that lessons learned are taken
into account and due diligence systems can be continuously improved.

Measure 5: Communicate how impacts are addressed
5.1. Communicate externally relevant information on due diligence policies, processes,
activities conducted to identify and address actual or potential adverse impacts, including
the findings and outcomes of those activities.

Practical
actions
for banks

Publicly communicating on:‒

RBC policies, including a statement of policy that expresses
the bank’s commitment to respect human rights.

‒

The implementation of policies including information on
measures taken to embed RBC policies into management
systems.

‒

Areas of significant risks and the significant adverse impacts
identified, prioritised and assessed, as well as theprioritisation criteria (at the level of client portfolios orbusiness areas).

‒

The number of cases subjected to enhanced due diligence.

‒

Efforts to prevent and mitigate actual or potential adverse
RBC impacts (at the level of client portfolios or businessareas) or co-operation in remediation as relevant.

‒Future RBC plans and targets (at the level of client portfolios
or business areas).

Where a bank has contributed to human rights impacts, providing information
sufficient to demonstrate the adequacy of the banks response to the specifichuman rights impact to the impacted rightsholders.

How can a bank communicate publicly?
Public disclosures should include the bank’s RBC policies and information on measurestaken to embed RBC into policies and management systems. They should also include thebank’s general areas of significant risks as well as significant adverse impacts or risks
identified, prioritised and assessed an explanation of the prioritisation criteria, and how
these risks and impacts have been or are being addressed.
Banks may choose the format of public communication on due diligence, provided that the
public can easily access the relevant information. Communication will often take the formof an annual report on sustainability or corporate responsibility available on the bank’s

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website. Public communication on due diligence may also be folded into other forms of
disclosure. Some jurisdictions or stock exchanges may have specific reporting
requirements with respect to RBC risks, issues or due diligence. Banks should ensure they
respond to local reporting requirements and also seek to communicate on how impacts are
addressed as described in this paper. This is likely to mean providing additional information
beyond what is asked for under local regulations.
Additionally, in order to promote more standardized and comparable reporting, banks may
also seek to communicate publicly in line with widely recognized reporting frameworks,
such as those developed by the Global Reporting Initiative (GRI).40
In the context of securities underwriting, the bank may encourage the client to include an
overview of the information listed in the practical actions section and above in theprospectus and marketing material for issuing shares and bonds.
Banks are encouraged to move towards promoting transparency. Public disclosures bybanks on social and environmental impacts associated with their clients have been very
limited in practice. Recently some banks have begun to issue enhanced disclosures
including reporting on their most significant impacts and examples of how they have usedleverage with specific clients to address them – having sought the clients’ permission toreport this information.

How can a bank communicate with impacted stakeholders?
Banks should encourage their clients to engage with stakeholders directly. Where a bankhas or may have contributed to adverse impacts it should be prepared to communicate with
impacted or potentially impacted rightsholders.
In these cases, banks will often find it best to communicate in collaboration with the clientin question. Such communications should occur in a timely, culturally sensitive andaccessible manner. Accessibility of information means that it is not only physicallyaccessible, but also understandable and disclosed at a time and in a format, language, andlocation that will best ensure that those for whom it is intended will notice it and be able touse it effectively. Such information may be communication through dialogue rather than inwriting as appropriate. This information should be “sufficient to demonstrate the adequacyof an enterprise’s response to the particular human rights impact involved” and “in turn notpose risks to affected stakeholders, personnel or to legitimate requirements of commercial
confidentiality.”41 In this respect, banks may find it useful to engage local expertise andadvice to support them in communicating with impacted rightsholders in an appropriatemanner.

How can client confidentiality concerns be addressed when communicating?
Client confidentiality should not prohibit public communication on due diligence if a bankcommunicates information in an aggregated or anonymized way. Even when aggregatingor anonymizing information, banks should exercise care to ensure they are notinadvertently revealing confidential client details. For example, a bank may report at thelevel of client portfolios or business areas. In recent years some banks have gone further
40

The GRI recently revised Human rights disclosure framework to align with the recommendationsof the OECD Due Diligence Guidance for Responsible Business Conduct.
41

UN (2011), UN Guiding Principles for Business and Human Rights, (2011), Principle 21,
Commentary.

