The integration of climate‑related risks and opportunities into investment strategies is gaining momentum among different types of institutional investors globally, driven by increased attention from regulators, changing market practices, and stakeholder expectations. Key trends include rising shareholder activism, increased investor engagement and policy initiatives (e.g. through the development of disclosure and governance requirements). Overall, this is leading to heightened expectations for institutional investors to consider adverse climate impacts that their investee companies and assets in their portfolios can have on society and the environment as well as on their financial performance.
In that context, institutional investors are increasingly adopting net zero commitments. However, studies have shown considerable variations as to the ways voluntary commitments materialise in practice and have raised concerns over the quality of commitments with regard to the credibility and transparency of their approaches (Noels and Jachnik, 2022[2]; OECD, 2017[3]). Grounding net-zero commitments in standards as highlighted by the UN High-Level Expert Group on the Net Zero can strengthen their credibility and comparability and level up the global playing fields among institutional investors (UN HLEG, 2022[4]).
Responsible business conduct standards, and in particular the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (“The OECD Guidelines”) and related OECD due diligence guidance, lay out the expectation that business, including investors, avoid and address adverse impacts of their activities on society and the environment (including climate change), throughout their own activities and business relationships, by carrying out due diligence, while contributing to sustainable development. RBC due diligence is the process enterprises should carry out to identify, prevent, mitigate and account for how they address adverse risks and impacts in their own operations, their supply chains and other business relationships, as recommended in the OECD Guidelines. The RBC due diligence process is dynamic, ongoing and informed by stakeholder engagement (OECD, 2018[5]). The role of RBC in the context of climate change and other environmental challenges has become particularly pertinent in light of the climate crisis, as well as increasing expectations regarding mandatory and voluntary environmental supply chain due diligence (OECD, 2021[6]).
This tool provides an overview of practical actions and key considerations with respect to RBC due diligence approaches relevant for institutional investors i.e. institutional investment managers and asset owners, including commercial banks, mutual funds, pension funds, hedge funds, insurance companies. It does not outline specific approaches for entities that facilitate investment (e.g. market research providers, investment banks that provide research on listed companies and execute trades, underwrite new security issuance and provide research for initial public offerings, stock exchanges, index providers etc.). However, it may be a useful reference for these entities as well since the recommendations of the OECD Guidelines are also applicable to them.
Where relevant, the tool distinguishes between approaches that may be specifically relevant for asset owners and asset managers, as well as specific assets and asset classes. In practice, investors may use a combination of investment strategies and asset classes and the line between these categories may be blurred. In these situations, a combination of approaches may be used.
The OECD paper on Responsible Business Conduct for Institutional Investors provides practical recommendations as to how investment managers and asset owners can undertake due diligence across their investee companies to identify and respond to environmental and social impacts, including climate change, as defined under the OECD Guidelines (OECD, 2017[7]; OECD, 2023[8]) (see Overview of climate‑related provisions in the OECD Guidelines and Due Diligence Guidance for more information). The tool further builds on analytical work undertaken by the OECD Directorate for Financial and Enterprises Affairs on ESG investing approaches among institutional investors, including among asset managers and asset owners, pension funds and insurance companies (Patalano, 2020[9]; OECD, 2017[3]).
