OECD releases the first guidance for environmental and social risk management for corporate lending and underwriting activity

 

Paris, 29 October 2019 - Financial institutions are increasingly being looked at to drive global sustainability agendas, and scrutinized when they finance clients who do not behave responsibly.

Carrying out due diligence can support banks in managing adverse environmental and social impacts on people, the environment, and society, and as result contribute to global sustainability goals. It can also help banks to improve stakeholder relationships and protect their reputation.

The new OECD paper Due Diligence for Responsible Corporate Lending and Securities Underwriting provides a common global framework for financial institutions to carry out due diligence to identify, respond to, and publically communicate on environmental and social risks associated with their clients.

According to Patrick Bader, Former Head of CSR for Corporate and Institutional Banking at BNP Paribas, “This guidance provides realistic recommendations to banks on how to manage environmental and social risks associated with their clients. It is not just aspirational, thank goodness! But that doesn’t mean it lacks ambition, rather it contains recommendations that push the agenda for banks.”

Broadly recognised environmental and social standards have previously not existed for corporate lending and underwriting transactions, although they represent the vast majority of banking finance activity.

“This paper is the first of its kind on the unchartered territory of what responsible due diligence entails for general lending. It provides useful guidance and practical considerations that benefit financial institutions in their due diligence process,” stated Mercedes Sotoca, Head of Environmental and Social Risk Management, ING Bank.

Global nonfinancial corporate debt, including bonds and loans, more than doubled over the past decade, reaching 66 trillion USD in mid-2017. While many banks have adopted the Equator Principals, a leading environmental and social management standard applicable to project finance, these only represent a fraction of most banks’ lending activities, leaving a vacuum with respect to the vast majority of banking debt transactions.

According to Greg Medcraft, Director of the OECD Directorate for Financial and Enterprise Affairs and former Chairman of Australian Securities and Investments Commission, “this paper fills this vacuum. It seeks to drive more ambitious due diligence processes in banks, and promote risk management that is driven by long-term value.”

Ray Dhirani, Head of Sustainable Finance & Green Economy for WWF-UK noted “at a time when we need to urgently re-purpose our economic and financial systems, this paper is timely. It illustrates how all banks should conduct due diligence in their general corporate lending activity in order to avoid adverse impacts and comply with the OECD Guidelines for Multinational Enterprises – a benchmark for global corporate governance. WWF believes that banks have a key role to play to help move us towards a fair and sustainable future, and, as part of that, they must be held accountable for any adverse impacts associated with their lending practices.”

This paper was developed in close consultation with a multi-stakeholder advisory group of over 50 organisations, including leading global banks and expert stakeholders. It was also endorsed by the 48 governments that adhere to the OECD Guidelines for Multinational Enterprises. 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.