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58  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
than aggregated reporting by reporting on engagement activities with specific clients, withthe latter’s consent, or by publishing the names of clients which form part of the bank’s
portfolio, where such consent is obtained as a condition of financing.

Measure 6: Provide for or cooperate in remediation when appropriate
6.1. When the enterprise identifies that it has caused or contributed to actual adverse
impacts, address such impacts by providing for or cooperating in their remediation.
6.2. When appropriate, provide for or cooperate with legitimate remediation mechanisms
through which impacted stakeholders and rightsholders can raise complaints and seek tohave them addressed with the enterprise. Referral of an alleged impact to a legitimate
remediation mechanism may be particularly helpful in situations where there aredisagreements on whether the enterprise caused or contributed to adverse impacts or on thenature and extent of remediation to be provided.

Practical
actions
for banks

Seeking to use leverage to encourage clients to provide for or cooperate inremediation where they have caused or contributed to adverse impacts.
Providing for, or cooperating in, remediation where the bank has caused orcontributed to the impact.
Enabling access to remediation by establishing bank-level grievancemechanisms and/or participating in grievance mechanism established byclients, industry initiatives or others.

When should a bank provide or contribute to remediation?
Where a bank has not contributed to the impact, but the impact is directly linked to its
products or services, it is not responsible for providing remedy. That responsibility rests
with the client causing the adverse impact. In these circumstances the bank should seek toencourage its client to provide for, or cooperate in, remediation of the impact. The bank
may also participate in dialogue or mediation processes with affectedstakeholders/rightsholders, where appropriate, to identify how it can strengthen its own due
diligence processes so that it proactively identifies similar actual or potential impacts
associated with client relationships in the future.
Where a bank recognizes that it has contributed to an adverse impact through its client
relationships or other business partners, it should provide for, or cooperate in, theremediation of that impact, in a manner proportionate to its involvement. 42 It should also
actively encourage the client to provide remediation appropriate to the client’s own
contribution. (See Measure 3: Cease, prevent and mitigate adverse impacts). If the client isunwilling to provide remedy, the bank should still provide for, or cooperate in remediation.

42

Attribution of responsibility, and thus responsibility for remedy, under the MNE Guidelines, isdistinct from issues of legal liability and enforcement, which remain largely defined by domesticlaws.

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However, this should be done in a manner that does not create perverse incentives for theclient to evade responsibility.43
Legitimate grievance mechanisms can provide a venue for reaching a solution where a bankand stakeholder disagree about whether the bank has contributed to an adverse impact
through its client relationship or other business partners.

What types of remedy are important?
The type of remedy or combination of remedies that will be appropriate will depend on thenature and extent of the adverse impact and the views of affected stakeholders. It may
include a variety of different forms including apology, restitution, rehabilitation, financial
or non-financial compensation, punitive sanctions, or taking measures to prevent futureadverse impacts (such as improving due diligence processes).44 A bank may consider
whether it would be appropriate to extend one or more of these forms of remedy even where
the harm is being remediated through other legitimate processes. For example, it may be
important for the bank to acknowledge the harm suffered and demonstrate efforts toimprove its processes to ensure that similar adverse impacts will not recur.45 Co-operatingin remediation does not necessarily mean that the bank will be expected to provide financial
compensation to impacted stakeholders, although it may be appropriate in some cases to
do so.

What processes to enable remediation can banks use?
Banks can use various processes banks to enable remediation. Legitimate remediation
mechanisms can include State-based or non-State-based processes through whichgrievances concerning enterprise-related adverse impacts can be raised and remedy can besought. Additionally, non-legal mechanisms can also be an effective in providing
remediation. (See Box 2.6 and Box 2.7).
Box 2.6. Examples of potential legitimate remediation mechanisms

Legal processes such as prosecution, litigation and arbitration are common examples ofstate-based processes that enable remediation.
Non-judicial state-based mechanisms such as specialist government bodies, consumer
protection agencies, regulatory oversight bodies, environmental protection agencies.
The National Contact Points to the OECD Guidelines for MNEs are a State-based nonjudicial mechanism through which issues can be raised about implementation of the OECD
Guidelines for MNEs in specific instances. (See Box 2.7).
Operational-level grievance mechanisms where they meet the core criteria of legitimacy,
accessibility, predictability, equitability, compatibility with the OECD Guidelines for
MNEs, transparency and being dialogue-based. This term should be understood broadly, to

43

Ibid.

