Stakeholder engagement in guidelines and legislation

OECD Guidelines and UNGPs

According to the OECD guidelines and UN Guiding Principles (UNGPs), meaningful stakeholder engagement involves interactive processes of engagement between a company and its stakeholders, for example meetings, hearings or consultation proceedings. Meaningful stakeholder engagement helps to identify, prevent, mitigate and address adverse impacts associated with the company’s operations, its value chain and business relationships. In this way it contributes to sustainable business operations and to the legitimacy and transparency of a company’s actions.

Both the OECD guidelines as well as the UNGPs emphasise meaningful stakeholder engagement as a key component of a company's due diligence process (see figure), and in some cases even a right in and of itself.

According to the OECD, relevant stakeholders are persons or groups, or their legitimate representatives, whose rights or interests are or could be affected by adverse impacts associated with the company’s operations, products or services. [1] Examples of stakeholders are communities, workers and employees, consumers and end-users, trade unions, NGOs, industry peers, business partners and investors. Where the interest is individual human rights or collective rights, the stakeholders whose human rights are or may be affected are referred to as rightsholders. [2] Companies can prioritise the most severely impacted or potentially impacted stakeholders for engagement. [3] It is crucial to prioritise engagement with these stakeholders because their risks need to be mitigated, or their adverse impacts need to be addressed. Stakeholders can inform companies about risks and impacts that should be considered in their operations and decision-making. It is important that the perspective of stakeholders is taken into account in business activities that may affect them.

According to the OECD Guidelines and the UNGPs, meaningful stakeholder engagement refers to ongoing and regular engagement with stakeholders that is two-way and focusses on stakeholders’ views, interests and concerns. Stakeholder engagement should be conducted in good faith by the participants on both sides and responsive to stakeholders’ views. To ensure stakeholder engagement is meaningful and effective, it is important to ensure that it is timely, accessible, appropriate and safe for stakeholders, and to identify and remove potential barriers to engaging with stakeholders in positions of vulnerability or marginalisation. In situations where stakeholder engagement is not possible, companies should gather information from credible proxies, for instance civil society. [4] [5] [6]

Corporate Sustainability Reporting Directive (CSRD)

One of the directives on RBC is the European directive for corporate sustainability reporting, the CSRD. The requirements in the CSRD have been operationalised in reporting standards – the so-called European Sustainability Reporting Standards (ESRS) – which contain guidelines for what the sustainability report should look like. On July 31, 2023 the European Commission adopted the first set of ESRS which applies to all companies in scope of the CSRD regardless of their sector. This first set contains 12 standards including two cross-cutting standards (ESRS 1, 2), five environmental standards (E1-E5), four social standards (S1-S4) and one governance standard (G1). Below you will find more details about how stakeholder engagement plays a role in relation to the ESRS. This document provides more details and references to the articles and paragraphs in ESRS related to stakeholder engagement.

Double materiality assessment and stakeholder engagement

The so-called double materiality assessment – i.e. identifying the material (actual and potential) impacts, risks and opportunities for the company on society and vice versa – plays a central role in the CSRD. The materiality assessment defines to what extent and on which sustainability matters the company has to report, in particular when it comes to policies, actions and targets. The outcome of a company’s sustainability due diligence process informs the company’s assessment of its material impacts, risks and opportunities. Companies are expected to engage with (affected) stakeholders in both their materiality and due diligence process, in order to identify and assess actual, potential and material impacts, risks and opportunities – among others through dialogue.

Reporting on stakeholder engagement in strategy, business model, policy and actions

According to ESRS 2, companies shall report on how the interests and views of stakeholders are taken into account in the company’s strategy and business model. The company shall disclose a summarised description of its stakeholder engagement [1], the way in which interests and views of stakeholders are understood, to what extent these have been considered in the company’s strategy and business model, and whether and how management is informed about this. Stakeholder engagement is also included in several minimum disclosure requirements concerning policies that are aimed at managing material sustainability matters. Additionally, the company shall report on the scope of the key actions in terms of affected stakeholder groups – where applicable.

Stakeholder engagement in topical standards

The topical standards of the ESRS are divided into the themes Environment, Social and Governance (ESG) and contain specific disclosure requirements per theme. Consultation and dialogue with stakeholders are frequently mentioned in these standards. For example, concerning grievance mechanisms for own workforce, value chain workers, affected communities and consumers/end-users.

Corporate Sustainability Due Diligence Directive (CSDDD)

The European directive for corporate sustainability due diligence (CSDDD) has been adopted. References to stakeholder engagement in this directive are further explained below.

The CSDDD defines stakeholders as the company’s employees, the employees of its subsidiaries, trade unions and workers’ representatives, consumers and other individuals, groups, communities or entities whose rights or interests are or could be affected by the products, services and operations of that company, its subsidiaries and its business partners including the employees of the company’s business partners and their trade unions and workers’ representatives, national human rights and environmental institutions, civil society organisations whose purposes include the protection of the environment, and the legitimate representatives of those individuals, groupings, communities or entities (article 3, 1.n).

In order to conduct meaningful human rights and environmental due diligence, companies should take appropriate measures to carry out effective engagement with stakeholders, for the process of carrying out the due diligence actions. Effective engagement should cover among others ongoing consultation that allows for genuine interaction and dialogue at the appropriate level, such as project or site level, and with appropriate periodicity (par. 65).

Carrying out meaningful engagement with stakeholders is explicitly described in article 13 of the directive. In summary, this article states that companies shall:

• Provide relevant and comprehensive information to stakeholders prior to the consultation, where appropriate or requested;
• Consult stakeholders at various stages of the due diligence process: when gathering the necessary information on actual or potential adverse impacts in order to identify, assess and prioritise adverse impacts, when developing prevention and corrective action plans, when deciding to terminate or suspend a business relationships, when adopting appropriate measures to remediate adverse impacts and when developing qualitative and quantitative indicators for monitoring;
• Additionally consult with experts – such as civil society organisations or natural or legal persons defending human rights or the environment (par. 65) – who can provide credible insights into potential or actual adverse impacts, where it is reasonably not possible to engage with stakeholders directly – or where engagement with additional expert perspectives is useful to comply fully with the requirements of this directive (par. 65);
• Identify and address barriers to engagement and ensure that participants are not subject to retaliation or retribution, including by maintaining confidentiality or anonymity;
• Meet the requirements in this article when consultation is done through industry or multi-stakeholder initiatives.

Article 14 of the directive expects companies to establish accessible and credible notification mechanisms and complaints procedures, in which complainants are entitled to meet with the company’s representatives at an appropriate level to discuss potential or actual severe impacts that are subject to the complaint and potential remediation (article 14.4).

Also, companies shall update – where appropriate – their due diligence policy, identified adverse impacts and the derived appropriate measures in accordance with the outcome of periodic assessments and with due consideration of relevant information from stakeholders (article 15).