This guidance sets out recommendations on how we, our executive agencies and non-departmental public bodies (NDPBs) should undertake appropriate due diligence on companies, including their human rights record, before entering into an investment relationship with them.
This should include an assessment of whether an individual or company, including any parent or subsidiary, has been associated with human rights abuses anywhere in the world.
Due diligence involves the detailed examination of a company and its financial or project delivery record before becoming involved in a business arrangement.
The UN Guiding Principles on Business and Human Rights are based on a framework of state responsibility to protect human rights, business responsibility to respect human rights and the requirement for remedy for negative human rights impact.
This advice aims to enhance existing due diligence checks.
Investment relationships for which due diligence should be undertaken
Due diligence should be carried out on any activity which could lead to an investment relationship or agreement with a third party.
This may include circumstances where direct financial support is provided through grants, loans, financial investments, equity shares and guarantees; or through non-financial support such as acting as a broker between two or more private sector partners when securing a buyer for or investment in a project, programme or business.
More in-depth assessment should be carried out in cases involving major investment projects, which are defined in the Scottish Public Finance Manual.
The nature and depth of due diligence to be undertaken
The scope and depth of the diligence checking carried out will be based on the nature and sensitivity of the relationship. It should take into account the financial and reputational level of risk, with higher value more complex programmes requiring more in-depth assessments.
Initial checking should take place at the outset of the engagement, prior to any formal meeting or discussion. More substantive checks should be carried out as the relationship develops and deepens.
The detail of what is checked is ultimately a matter of judgement by whomever has initiated the relationship and/or responded to a proposition from a third party and will depend on the circumstances of each case. However it is likely to include as a minimum:
governance and internal control systems of the potential investor - does the organisation have policies or mechanisms in place that address its human rights obligations, e.g. through ethics, equalities or corporate social responsibility committees or programmes? Have steps been taken to improve its record and/or provide redress for any prior human rights issues?
ability to deliver – has the organisation a track record of delivering similar projects or investments of the type, size and complexity of the one proposed? Does it have staff and resources with both capacity and capabilities to deliver? Does it have a previous record of working successfully with Governments and agencies etc?
financial stability – can the organisation or investor provide assurance on financial viability? Does it have any past record of financial wrongdoing, for example bribery or corruption? Are financial controls are in place and are operating effectively? Does it have a robust internal or external audit function?
downstream delivery - is there evidence that the organisation carries out its own due diligence checking on its partners, joint ventures, subsidiaries etc? How does it monitor, evaluate and control the risk of existing projects? Is there a record of any human rights concerns of any subsidiary or partner organisation?
As well as considering the track record of the organisation(s) involved it may be appropriate to undertake due diligence on particular individuals.
The need to record the due diligence undertaken
A record of checks carried out on a company or individual should be maintained. Checks should take into account:
- the country or countries in which the company or individual is headquartered or based, and where its principal and subsidiary operations are conducted
- what the company says about its own approach to human rights. Consideration can be given to annual reports, human rights and equality statements, CSR reports, due diligence processes, information provided by the company in response to specific questions or meetings with its representatives etc
- information about the company's human rights record that can be gathered from other sources
The Scottish Public Finance Manual provides binding guidance on the proper handling and reporting of public funds.
As well as setting out the relevant statutory, parliamentary and administrative requirements it emphasises the need for economy, efficiency and effectiveness, and promotes good practice and high standards of propriety.
Information about potential investors can also be found online. Care should be taken to ensure the information obtained is proportionate and legitimate.
The following websites may prove useful:
- UN Guiding Principles on Business and Human Rights
- Institute for Human Rights and Business
- Business and Human Rights Resource Centre
- Corporate Human Rights Benchmark initiative
- Norges Investment Bank Excluded Companies Report
- World Bank List of Ineligible Firms and Individuals
- Transparency International UK Corruption Perception Index
General Country Reports
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