44

OECD (2018) Due Diligence Guidance for Responsible Business Conduct, Section II, 6.1 (b)45

OHCHR (2017) OHCHR response to request from BankTrack for advice regarding the applicationof the UN Guiding Principles on Business and Human Rights in the context of the banking sector
https://www.ohchr.org/Documents/Issues/Business/InterpretationGuidingPrinciples.pdf

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cover grievance mechanisms that are set up by a bank, alone or together with otherstakeholders, as well as grievance mechanisms established by bank clients or financed
projects. (See Table 2.1).
Global Framework Agreements between companies and Global Trade Unions, multistakeholder grievance mechanisms, community grievance mechanisms, collective
bargaining agreements, and enterprise supply chain grievance mechanisms are all examplesof non-State-based processes that could enable remediation.
Source: OECD (2018) Due Diligence Guidance for Responsible Business Conduct

Where a client is either providing remediation and/or is being held to account through alegitimate mechanism, it will typically be appropriate for the bank to defer to that process.46
This is particularly the case where a parallel remediation process could undermine other
legitimate processes.47 Deferring to other remediation processes does not imply a limitationof the bank’s responsibility. However, for reasons of accountability and reasonableness,the entity most directly involved with the adverse impact should have the primary
responsibility to provide remediation.48
However, banks may decide to participate in multiple grievance processes, depending upon
the particular needs of the case at hand. Any particular grievance mechanism should not beviewed as a mutually exclusive option for accessing remedy. For example, stakeholders
may seek various forms of remedy (i.e. financial compensation, sanction, apology or
remediation activity) and as such may choose to access various platforms for seeking such
remedies.

Do banks need to establish grievance mechanisms?
Banks are expected to have mechanisms in place (their own or one(s) they participate in)to respond effectively if or when grievances arise. In this respect, banks can choose toestablish their own grievance mechanisms or may also participate in mechanisms
established by, or in collaboration with, or by other entities (e.g. banking sector initiatives
that may be established in the future,49 or mechanisms established by other sectors ororganisations 50).
Such mechanisms are not expected to be specific to an individual client or established at
the level of the specific operation the bank is financing, although banks may also participate
in legitimate grievance mechanism established at this level by their clients or other parties.

46

Ibid.

47

Ibid.

48

Ibid.

49

Most commercial banks have not established grievance mechanism, but inspiration can be drawn
from development banks. For example, the Independent Complaints Mechanism established by the
Dutch development bank FMO (https://www.fmo.nl/independent-complaints-mechanism), theGerman development finance institution DEG and PROPARCO (Groupe Agence Française deDéveloppement) and the Compliance Advisory Ombudsman (CAO) of the IFC (http://www.caoombudsman.org/cases/).
50

For example, the Roundtable on Sustainable Palm Oil (RSPO).

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While a grievance mechanism should be able to receive all types of concerns andcomplaints, it does not have to be designed to provide remedy for all types of issues. In thisrespect, some complaints may be referred to external processes, for example due to theirseverity.
Remediation is only one of the roles that grievance mechanisms are intended to serve.
Where a bank is involved with an adverse impact, a grievance mechanism can also result
in recommendations intended at strengthening a bank’s due diligence process. It can also
serve as an early warning or feedback mechanism for the bank to alert it to certain issues.
Grievance mechanisms should reflect certain characteristics. The effectiveness criteria fornon-judicial grievance mechanisms contained in the UN Guiding Principles on Businessand Human Rights provide an important reference point (see Table 2.1 below for more
information).
Table 2.1. Effectiveness criteria for non-judicial grievance mechanisms
Legitimate
Accessible

Predictable
Equitable
Transparent
Rights-compatible

Continuous learning
Based on engagementand dialogue

Trustworthy
Accountable
Known
Variety of access points
Assistance to overcome barriers
Clear procedures
Clear timeframes
Fair access to information, advice and expertise
Fair treatment
Keeping parties informed about progress of cases
Providing information about the process to build confidence
Outcomes and remedies must accord with internationallyrecognised rights
No prejudice to legal recourse
Identification of lessons for (i) improving the mechanism and(ii) preventing future harm
Consulting ‘users’ (including internal users) on design andperformance1

Source: A Guide to Designing and Implementing Grievance Mechanisms for Development Projects, The Officeof the Compliance Advisor/Ombudsman, incorporating the effectiveness criteria for non-judicial grievancemechanisms contained in the UN Guiding Principles on Business and Human Rights

Various resources exist on developing effective grievance mechanisms including in thecontext of the banking sector.52 When assessing or designing individual or collaborative
grievance mechanisms, banks are encouraged to consult existing resources as well as

51

See UN Guiding Principles for Business and Human Rights, (2011) Section B, Paragraph 31,
www.ohchr.org/documents/publications/GuidingprinciplesBusinesshr_en.pdf.
52

See for example, OHCHR (2017), Banktrack and Oxfam Australia (2018), Developing Effective
Grievance
Mechanisms
In
The
Banking
Sector,https://www.banktrack.org/download/developing_effective_grievance_mechanisms_in_the_banki
ng_sector/2018_pa_002_bank_report_faweb2_3.pdf ; Shift: Remediation, Grievance Mechanisms
and the Corporate Responsibility to Respect Human Rights, Workshop Report, May 2014,
https://shiftproject.org/wp-content/uploads/2014/05/Shift_remediationUNGPs_2014.pdf

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62  2. KEY CONSIDERATIONS FOR RBC DUE DILIGENCE IN BANKING TRANSACTIONS
experts and relevant rights holders to ensure the above effectiveness criteria are adequatelyreflected.
Box 2.7. NCP specific instances processes: What to expect

The OECD Guidelines for MNEs have a built-in non-judicial grievance mechanism
through the National Contact Points (NCPs). NCPs are established by Adherents to theOECD Investment Declaration. NCPs have the mandate of furthering the effectiveness of
the OECD Guidelines for MNEs by: undertaking promotional activities, handling enquiries
and contributing to the resolution of issues that arise relating to the implementation of theOECD Guidelines for MNEs in specific instances.*
Any individual or organisation can bring a specific instance (case) against an enterprise to
the NCP where the enterprise is operating or based regarding the enterprise’s operations
anywhere in the world. NCPs facilitate access to consensual and non-adversarial
procedures, such as conciliation or mediation, to assist the parties in dealing with the issues.
Each specific instance proceeding begins with an initial assessment of the submission. As
part of this assessment the NCP may reach out to the enterprise(s) involved for their input
or feedback on the issues raised. Here, banks involved in a specific instance proceeding
would have their first opportunity to understand and respond to issues raised in thesubmission.
While some NCPs publish initial assessment statements naming the parties and describing
the facts and circumstances of a specific instance, other NCPs do not. If a submission is
accepted for further examination following the initial assessment, the NCP will offer toprovide mediation to the parties through a confidential process aimed at reaching anagreement between the parties. Through this process, parties are given the chance toexchange and explain their views. This may involve one or several meetings between theparties, mediated by the NCP. Some NCPs use a professional mediator.
The specific instance process concludes with a final statement or report by the NCP.
Where the NCP decides that the issues raised do not merit further consideration, thestatement includes, at a minimum, a description of the issues raised and the reasons for the
NCP’s decision.
When the parties have reached an agreement, the statement at a minimum describes theissues raised, the procedures the NCP initiated in assisting the parties and when agreement
was reached. The statement only includes information on the content of the agreement
insofar as the parties involved agree thereto.
When no agreement is reached or when a party is unwilling to participate in the procedures,the statement at a minimum describes the issues raised, the reasons why the NCP decided
that the issues raised merit further examination and the procedures the NCP initiated in

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assisting the parties. Where appropriate, the statement may also include the reasons thatagreement could not be reached.
The NCP may make recommendations on the implementation of the OECD Guidelines asappropriate, which should be included in final statements and may engage in follow-up
with the parties on their response to these recommendations.
Many NCPs allow parties to specific instances to review and provide feedback to final
statements before they are published.
* Specific instances is the term used in the Guidelines to describe practical issues that may arise with theimplementation of the Guidelines.

How can bank cooperate in remediation mechanisms while respecting the dutyof client confidentiality?
Grievance mechanisms established by banks for harms related to the activities of clients
will not be accessible to stakeholders if they do not know the companies banks arefinancing. One approach can be to seek consent to publish client names as a matter ofpractice, as is already done for transactions falling under the Equator Principles and bycertain banks as a condition of financing. Clients may also be asked to agree to exceptions
to confidentiality provisions where stakeholders wish to pursue a remediation process withbanks financing the clients in question.
In order to be accessible, it is important that banks disclose information about the grievancemechanism they have established or participate in. They should encourage clients to do thesame in order to inform impacted stakeholders about potential avenues of redress.

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Conclusion
Banks play a key role in providing access to financing across industries globally. Carryingout due diligence is a key aspect of risk management which can help enable responsible
and sustainable business practices. In addition to contributing to positive impacts, therelationship of banks to negative environmental and social impacts caused by companies
they invest in, or finance, is increasingly under scrutiny. Due diligence processes can helpbanks both know and show their investors, clients and broader public that they are acting
responsibly.
This paper has sought to outline how due diligence processes can be carried out by banks
in the context of corporate lending and securities underwriting transactions. To date,processes for management of environmental and social risks in the context of the banking
sector have often focused on project finance transactions, although general corporate
lending and underwriting transactions represent the majority of financing activity by banks.
The recommendations provided in this paper can help banks enhance and scale up their
RBC risk management processes to ensure they are effectively addressing adverse impacts
associated with their portfolios.
Further innovation such as enhancing access to information, promoting inclusion of RBC
provisions in standardised loan agreements, and developing collaborative grievancemechanisms for banks will be valuable to facilitating due diligence processes for banks. In
this respect banks, policy makers and civil society are encouraged to work together todevelop necessary tools, confront challenges and enhance standards and performance inthis sector more broadly.

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ANNEX A. TERMINOLOGY  65

Annex A. Terminology

The MNE Guidelines include terminology that is also commonly used in the context ofgeneral corporate lending and securities underwriting. However, the meaning andapplication of this shared terminology is different in the context of the MNE Guidelines
than in the context of such transactions. Most particularly, the term ‘due diligence’, acentral expectation under the MNE Guidelines, is a common ‘term of art’ in both thefinancial and other sectors, but the meaning differs from that in the MNE Guidelines. To
facilitate understanding, this list shows the different meanings of relevant terms in thecontext of the OECD Guidelines and banking.

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66  ANNEX A. TERMINOLOGY

Risk

Term

Terms used
under theOECD
Guidelines forMultinational
Enterprises

 “Risk” within the meaning of the MNE Guidelines refers to the existence of real or
potential ‘adverse impacts’ on all matters covered by the MNE Guidelines (e.g.
disclosure, human rights, employment and industrial relations, environment,
combatting bribery, bribe solicitation, extortion, and consumer interests).53
It does not refer to financial risk, but rather to risks of adverse impacts when therecommendations of the MNE Guidelines are not respected (e.g. health and safety of workers or
the public, adverse impacts on livelihoods, etc.).
 “Risk” for banks refers to the potential damages which clients and banks
themselves face. These impacts are primarily financial and relate to how the capacityof the client to repay its debt would be affected. Risk may also relate to the risk of abank’s non-compliance with regulations; however, such risks are generally also
linked to negative financial impacts to banks.
Risk categories that can typically be influenced by responsible business conduct (RBC) issues:‒

Terms
commonlyused by
banks

‒
‒

‒
‒
‒

Differences interminology
andapplication
for thisdocument

Credit risk: the risk of a loss deriving from the failure of a client or counterparty to meetits contractual obligation.
Market risk: the risk of a loss which results when the value of an asset (i.e. aninvestment) decreases due to changes in market factors.
Compliance risk: the risk which results from not complying with rules, regulations, laws,
accounting standards, or local or international best practices, which can result in
regulatory fines or penalties, including the restriction or suspension of businesses.
Liability risk: the risk which results when a bank, or someone acting on its behalf, faces
legal claims when failing to fulfil the obligations, responsibilities, or duties imposed bylaw or assumed under a contract.
Reputational risk: the risk to a bank’s standing which results from the controversial
perception of the bank's actions and business decisions by its stakeholders.
Environmental and social risk: the risk of a loss which results from poor environmental
and social performance by a client. This can also be reflected in reputational risk orcompliance risk.

The principal difference between these two understandings of risk is the nature of the impacts
that they reference. Under the OECD Guidelines, it means broadly, risks external to the bank ─risks of adverse impacts (e.g. risk of adverse human rights, labour, and environmental impacts).
In the context of general corporate lending and underwriting transactions, it refers to the risk ofinternal impacts to the bank or the bank’s client.

 For the purposes of clarity, this paper refers to "risk" as understood under the MNE
Guidelines. Such risks can also have financial implications (negative or positive) forthe company concerned and thus sometimes “RBC risks” are also financial risks.

53

This paper focuses primarily on risks associated with the human rights, employment andenvironment chapters of the MNE Guidelines. See section on Scope.

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ANNEX A. TERMINOLOGY  67

Term

Due Diligence “Due diligence” is the process through which enterprises can identify, prevent,mitigate, and account for how they address their actual and potential adverse impacts
as an integral part of business decision-making and risk management systems.

Terms used
under theOECD
Guidelines forMultinational
Enterprises

Due diligence is an ongoing, both proactive and reactive, and process-oriented activity; it is tobe conducted throughout the entire life-cycle of operations, products, and service because
circumstances change and so will adverse impacts. This means that due diligence should not belimited to an initial investigation of a potential business relationship or transaction, but should
also be applied proactively through establishment of systematic measures to identify RBC risk
and prevent or mitigate potential adverse impacts, as well as through on-going monitoring ofbusiness relationships and related operations.
Due diligence is a key aspect of RBC as it is a process for enterprises to ensure that they can'know and show' their actions in the context of adverse impacts.

Terms
commonlyused bybanks

 “Due diligence” for banks is generally understood as a process that is conducted
before a transaction is made to identify the risks which may result from it.

The principal differences between the meaning of due diligence in the context of the MNE
Guidelines and banking are: under the MNE Guidelines, due diligence is a continuous process,whereas in banking practice, it is carried out prior to engaging in a specific transaction.
Differences interminology
andapplication
for thisdocument

Under the MNE Guidelines, it is not only the process of identifying issues but also actively
managing and accounting for them; whereas in banking practice, it describes processes used to
identify potential risk when considering a transaction or client relationship.
Under the MNE Guidelines, due diligence aims to avoid and respond to RBC risk; whereas inbanking practice it aims to identify financial risk for the client and the bank.

 This paper only discusses due diligence as understood under the MNE Guidelines
and all references made to due diligence should be understood within the meaning of
the MNE Guidelines, applied in the context of corporate lending and underwritingtransactions.

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68  ANNEX A. TERMINOLOGY
Term

Terms used
under theOECD
Guidelines forMultinational
Enterprises

Terms
commonlyused bybanks

Differences interminology
andapplication
for thisdocument

Term
Terms used
under theOECD
Guidelines forMultinational
Enterprises

Terms
commonlyused bybanks

Differences interminology
andapplication
for thisdocument

Leverage “Leverage” is an advantage that gives power to influence. In the context of the MNE
Guidelines it refers to the ability of an enterprise to effect change in the practices ofanother party that is causing or contributing to adverse impacts.
Where a business enterprise is found to be directly linked to an adverse impact through abusiness relationship, there is an expectation under the MNE Guidelines that it use its leverage
to influence the entity causing the adverse impact to prevent or mitigate that impact, acting alone
or in co-operation with other entities, as appropriate.

 “Leverage” for banks is a technical term used to describe: (i) the use of financial
instruments or borrowed capital to increase the potential return on an investment,and (ii) the ratio of a company's debt to the value of its equity, which is a measure of
risk.
However, the word “leverage” is also used in a more colloquial sense to describe the ability to
influence a person, a company, or a situation.
In the context of the MNE Guidelines, leverage is intended to effect change in the wrongfulpractices of a party causing or contributing to adverse impacts whereas in the context of banking,leverage is primarily a technical term.

 In the context of this paper, leverage should be understood within the meaning
under the MNE Guidelines.

Responsible Business Conduct (RBC) Under the MNE Guidelines “responsible business conduct” (RBC) means thatbusiness should: i) make a positive contribution to economic, environmental, andsocial progress with a view to achieving sustainable development; and ii) should
avoid and address adverse impacts through their own activities and seek to preventor mitigate adverse impacts directly linked to their operations, products, or services
by a business relationship.
 “Environmental, social, and governance” (ESG) criteria or “Environmental andsocial risk” (ESR) is the term normally used by financial institutions to describe theset of criteria they use when assessing the sustainability performance of a company.
Environmental criteria looks at how a company performs as a steward of the natural environment.
Social criteria examines how a company manages relationships with its employees, suppliers,
customers, and the communities where it operates and often includes human rights and labour
rights. Governance deals with a company’s corporate governance – its leadership, executive
pay, audits and internal controls, and shareholder rights.
The scope of RBC and ESG/ESR criteria are related. Both relate to social and environmental
considerations, however RBC is broader and specific to the standards and recommendations
set out in the MNE Guidelines. ESG/MNE criteria may be used primarily to identify financial risks
rather than RBC risks (see above).
 This paper discusses RBC as defined by the MNE Guidelines.

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ANNEX B. OVERVIEW OF BANKING TRANSACTIONS  69

Annex B. Overview of Banking transactions: General purpose loans, andunderwriting securities.

To illustrate how the due diligence process works at the level of individual clients andtransactions, this paper considers the due diligence process along two typical types ofbanking transactions in order to illustrate how a bank can address RBC issues appropriatelyin specific types of transactions. The type of transactions covered by this paper are: General
purpose loans, and underwriting securities.

A. General purpose loans
Companies often raise money for general purposes, such as day-to-day corporate
expenditure and investments. The bank normally does not know for which precise purposethe loan is intended. Commercial or private real estate often serves as security (collateral)
for the loan. Otherwise, with well-established firms in particular, the loan will be provided
without collateral, tailored to the client's ability to repay the loan in the future.
A common mode of providing general-purpose loans is through syndicated loans.
Syndicated general purpose loans are issued by a group of lenders to a single borrower. The
purpose of the syndicate is to spread risk across a group of lenders. Typically, one or several
banks, known as arrangers or lead arrangers, may negotiate the terms and conditions ofsuch loan with the Borrower (including generally the negotiation of the financing
documentation) and may initially underwrite a large proportion or the entirety of the loan
in order to allow the Borrower to secure quickly the financing and to thereafter syndicate
such loan to other banks, whilst retaining generally a share of such loans. The other banks
are often referred to as syndicate members. Once the loan is signed, the arranger or leadarranger role is terminated and there is usually one bank appointed as agent to liaise
between the Borrower and the syndicate members, pursuant to the provisions contained in
the financing documentation.

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When a company needs additional cash, it may approach a bank for a loan. The
representatives of the company will meet the bank's relationship manager and ask for a
proposal of the terms and conditions that the bank would be willing to offer.

When the bank has no pre-existing client relationship with the company (A1), therelationship manager will initiate the client on-boarding process for this company (B1).
This process is either performed by the relationship manager or by a due diligence officer.
The overall objective is to assess whether the banks is willing to enter a client relationshipwith this company. Traditionally, primary concerns have been potential linkages to money
laundering, corruption, or other financial crimes.
The client on-boarding process is also the ideal moment for the bank to identify actual or
potential adverse RBC impacts that the company may be linked to. It is easier for the bankto identify risks before committing to a client relationship.
When the bank already has an established business relationship with the company (A2), it
will initiate the transactional due diligence process. In this case, the client advisor may
already have certain information about the company's performance in regards to RBC
issues. Otherwise, the client advisor will conduct an assessment and engage with the client
when necessary.
The exposure of the company to sectoral, geographic, product and enterprise risk factors
will define to what extent the bank will attempt to identify actual or potential adverse RBC
impacts. Once significant issues are identified, the bank's Environmental and Social Risk
unit (ESR unit) will be contacted to assist with the next steps of the due diligence process.

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ANNEX B. OVERVIEW OF BANKING TRANSACTIONS  71

The ESR unit will engage with the business units to provide a recommendation and/or
decision regarding the client relationship or transaction: approve, approve with conditions
or decline. Depending on the governance structure of a bank different committees may be
involved in reaching a final decision on whether to extend financing.
A first step, the bank may decide to further engage with the company to gain a morecomprehensive understanding of the situation.
Once the actual or potential RBC issues are understood, the relationship manager willsubmit the loan request to the credit committee or additional committee(s) depending on
the governance structure of the bank for approval. It may escalate the decision to a higher
level committee. The credit committee, and potentially other committees, will review theloan request, assess whether all aspects are in line with bank's policy framework and theneither approve, approve under conditions, or reject the loan request and the corresponding
terms and conditions. Depending on the size of the transaction, the credit committee may
also be involved earlier on, e.g. in early discussions with the company.
The relationship manager informs the client about the bank's decision and offer. Once theclient signs the loan agreement the bank will extend the loan (C).
Normally loans undergo some form of periodic review in which the client's
creditworthiness is re-evaluated. The review is also used to monitor whether the client
meets the conditions stipulated in the loan agreement or other documentation (D). During
this review the relationship manager can also assess whether actual or potential adverse
RBC impacts are linked to the client.
In lending a transaction normally ends when the client pays the loan back to the bank(sometimes by receiving a new loan from another bank) or when the client renews the loan
with the same bank.

B. Securities underwriting (raising capital by selling securities to investors)
Securities underwriting is the process by which investment banks typically raise capitalfrom investors on behalf of corporations or other organizations, such as governmental
entities. The investment bank acts as matchmaker. Investment banks will often compete to
be awarded underwriting deals. The client selects a lead manager and co-managers. The
banks will then work closely with the client towards the successful issuance of the security(debt or equity).

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72  ANNEX B. OVERVIEW OF BANKING TRANSACTIONSBox A B.2. Integration of due diligence in securities underwriting transactions

When a company needs additional cash, it may ask an investment bank to raise capital fromthird-party investors by selling securities to them (equity or debt). Such a sale can happen
either in a private or a public placement. The latter process involves the sale in publicmarkets and requires the approval by a regulator. In some cases it also involves theprovision of an independent rating by an independent rating agency.
The company will invite a group of investment banks to submit ideas for such a transaction.
Senior representatives of the company will meet senior relationship managers from several
banks to discuss the transaction. Depending on the size of the transaction, the company will
select one or several banks as lead managers. The lead manager(s) will invite a group ofadditional banks to join the underwriting syndicate as co-managers.
When the bank has no pre-existing client relationship with the company, the bank's deal
team will initiate the client on-boarding process for this company (B1). This process iseither performed by the relationship managers, due diligence officers, or a specialized unit
in charge of conflict clearance, for example. The overall objective is to assess whether thebanks is willing to enter a client relationship with this company. Traditionally, primaryconcerns have been potential linkages to money laundering, corruption, or other financial
crimes – or ethical or legal conflicts resulting from existing client relationships. For this,the bank will conduct a standardized assessment and engage with the company whennecessary. During this phase, banks could also attempt to identify actual or potential
adverse RBC impacts that the company may be linked with.
As investment banks normally work with very specific groups of clients, the relationshipmanagers will often already maintain long-term personal relationships with company
representatives and be familiar with the company's strategy and business model. Also,
given that they normally deal with larger companies, they may have prepared a pretransaction view of the company on RBC issues.
Once the client mandates the lead arranger(s) they will engage in a more detailed due
diligence phase. During this phase the lead arrangers will work closely with the company
to identify legal, financial, and other risks. Banks are encouraged to use this phase to
identify actual or potential adverse impacts the company may cause, contribute to or belinked to. The co-arrangers will primarily focus on sales related activities (D), but are stillencouraged to conduct their own due diligence, or at a minimum ensure that the leadarranger is carrying out due diligence effectively. Both, identified risks and actual or
potential RBC impacts require appropriate action, including, in cases where the risks arecommercially material, encouraging clients to disclose them in the prospectus or brochurethat is presented to investors. In contrast to a corporate loan, the client relationship ceases
to exist as soon as the securities are sold to the investor and the company receives the capitalthat has been raised. The bank will aim at maintaining an ongoing client relationship withthe company, which can provide the bank with further opportunities to engage on actual or
potential RBC issues. However in practice, the bank's leverage over the client will besignificantly reduced once the transaction is finalized.

DUE DILIGENCE FOR RESPONSIBLE CORPORATE LENDING AND SECURITIES UNDERWRITING © OECD 2019